Embrace Your Losses - They Will Make You Stronger

This is an updated post from my ongoing series on Startup Advice that I learned from founding two companies.

frustration

I HATE LOSING. I hate it. I really, really, really hate it. It chaps my hide. It rips at my core. I don't get over it easily. I lose sleep. I fucking hate losing. It's not so much the actual outcome that I hate—it's the process. The fact that I lost when I should have won.

I think about it for months, often years. But I embrace losing. It is how I learn. I relive the moment so many times over in my mind wondering if I could have done this differently or if I shouldn't have said or done this or that. I talk to trusted sources about it. I ask for feedback. I hate losing. I don't want to lose next time.

I believe that it is part of the DNA of an entrepreneur—being so competitive that you're practically sick when you lose. It's what makes you stand out from the rest. Entrepreneurs are neurotic about it. They're competitive. It's the one thing I miss having switched from player to manager—I love the joy of winning and of competing. It is never as rewarding when you're the coach (but coaching has many other benefits ;-)

Don't get me wrong—I'm not a sore loser. I don't break tennis rackets, cry foul, fall over like an Italian soccer player or work the referees. Quite the opposite. I'm usually quite a gracious loser. I don't hold grudges. I move on. I keep my competitors as friends and those that didn't choose me or my product as friends, too. But I never really get over it.

I'm not talking about garden-variety losses—that sort of loss I get over in a couple of days or weeks (but you don't want to be around me that evening for sure). I'm not even too bothered by the occasional deal that got away. I'm talking about the hard fought battle. The one that you thought you had. The one you were counting on. I'm talking Tom Watson at the British Open or Andy Roddick at Wimbledon.

On Losing in VC

Last year I lost a deal in a company that I wanted to invest in and that I thought I should have won. I was angry—mostly at myself. Rather than blame the team that I thought should have chosen me, I became reflective. They were in LA and I was in LA. They had a prominent NorCal investor already so I thought a SoCal lead would make sense—that I could help them in a more hands-on way. They had agreed!

I had lost a previous deal where the team said they liked me but didn't know my partners well enough so I promised myself never to let that happen again.

So I organized a team dinner with all four of my partners and all three of their founders. I wanted to be sure that they knew how much all of our partners loved what they were doing with their company. I wanted to be sure that they felt they knew all of my partners well so they could see why I joined up with them in the first place—they are smart guys who have a 20-year track record of winning. 15 companies North of $1 billion exit. And they are normal, down-to-earth people as well.

After dinner on a Thursday night I thought we had the deal and that the team knew how hard I would work on their behalf if I were chosen. By Monday morning after their board meeting in NorCal I didn't get a return phone call. I knew what this meant. Good news always comes quickly, bad news takes time to simmer. By the time I got through to the guys on Tuesday we had lost.

I knew that the, "I'm really sorry" message was coming. I embraced it with honor and didn't give them a hard time. But I obviously asked, "Why did it happen? I need to learn for next time."

There were two main reasons that I could distill from their kind words of solace: 1) the existing NorCal investor didn't know me well enough & 2) the new NorCal investor had a good knowledge of and presence in China, which they believed would be critical.

I decided to put both of those issues to bed in 2010. I came several times to NorCal (where I grew up, actually) and went and met several partners from each Silicon Valley firm. I didn't want this to happen again—that people didn't know me. I also made several trips to New York & Boston. Next year I'm going to spend time in Seattle and Boulder in addition. I realized that it is not enough to know one partner per firm and it is not enough for only the management team to like you. VCs have a seat at the table in deciding future investors.

I also spent two weeks in China and vowed to make it back frequently. China is indelibly an important part of the future of the global technology system. Although I had lived and worked in more than 10 countries—it wasn't good enough. I didn't know the one that mattered most to their future. And for my own good I vowed to have relationships in China and knowledge of the local markets. I'm not looking to invest there—I'm looking to understand the trends, the people, the innovation, the regions and how China can become an integral part of any of my portfolio companies as they scale.

I know I won't win every deal I want to in VC. There are other great VC's in SoCal and there is always the allure of the NorCal guys flying down and talking about how they invested in Google, Facebook, Yahoo! or eBay. But I will learn from any deals that I want to do and am not able to do. I will embrace my losses. May they be few and far between. I can't afford more sleepless nights.

This company is back on the market raising money again. I love the area and the team as much now as I did a year ago—probably even more now that I know them better and have seen them perform. I'm dropping everything non-portfolio related in the next few weeks and setting my sights on righting my wrong. One great thing about losing is when you get a second chance. I hope the next chapter will be written by the victor.

Make sure you learn your lessons from losses. Specifically:

lockerroom1_original1858421. Ask your customer why you lost. Tell them that you'd like to learn so that you can improve. Promise you won't be defensive or try to change the decision. Best to ask after the dust from the decision has settled. Ask multiple people involved with the decision. Be gracious. Write things down.

2. Discuss with your team - do your post game analysis. Don't ignore your losses. Don't blame the people involved with the loss. Don't accept your internal team's answer of why you lost—hear it for yourself. Make sure that you hear all of your team's perspective. Draw your own independent conclusions—even if they are different from other people's point of view.

3. Triangulate. Who else was involved with the decision? Were their consultants? Can you discuss further down the line with your competitor? Do you have friends on the inside? The clearer picture you have of why you lost the more you'll learn for next time.

4. Learn. And don't make the same mistake twice. Obvious, but I find that some people just never learn. I read this post from Marc Hedlund at Wesabe on why they lost to Mint. It's one of my favorite blog posts. I don't know Marc but now I feel I want to work with him after reading this. I had planned to blog about it at the time but I waited 2 days and the whole world blogged about it so I didn't pile on. If you never read it, please do. It's brilliant, reflective & humble. And I think he's right that Mint never solved the problems the industry wanted to solve.

