Most New Businesses Fail
Let me guess. If you're reading this book, it's probably because you hope to become a truly successful entrepreneur. You want to build something dynamic, useful, and great, and maybe even get rich in the process. If that's the case, then allow me to give you the good news right up front:
Most new ventures fail—usually for good reasons.
They fail because their founders launch without being truly committed to their success. They fail because a would-be entrepreneur becomes convinced that a lousy business idea is brilliant, or because he doesn't understand the market he's targeting. They fail because their leaders don't hire the right people or offer the best people a good reason to join the venture. They fail because the founders don't have enough capital, don't know how to communicate effectively, or don't adapt to take advantage of new opportunities. Sometimes they fail because of bad luck. But more often—and this is key—unsuccessful entrepreneurs blame bad luck because they don't understand what actually caused their failure.
How can all this amount to good news for aspiring entrepreneurs? Simple: it opens up a world of opportunity. Since most founders don't learn from their successes and failures (let alone those of their predecessors), anyone who is willing and eager to learn the rules of successful entrepreneurship can enjoy a great advantage.
We live in a culture that claims to value entrepreneurship. We've made household names of the founders of some of our most successful companies. If you're standing in the business section at Barnes & Noble as you read this, or browsing through this book on Amazon, chances are you'll see the memoirs of several of those founders nearby.
But in recent years much of the success that many entrepreneurs supposedly achieved was revealed as illusory. Market after market collapsed. Companies that were once worth a great deal of money on paper shut their doors. More recently, a new body of research has shown that much of what we think we know about entrepreneurship is wrong. We think of startups as exciting new ventures, incorporating spectacular innovation and great new ideas. We imagine businesses operating in emerging fields, led by founders with big dreams for growth. But the truth is quite different.
• Most new businesses launch in unattractive, static fields.
• Most startups offer no innovation or competitive advantage, cannot articulate growth plans, employ only the founders, and generate revenues of less than $100,000 a year.
• Only a third of new businesses last seven years.
• The typical startup begins with less than $25,000 in capital, acquired from the founder's savings (or run up on his or her personal credit cards).
Sounds daunting, doesn't it? But for the committed founder, the one who is truly determined to dare mighty things and succeed, all that entrepreneurial carnage can be a blessing. Here's why.
First, there is rarely any reason to reinvent the wheel in entrepreneurship. Some successful founder, somewhere, has addressed the same issues that just about every founder or aspiring entrepreneur faces today. By studying their examples and outcomes, the intelligent entrepreneur can dramatically improve his or her odds of success. The answers are out there, if only you know where to look.
Second, the doomed-to-fail entrepreneur doesn't have to be you. He or she can be—should be—your competition. Remember General George Patton's wise advice about the nobility of sacrificing one's life in combat: "No bastard ever won a war by dying for his country. He won it by making the other poor dumb bastard die for his country."
Easy enough, right? Just identify the best examples and follow them. As it turns out, though, these lessons can be difficult to find. Even at a place like Harvard Business School (HBS), where they investigate successful enterprises for a living, there is a wealth of academic research on how to manage and grow big corporations—but nowhere near as much data-driven research on early-stage companies.
"Even knowing what questions to ask is difficult," explains Noam Wasserman, an HBS professor who specializes in entrepreneurship. "Moreover, these are private companies. And that means that inherently there are no data. I have to go out and collect all of my own data."
True, Wasserman continues, when companies prepare for an initial public offering, they have to reveal themselves to the Securities and Exchange Commission (SEC) and the world. But when academics study these companies, Wasserman points out, they are almost never able to study founders, because at that point few of them are still around. "Until recently, we weren't able to really draw any real conclusions about the types of issues and decisions that founders face."
