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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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What Failure Really Feels Like

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I just read an amazing post from Nikki Durkin, the founder and CEO of 99dresses.

It’s titled My startup failed, and this is what it feels like and it is one of the best posts I’ve ever read about startup failure.

I almost titled this post “What Failure Tastes and Smells Like” because Nikki does such an awesome job of describing not just what happened, but what she felt throughout the process. The post is long and goes through multiple ups and downs, just like a startup. It covers four years, several near death experiences, recoveries, and then final failure.

I don’t know Nikki but have immense respect for her taking the chance to put this out there. In today’s world of “look how great we are doing”, we know we all aren’t doing great. It’s fucking hard to fail, deal with failure, and recover from failure, especially when you look around and feel like you are the only failure.

Nikki – if you ever want to turn this, and other lessons you learned from this experience into a book (as you hint near the end of the post), my friends at FG Press would love to talk to you about working with you on it.

After Failure, What’s Next?

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Recently, I wrote a post titled After Your First Big Success, What’s Next? The comment thread was powerful and fascinating, as was the direct email feedback I got, including the following note:

“I think it would be interesting to hear your perspective on how an entrepreneur should approach “what’s next” after coming off a failed business. How should one manage their own emotions and their own perspectives post failure? It’s easy to play the blame game and it’s easy to be extremely hard on ourselves. There has to be constructive ways to move forward rather than destructive ways that could lead to lack of confidence, or depression.”

Having failed at a lot of things, I’m completely comfortable tackling this. But let me establish my bonafides first. My first company, Martingale Software, failed (we returned $7,000 of the $10,000 we raised.) My second company, DataVision Technologies failed. I didn’t have success until my third company, Feld Technologies. While my first angel investment was a success, I resigned as the chairman after the VCs came in and left the board after the CEO was replaced. In the late 1990s, what looked like my biggest success at the time, went public, peaked at an almost $3 billion market cap, and then went bankrupt three years after the IPO. And the second VC fund I was part of, which raised $660 million in 1999, was a complete disaster.

As the cliche goes, I learned a lot from these failures.

I’ve had many more. I remember firing my first employee, which I viewed as a failure on my part, not hers. I remember the first CEO I fired and staying up all night prior to doing it because I was so nervous and miserable about the decision I’d made to back him. I remember the first company I funded as a VC that failed and struggling to figure out how to shut it down after everyone else fled from the scene. I remember the first time someone threatened to sue me for doing a bad job for them (they didn’t.) I remember the first time I was sued for something I didn’t do (I eventually won.) I can keep going, but you get the idea.

What’s next is simple. It’s whatever you do next. In some cases this will be easy – you’ll already be on to the next thing before the previous thing you were working on failed. In many cases it won’t be easy – you’ll be wallowing in the quicksand of the failure well after the other bodies have been sucked below the surface.

How you deal with your own emotions, and perspectives, is an entirely different matter.

I love the approach of Jeremy Bloom, the CEO of Integrate (we are investors) who I have immense respect and adoration for. In 2006 at the Winter Olympics, he was the best freestyle mogul skier in the world. On his last run, he was expected to take gold. Halfway down he missed a turn and placed sixth. As Jeremy told me, he gave himself 24 hours to be angry, depressed, upset, furious, frustrated, confused, and despondent. I imagine him in his room in the Olympic Village systematically destroying all the furniture. One minute after 24 hours, he was on to the next thing, with the failure solidly in his rear view mirror.

Now, 24 hours is a short amount of time. I’ve often carried my failures around for longer, but never much longer than a couple of days. I separate how I feel from failure from how I feel about life and what I’m doing. Interestingly, for me, failure isn’t the thing that gets me depressed, it’s boredom combined with exhaustion. But that took me a long time to figure out.

I’ve found that talking to people about my failures is helpful. Rather than hold them inside, I talk to Amy (my beloved) about them. I talk to my partners about them. I talk to my close friends about them. I don’t ignore the failure or try to bottle it up somewhere. Rather, I set it free, as quickly as I can.

In our book Do More Faster, we have a chapter on the the wonderful story of the failure of EventVue. After it failed, some of Rob and Josh’s friends from the Boulder Startup Community had a wake for EventVue. We celebrated its life, buried it, and moved on. I loved this idea and have done it a few other times for failed companies. It’s important to remember that even in death you can celebrate the wonderful things that happened during life.

