The Startup Failure Boom, And What To Do When It Happens To You

People are pouring into startups at a rate we've never seen. Literally, never—not even during dotcom mania, at least if Stanford's MBA program is a good barometer. Per a Fortune report, the 2011 class sent 16% of grads to start their own companies, a full third higher than the late-'90s peak, and more than three times greater than the early '90s averages. And we should probably assume that the 2012 numbers will be higher yet.

The reasons for this are well documented: It’s never been easier to start a company, lots of traditional careers (banking, consulting) have been tarnished, and Instagram sold for a billion bucks to a certain online yearbook website. 

There's a shadowy underbelly of this boom, though—and it's, well, another boom. There’s going to be a dramatic spike in failures. Many from first-time entrepreneurs. Many from first-time entrepreneurs who previously worked in comfortable structured environments. 

Failure is almost glorified in the startup world—Y Combinator founder Paul Graham recently told NPR that startup founders are "connoisseurs of failure, experts in both avoiding it and living with it," noting that only about half the companies he backs will thrive. Dave McClure, founding partner of 500 Startups, calls his own company a "fail factory." 

But when it happens to you, it’s going to hurt. It's hard to define failure at a startup but—like porn (thank you, Potter Stewart)—you know it when you see it. So it's worth a look at what to do in that moment you realize it's over.

I just survived my first failure.

I'd left finance in early 2009 to join a payments startup. It was well funded and I had a specific role to play on a broader team with lots of momentum. With a taste of building, I was convinced that starting businesses was what I should be doing, so I left after two years to build a web startup in New York early last year. We had a social-recruiting technology that seemed to address an enticing problem, a team with two star developers (one fresh off a Facebook exit), and we'd raised an angel round from top-notch consumer angels. Six months later, the product wasn't moving fast enough, and a slew of events took apart the team. We were a bust. Like mail couch-change-checks-back-to-investors bust. And my name was all over it.

I'd had plenty of professional ups and downs: My first employer (Arthur Andersen, with 80,000 employees) disintegrated six months after I started. But nothing was as awful as this. I'd failed and lost money for our investors. Yes, I had cofounders, but when you fail, it feels like it's all you.

There's tons to learn from failures, and stacks of books have been written about that, but I'm most intrigued by what to do in that moment you mentally accept your company is not going to work. You're basically high centered, and the wheels aren't even spinning. You've got to get yourself unstuck.

There seem to be three paths: one, you get out (go find safer work, maybe back where you came from), two, you immediately get as far away as possible, or three, you throw yourself into the next thing.

Option #1 seems easy, and many chose to (or need to) do it. You go get a job, get back on a decent salary, and regroup. If you're out of cash, you may have no other choice. I had a more runway, but going this route seemed like more failure. For me, it wasn’t easy—I couldn't go back and face my old colleagues and my old life; I wanted to do this.

The second path (going away) didn’t fit, either. I hadn't been at it long enough. Dane Atkinson, currently the founder/CEO of SumAll, had been at it long enough when his company SenseNet, Inc. got wiped out. He was 27 and had spent eight years building a team that totaled in the hundreds. He was "burnt toast" when it ended, and immediately started liquidating everything: he sold his bar, his apartment, and his stake in his other companies. He traveled and went scuba diving and learned to fly planes—anything to get away. He says this let him begin a process of mental reform that finally allowed him to accept that his next thing would have to be built slowly again, "inch-by-inch." He’s gone on to build Squarespace, where he was CEO, and now SumAll, which is 25 people strong.

I didn't feel like I had any time, so left me the third option: jumping back in. I'd accepted that I wasn't going to get a job; yet my own personal runway was dwindling, adding to the pressure that I figure something out immediately. I just needed a quicker mechanism.

Here’s what I did.

· Drink. No blackouts required, but just a couple of holy-shit-that-sucked cocktails with good friends from other worlds. I listened to my photographer, finance, and food friends—many are entrepreneurs, so I mostly listened to what they were doing. The tech startup world can be an insular little thing and it was healthy to get out of that and get other inputs. And your friends know who you are and will probably give you some good Stuart-Smalley-in-the mirror reinforcement.

· Draw. I sat in a room by myself with the door closed and a giant white board. I divided it in halves. On one side, I wrote down all the stuff I was good at and all the stuff my remaining cofounder was good at. One the other side, I wrote down how the software product we'd been building lined up with those strengths. It didn't. This was obvious—we'd failed, after all—but it it was conclusive to see there on the big board and it gave me the right grounding to find something else.

· Design. As in, design the business you can build based on those strengths. For us it was content (editorial) and events.

In hindsight, a little more downtime would've been welcome—we started building it quickly after the software product failed. But I credit this little process to the fact that we’re now building Wakefield, which publishes a daily email on startups and also puts on UNCUBED, New York's largest startup tech recruiting fair. Content and events—our strengths. And it's going well so far.

So when the tow truck's backing up to haul off your startup, it's going to hurt, maybe as much as anything else in your work career. But if you can figure out that first step forward, you just might find your stride.

If the numbers are right, it looks like a whole lot more of us might need to figure out how.

[Image: Flickr user bandini'sonfire]

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7 Comments

  • Matthewhsigman

    What about your bills outstanding? Especially if you have legal bills +5,000? What do you do? 

  • Sandeep Jaiswal

    Thanks for sharing your experience. You bought in me a mental reform which is better compared to what Mr. Atkinson did by spendig grn moolah! ;-)

    Keep inpiring. Cheers!

  • Futurebooks

    All entrepreneurs need to make
    mistakes to discover new ideas and direction. Mistakes give rise to innovation
    and new direction. The trick is to make mistakes at the lowest possible cost.
    Test your theories on a small scale before tipping in heaps of cash.

  • Peter Moelgaard

    thanks for sharing... keep your impressions coming, its interesting and you convey it well...

  • Owner of Lushpad.com

    What a great and timely article for me. It eased the tightness in my chest about my own precarious startup and put a smile on my face. Sure, I have the potential to lose the tens of thousands I put into developing my online site, but I also have the experience and tenacity to go at it again if need be!

  • Support

    Thanks good advice and sharing your experience. It is always difficult road for start up to survive and prosper. Key to any success is planing and hard work. I only believe in one thing if you think big you will work on it!!! If you can't take risk new venture is not for you, might as well do 8 to 5 job!!!
    Regards
    http://www.cmtech.com.au

  • humananon

    This was a nice piece.  Definitely gave a little inspiration to persevere through those failures that leave you without an ounce of confidence in yourself, and your ability to create something that people need and want, and eventually make a bloody modest honest living out of it!  Thank you for sharing your experience!