I know that other authors have tried to tackle this problem. But this book is different from others, most of which choose between providing a dry analysis of founders and startups, or using made-up examples, anonymous anecdotes, and composite stories to illustrate their theories. Instead, The Intelligent Entrepreneur tells the true stories of three entrepreneurs from the Harvard Business School class of 1998 who started four successful businesses within ten years of graduating. Over the course of that decade, these HBS graduates also learned ten key rules of intelligent entrepreneurship, and this book examines the rules in detail, allowing every reader to discover what it takes to start a new business and make it a big success.
Chances are, you don't know this trio of entrepreneurs unless you happen to have been a client or competitor of one of their companies. But by following them over roughly a decade, as they imagined, started, and built their firms—and ultimately as they decided whether or not to sell what they'd created—we can absorb their stories, learn from their mistakes, and internalize their actions. Ultimately, my goal is to help you understand how they practice what I call "high-percentage entrepreneurship"—and to show you how you can, too.
Who the Heck Is Bill Murphy Jr. and
What Does He Know About Entrepreneurship?
Fair question. They say all writing is autobiographical, and this book is no different. It grew out of a number of my personal experiences.
First, I'm a journalist, not an academic. I've been a business owner and an entrepreneur. (I was a cofounder of a publishing company, and later one of the first employees at a dot-com.) I've always been interested in entrepreneurship and leadership. Not long ago, I wrote a book about a different kind of leadership—West Point's class of 2002 and those young military officers' experiences in the wars in Iraq and Afghanistan. When I finished, I realized that I'd learned far more about the military and warfare than I'd actually used in the book. I learned how the gun sights work on an M1A1 Abrams tank. I learned what the computerized voice of the pilot warning system sounds like on an Apache Longbow attack helicopter. I learned, at least in theory, a good deal about infantry tactics and what it takes to lead men in war. I interviewed hundreds of America's best-educated soldiers. They'd thought a lot about what they had experienced, and they spent many hours with me, sharing what they'd learned.
But with no plans ever to operate a tank or a military helicopter, much of what I learned was of limited practical use. As I considered what I wanted to do next, my thoughts kept circling back to my experiences as an entrepreneur. Ultimately, the businesses I launched and joined never got past the startup stage. Frankly, they failed.
I'd always wondered whether I might have succeeded if I'd had better mentors, or if somebody, somewhere, had discovered and boiled down what it took to become a successful entrepreneur—someone who could have told me in advance what to expect so I'd have been better able to deal with each challenge as it came along. West Point teaches young men and women to become first-rate soldiers; was there an equivalent institution that teaches people how to succeed at entrepreneurship? Looking for the answer, I cast a wide net. Before long I found it at the so-called West Point of capitalism: Harvard Business School.
Beginning in early 2008, I sought out and interviewed more than one hundred entrepreneurs from the Harvard Business School classes of 1997, 1998, and 1999, years in which many alumni launched companies either right after graduation or in the first few years afterward. My overriding goal during these interviews was to learn everything I could about entrepreneurial best practices. But I also knew that I wanted to tell an engaging and instructive story.
Instinctively, I knew it would be a mistake to write about entrepreneurs who were blessed at the start with advantages far beyond the normal founder, or who achieved success too easily. Honestly, what lessons can we learn from a hypothetical founder who might say, "Well, the first thing I did was to convert part of my trust fund into five million in cash" or "Since my father was the managing director of a venture capital firm, I asked some of his tennis friends for advice."
Meanwhile, a handful of HBS graduates in the late 1990s were blessed with incredible timing, and they built and sold businesses for extraordinary amounts of money in ridiculously short periods of time. I got to know some of them, and although they are interesting people with good stories, they are clearly anomalies. Besides, challenge and hardship can be the best teachers. Certain that their long, hard journeys would provide some very useful lessons, I wanted to find and write about entrepreneurs who had launched, stumbled, fallen, recovered—and learned.
That meant focusing on a small number of entrepreneurs who would be willing to tell me everything—the good, the bad, the downright ugly—about their efforts to start and build new companies. Over time, I came up with three criteria that helped me to identify the entrepreneurs who would ultimately play the starring roles in this story.
