How To Lose $35 Million And Remain A Success

Steve Blank had high hopes for his video game company. When it crashed and burned--and took millions from investors down with it--how did he recover?

Not long after Steve Blank's videogame company Rocket Science Games lost $35 million for its investors, his wife noticed he was acting a little strange.

"I was coming home and going to bed at four in the afternoon," he says. The year was 1996. At the time, Blank, now the mastermind behind the Lean Startup Movement, was devastated. His company had been on the cover of Wired and the press had called him and his team "the first digital super group." People believed Rocket Science would be responsible for revolutionizing the video game industry.

But the revolution never came. Rocket Science turned out to be a spectacular failure. When Blank's investors dropped the company, he went through what he likes to call "the six stages of failure and redemption"--shock and surprise, denial, anger and blame, depression, acceptance, and last but not least--insight and change.

"We were one of the hottest companies in Silicon Valley. To have our customers tell us our games sucked--I couldn't believe it," says Blank. "When the company was finally shut down and all the rubble stopped bouncing, I started thinking about what I could have done and why I didn't do it."

Accepting his failure took well over a year. Six months later, he heard from the VCs who'd pulled their funding out of the business. They wanted him to evaluate their portfolio. Seriously? Blank was in awe that they'd make such a request.

The company had failed, they told him, but they still thought he was a smart business guy. Not long after, Blank went on to found E.piphany, which developed customer relationships development software and earned its investors $1 billion a piece in returns.

Here are six lessons Blank learned from his first failure that helped him succeed the second time around:

1. Don't believe your own press release.

Your business is about much more than you let on in your marketing spiel. Blank got swept up in all the press and positive attention his business was getting, letting practical matters like whether or not they were actually able to monetize their ideas slip through the cracks.

'"If you can't differentiate your press from bullshit, your tenure as the founder and CEO is short," says Blank. Focus on the cold hard numbers--"not the echo-chamber of press and PR most founders live in," he says.

2. If you hate your customers, you're screwed.

When Blank realized his core customer base was 14-year-old boys, he couldn't help but feel put-off. He wanted to build video games with complex and compelling storylines, but his customers were more interested in killing stuff.

"You can't blame your customers for who they are," he says. Still, he couldn't help resenting them. Once you disconnect yourself from customer needs and desires, unless you get really lucky, says Blank, you're in trouble. "If you find yourself hating your customers, you should shut down your company."

3. Confidence and stubbornness are not the same.

Founding a company and developing an innovative idea means you're taking a risk. It requires a healthy ego and some hubris. But there's a thin line between having the confidence to know what you need to do and feeling like you don’t need to listen to anyone but yourself.

Blank didn't have an advisory board of people who were guiding him when he started Rocket Science. "I would have been better helped by having people in the domain I trusted who could say, 'Steve, you should understand what you are about to do here,'" he says.

4. Test your idea outside the building.

Rocket Science developed four different games from the get-go. Feeling the pressure of shipping them out in time for Christmas, rather than testing one game with customers and figuring out how to make it better, they went in full force.

Blank's lean startup model comes out of his realization that ideas need to be tested and iterated before you get too deep into developing them. Users hated the first two games Rocket Science made, but it still pressed on and made two more. "That was a pretty big wakeup call," says Blank.

5. You should be losing sleep over it.

Entrepreneurs need to be able to convince investors, customers, and potential employees that they are worth taking a chance on. That’s a key requirement if you want to scale your startup. Believing in your goals and future plan is important, but don't ever let the risk involved escape you.

"You should lose sleep over what you are saying, not feel smug and satisfied," says Blank. "At Rocket Science, I believed every word I said."

6. Find someone who can slap you silly, not twist your arm.

Blank often let his board call the shots. Even when he didn't agree with them, he would relent to a decision they made because they were the ones with the money. But often that meant going against what he felt was best for the business.

Having advisors outside of his board would have helped him better weigh his options. "I wish I would have had some great advisors who would have slapped me silly," he says. "If you don’t stand up for what you believe is right, then you don’t deserve to be the founding CEO."

[Image: Flickr user kris krüg]

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