But ultimately, you have to know yourself. There is no right answer or magic salve for getting past failure. If you are going to be an entrepreneur, you are going to experience it a lot. It’s just part of the gig. Start by understanding that, and asking yourself what you are really afraid of. And, after you fail at something, let yourself experience whatever you want to experience, remembering that it’s just another small part of the journey through life. And then go on to whatever is next, in whatever time you are ready for it.

Talking About Failure

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Startups fail. That’s part of the natural entrepreneurial cycle.

A great post is making the rounds from an entrepreneur who has 30 days left before he hits the wall. His blog - My Startup has 30 Days to Live – promises to be a powerful one, at least for 30 days. I’m only sad about two things: (1)  It’s anonymous and (2) There are no comments so it’s one way.

I left a message on “Ask me anything” asking him/her to reach out if I can help. We’ll see if he/she responds – or it’s either (a) a one way rant or (b) a fake failure story.

Either way, entrepreneurs need to talk about failure. It’s fine – I’ve failed at a ton of things. On Monday, I gave my “How To Fail” talk at Techstars Boulder. Included were all the Startup Summer students as well as a bunch of members of the Entrepreneurs Foundation of Colorado. I told the story of my first failure (my first company – Martingale Software) and my biggest failure (Interliant). I made some broad points and then did an hour of Q&A.

I hope it was useful.

I see entrepreneurs, especially first time entrepreneurs, in denial all the time about the possibility of failure. “Failure is not an option”, or “I’m afraid to fail”, or “Everything is going great” (when it isn’t). Sometimes failure is your best option.

Denial of reality – and what you can do – is a big issue. Ignoring reality until it’s too late is another. Not reaching out for help when there is still time is yet another. Fear of failure – which is the mind killer  – is yet another.

In one of my darkest moments of Interliant, I was sitting hunched over at the kitchen table of one of my co-founder’s (Len Fassler) – breakfast table. We had a brutal day in front of us and I was waiting for him to finish getting dressed so we could head to the office to deal with things. When he came into the kitchen, he saw me and said “C’mon Brad – suit up – let’s go.” He patted me on the back in the wonderful way he always does and said “Just remember – they can’t kill you and they can’t eat you.”

Follow My Startup has 30 Days to Live. Learn from it. And if the entrepreneur uncloaks, let’s try to help, even if it’s just providing emotional support.

Sometimes Failure Is Your Best Option

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This post originally appeared last week in the Wall Street Journal as part of their Accelerators Program in answer to the question “When and how should you wind down a failing business.”

Some entrepreneurs and investors subscribe to the creed “failure is not an option.” I’m not one of them.

I strongly believe that there are times you should call it quits on a business. Not everything works. And — even after trying incredibly hard, and for a long period of time — failure is sometimes the best option. An entrepreneur shouldn’t view their entrepreneur arc as being linked to a single company, and having a lifetime perspective around entrepreneurship helps put the notion of failure into perspective. Rather than prognosticate, let me give you an example.

My friend Mark’s first company was successfully acquired. After being an executive for several years at the acquirer, Mark decided to start a new company. I was the seed investor, excited to work with my friend again on his new company.

Over three years, this new company raised a total of $10 million from me and several other investors over several rounds. The first few years were exciting as Mark launched a product, scaled the company up to about 40 people, and tried to build a business. But after two years we realized that we weren’t really making any progress — there was a lot of activity but it wasn’t translating into revenue growth.

In year three we tried a completely different approach to the same market with a new product. Mark scaled the business back to a dozen people in an effort to restart the business. Over the course of the year we tried different things, but continued to have very little success.

By the end of the year there was $1 million left. Mark cut the company back again — this time to a half dozen people. He started thinking about how to restart for a third time on the remaining $1 million.

Mark had never failed at anything in his life up to this point. He was proud of this, and the idea that he couldn’t at least make his investors’ money back was devastating to him. But he was stuck and started exploring creating an entirely different business, in a completely different market, with the $1 million he had left.