Looong Appendix (only for those interested in reading another story about losing a sale & key lessons):

A personal story of losing a sale that haunted me for years

soccer lossIn the 2003/04 timefame I was living in the UK and running my first company. I had been competing to win a contract at Thames Water, the largest water company in the UK. They were looking for a collaboration tool to manage all of their large water development projects. The initial contract was worth about $500,000 and the whole value of the contract would have been worth a couple of million over the years. I was working hand-in-hand with my close friend and associate Stuart Lander who was running our UK office and with one of our local sales reps.

We had initially been told that we had no chance because they had previously purchased Documentum and it would mean changing the system entirely. They had a team trained up in Documentum and we certainly had enemies from the inside. But we worked the account tirelessly for months. We helped the write out their requirements for a system. We met everybody in the organization. We had every reference client we worked with call their senior team members (we had already won a major project at Scottish Water, Anglian Water and another at a large water company in Paris, France).

There were about 8 initial contenders for the work and in the end it came down to just 3 of us. As the founder & CEO I personally went and met with as many people at Thames Water as I could. We felt this was a marquee account and one that would help us take our collaboration tool global as Thames owned assets all over the world. Winning the contract meant that we would hit our quarterly revenue figure and be in good position for our annual sales target.

And then the news came. A woman named Trish Hannon called me with the good news that we had won the project. I was to tell noone until the contract was signed. I immediately put a full team on contract management and another on drawing up an implementation plan.

DefeatI later learned one of my biggest lesson in sales. You are most vulnerable right after you have won a deal. It is when you're competitors have nothing to lose. It's when the people who are part of the decision making process who don't support the decision seek ways to undermine you. That is when you potentially become complacent.

Two weeks after winning the deal and well into implementation planning we released a new version of our software. We had made the decision that we would no longer be supporting IE v 5.5 (we would support 6.0 and 7.0, which was in beta). Even Microsoft publicly said that there were security flaws with 5.5 and that people should upgrade. But Thames Water was still on version 5.5. We assumed they would take our advice and upgrade. We had discussed this with Trish.

An internal resource inside Thames Water used our upgrade and lack of 5.5 support as a way to re-open the decision. How could a company like ours be so callous as not to support their software (even one more than 4 years out of date)? Did we really have good change management procedures if we were willing to launch products without backward compatibility. And so on. They decided to re-open the competition for 3-4 more weeks. I knew THEN that we had lost. We fought hard to stay in the game.

They hired a consultant to help them with the review. They stopped allowing us to contact them directly. The momentum had shifted. Something happened and it was clear to me that this IE issues was just a smoke screen. Somebody had gotten to somebody senior in the Thames organization. It just so happened that the consultant they hired to chose a software vendor worked for a company that had owned one of our competitors. It was a tiny little collaboration company that only had a presence in the UK (and therefore couldn't meet their international needs). And surprise, surprise the decision came back 3 weeks later than none of the preferred 3 vendors had won but rather this tiny little competitor owned by the consulting company charged with doing the review.

Outrage. Scandal. Surely inside Thames they would see it for what it was. Given that it was a public tender the chairman of our board had encouraged us to think about launching a complaint with the UK government agency in charge of such reviews. We talked with lawyers. We felt totally deflated. We decided it wasn't worth the fight. We licked our wounds and moved on.

I am still not over that loss. I sometimes call Stuart and we recount what happened. But that loss was really important in my career. It taught me a lot of lessons. We spent enough time dissecting it to really learn.

Here are my take aways from the loss:

1. In a sales campaign you always need to call as high as you can. If you don't, your competitors will. If you don't know them, somebody else does. They may not overturn decision, but they sometimes do.

2. No deal is ever done until the ink is dry and the money is in your bank account. Never take your win for granted.

3. You are most vulnerable right after it has been announced that you won (I will write a separate post on this). This is the most important lesson I learned from this experience. All other lessons were sort of obvious. This one was eye-opening.

4. We in the tech world extol the virtues of lots of product releases and rapid innovation. I hear Silicon Valley firms bragging all the time about how often they release software. In the consumer world, maybe. In the corporate world this strategy is flawed. Many large clients prefer stable technology and no changes—even sometimes when there are known security flaws. When I was at Salesforce we launched a new version of our UI. We gave users the choice to upgrade or keep with the classic UI. Years later 10% of users were still on classic. Go figure.

5. In every deal where you have serious competitors there is always somebody on the inside against you. You need to find out who that is and neutralize them.

6. No matter how much your customer tells you that they love you and that they favor you it is possible they are telling other people the same thing or some variation of this. (you would have thought I would have learned this lesson in high school ;-)

7. No matter how much large clients tell you they want transparency in pricing, they always seem to fall for the same old trick. Competitors price low to get in the door and then nail them with scope control, change orders, product extension costs and other hidden items. You can try to convince them of your "pay no more once you've signed up" model but they fall for the other guy's pitch every time. Low numbers are sexy. I stopped trying to win this argument and chalk it up as some sort of human condition that I can't change (like thinking that $14.99 = $14).

8. Time is the enemy of all deals. If you have a chance to close something—don't let it drift.

9. Losing sucks. But at least it has made me a better competitor.

Reprinted from Both Sides of the Table

Mark Suster is a 2x entrepreneur who has gone to the Dark Side of VC. He joined GRP Partners in 2007 as a General Partner after selling his company to Salesforce.com. He focuses on early-stage technology companies. Follow him at twitter.com/msuster.

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