• They had to be successful. Nothing builds credibility like success, so I wanted to tell the stories of a few entrepreneurs who came up with a great idea and over time made it a reality. When considering which enterprises to write about, I looked at several standard measures of success, such as annual revenue, market share, and in some cases the founders' ultimate financial windfall. Each of the three entrepreneurs who became the main characters in this story started more or less from zero and then built firms that generated at least $50 million a year in revenue and/or netted their founders more than $20 million in personal profit.
• They had to have endured. The most useful experiments are those that observe their subjects over time, and I wanted my accounts of these entrepreneurial ventures to be what a social scientist might call longitudinal case studies. Rather than track a startup for a year or two, I wanted to tell the story of what happens to entrepreneurs and their enterprises during a five- or ten-year period. As you read this book, you will get to know:
• the founder of a national retail company who grew her venture over eleven years (and counting);
• an entrepreneur who started and sold one Internet-based business, and then started and sold another, both of which are still thriving; and
• an entrepreneur who spent the first five years after graduation from HBS figuring out which venture to start, and the next seven or so building it into a very profitable and successful firm (it, too, is still going strong).
• They had to be candid. My entrepreneurs had to talk honestly about their ups and their downs, their inevitable failures as well as their exhilarating triumphs. They had to have thought long and hard about what led to their success, and be willing to explore their experiences further with me. They also had to be willing to open their books, open their lives, and make introductions to people who had known and worked with them. In fact, one of the first things I asked my top candidates to do, once I was satisfied that they met the other criteria, was to ask them to introduce me to five people they'd known at various points in their lives and encourage those people to speak freely with me. College roommates, old romances, ex-employees, the whole bit. I asked them—and they agreed—to provide thousands of pages of documentation so that I could explore and back up their stories of what happened. They forwarded me hundreds of e-mails and lent me journals and photo albums. I even had to buy an old 1.44 MB disk drive so that I could go through some of their original (and now technologically outdated) computer files. I wanted to be as confident as possible that the stories I'd be telling were true.
How to Read This Book
Virtually every class at HBS is taught using the case method. Students read and prepare case studies recounting real-life stories about all sorts of businesses. The idea is to put the student in the decision makers' shoes and, over time, to instill confidence and familiarity—if not with the outcomes of any particular dilemma, at least with the decision-making process. Think of this book as an extended case study, one that weaves together the stories of three successful entrepreneurs. Collectively, these three stories—and the lessons we will draw from them—will help you develop confidence and familiarity with high-percentage entrepreneurship.
In a way, though, this is really two books in one. There are twenty-two chapters here; in the odd-numbered chapters, we'll follow the stories of our three intrepid entrepreneurs—Marla Malcolm Beck, Chris Michel, and Marc Cenedella—just as they unfolded in real life, highlighting their challenges and their triumphs. In the even-numbered chapters, we'll step back and explore the key rules of entrepreneurial success that Marla, Chris, and Marc learned along the way. (In case you're the impatient sort, the ten rules are summarized on pages 36-37.)
Over the course of a decade, these three entrepreneurs built successful businesses, made millions of dollars, and created hundreds and hundreds of jobs. As you read their stories, I hope you'll keep in mind that they are living, breathing human beings who started out just like most of us—with a hunger to succeed, but also with the usual array of fears and insecurities. Each of them sat alone in a room with a blank sheet of paper (or, more likely, a blank screen) and developed an idea. They wrote business plans. They attracted teammates and partners. They raised money. They built prototypes. They launched; they built brands; they scaled up their businesses. They also made big mistakes, faced serious hardships, and in a few cases nearly lost everything. Along the way, they learned to overcome the obstacles—real and imagined—that held them back. And ultimately, they persevered and prevailed.
Over the course of a decade, after much trial and error, Marla, Chris, and Marc became intelligent entrepreneurs. More important—at least for our purposes—they learned the ten rules of successful entrepreneurship. My fervent hope is that, by following their examples and understanding the rules they learned, you will be able to achieve your entrepreneurial goals as well.