Mark was newly married and was working 20 hours a day. We were talking at the end of the day during the middle of the week and he was so tense, I thought his brain might explode. I told him that as his largest investor and board member, I wanted him to turn off his cell phone, take his wife out to dinner, have a bottle of wine, and talk about whether it made any sense to spend the next year of his life trying to restart the business with the remaining $1 million.

After resisting turning his phone off, I insisted. I told him that I gave him permission to decide that it wasn’t worth the next year of his life at this point and that as his largest investor it was perfectly ok to shut the business down and declare it a failure. I then said I was hanging up the phone and would talk to him in the morning. Click.

He called me back early the next morning. He was calm. He started by saying thanks for giving him permission to consider shutting down the company. This had never occurred to him as an option. During dinner, he realized he needed a break as he was exhausted. He wasn’t coming up with anything to do to reinvent the business and was just desperate to figure out a way to pay his investors back.

By morning, he realized it was time to shut things down, return whatever money was left, and take six months off to recover from the previous three years while he thought about what to do next.

We gracefully wound the company down and returned five cents on the dollar to the investors. Mark took six months off. He then spent six months exploring a new business, which ended up being extraordinarily successful. And he’s now very happily married.

Failure is sometimes the best option if you view the process of entrepreneurship as a lifelong journey.

What Just Happened With OnLive?

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Disclaimer: I’m not an investor in OnLive and I know nothing about the specifics of what happened. I’m just speculating, but it’s informed speculation based on my experience.

I read a few articles over the weekend about OnLive potentially going out of business, potentially screwing its employees, and a few other things. The first articles were weirdly hostile with a focus on how OnLive just laid all their employees off in preparation for a sale in order to enrich the founders/investors at the expense of the employees. By the end of the weekend the reporting was more thorough and balanced.

Companies fail – all the time. It’s part of entrepreneurship. It’s painful and sucks when you are part of a company that fails (I know from experience – I’ve been there many times) – whether you are a founder, employee, or investor. But failure is part of it and at the moment of acceptance of failure, a good founder and board look for the most graceful path forward, however messy and yucky that might be.

One of those approaches is something called assignment for the benefit of creditors (ABC). If you were around during the collapse of the Internet bubble, you’ll remember this. It’s a lot easier and quicker than a formal bankruptcy (via a Chapter 11 filing) and allows the assets of a company to quickly be sold to a new owner. In some cases this is just for cash to pay off creditors; in other cases it’s a way to sell the company to a new owner and keep the business operating.

OnLive looks to me like the second case. The news is coming out that it has a new owner, that many of the employees have already been offered jobs post ABC, and that the service will continue to operate and customers won’t be negatively impacted.

The key thing to understand in an ABC is that 100% of the equity is wiped out and deemed worthless. The founders equity, the investors equity, and the employees equity. When a company goes into ABC, it’s almost always because the value of the liabilities far outweighs the perceived value of the assets. No buyer was found that was willing to take on the liabilities while giving the equity holders any economic value. So – an ABC effectively “cleans this up” for the new owner – compartmentalizing the liabilities in the ABC process and using the proceeds from whatever asset sales come out of ABC to pay off some portion of the liabilities.

Occasionally investors will get something in an ABC because they are creditors. If the last round (or rounds) have been in convertible debt, or just straight debt, the investors (whoever holds the debt) will be creditors. They can often be pretty high up in the creditor stack and sometimes recover some or all of their debt. But their equity will almost always be worthless.

In a situation where the company is immediately purchased out of ABC (which is what it looks like happened in OnLive’s case) many of the employees will be rehired by the new owner. While their stock options will be worthless (as is all equity) they are often immediately offered new stock option packages. Usually the vesting clock resets completely; sometimes a new owner will be extra generous and offer a shorter vesting term.

In OnLive’s case, it feels like the company simply ran out of options and couldn’t find a new investor or a buyer who would take on the company outside of ABC. Rather than shut down, they found a buyer / investor (which could be a subset of the existing investors) who would recapitalize the company and keep it going as long as he didn’t inherit the liabilities. Hence, the ABC process.

Rather than screwing the employees to enrich management, this feels to me like a pretty employee friendly approach. Hopefully the stories this week will clear this up, rather than end on “it looks like the investors and the founders screwed the employees.”

Don’t ever forget that failure is part of the process.

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