The climate has never been better for entrepreneurs, but the startling reality is that for the past thirty years, the failure rate of new businesses hasn’t changed–and it’s pretty depressing. Whatever way you look at it, the fact is, most companies fail.
Data from the Small Business Administration and the Bureau of Labor Statistics consistently show that approximately half of new start-ups no longer exist after five years, and that approximately two-thirds will cease to be in operation ten years after founding. Dane Stangler of the Kauffman Foundation notes that approximately five hundred thousand new firms are created every year and that after five years, fewer than half of these companies will remain. Shikhar Ghosh, a senior lecturer at the Harvard Business School, looks at startups that take in outside money and finds that 30 to 40 percent fail. He defines failure as liquidating all assets, with investors losing most or all the money they put into the company. If failure is defined as not realizing the projected return on investment, then the failure rate is 70 to 80 percent.
And the startups that get big–really big, Amazon or eBay or Google or Salesforce.com big, represent only a small sliver of total businesses. Of all of the technology companies started in the United States in any one year, only approximately fifteen ever generate $100 million in annual revenue. Those fifteen companies will ultimately be responsible for 97 percent of the market capitalization of the entire set of companies started that year. The truth is, not everyone is born to be an entrepreneur. It’s incredibly hard work. Marc Andreessen, the famed entrepreneur turned legendary venture capitalist, famously told then-CEO of Loudcloud (and now business partner) Ben Horowitz that when it comes to starting a company, “You only ever experience two emotions: euphoria and terror. And I find that lack of sleep enhances them both.” Eddy Lu, the entrepreneur who slept in his car when he started Grubwithus and was ferociously trying to make ends meet, couldn’t agree more. “It’s not for everyone,” he says.
Ben Silbermann, the founder and CEO of Pinterest, always idolized entrepreneurs (he says he thought they were cool the way people think basketball players are cool), but instead of striking out on his own, he took a job at an IT consulting firm when he graduated college and then went to Google, where he worked for the display advertising group. He imbibed everything he could from the company–learning to think big and embracing the importance of working with very smart people. “Google had the audacity to think at a really big scale . . . It was inspiring,” he said.
But he wanted to build something on his own, though he wasn’t sure what. He resigned and lived off his personal savings while making iPhone apps with a college friend. They weren’t successful, and he had a big vision, but not a big paycheck. “I’ve worked on products where they go down in the middle of the night and no one notices,” he says of this time.
None of those apps went very far, and neither did Pinterest–in the beginning. The company, which launched in an apartment in March 2010, had a low user base and very little engagement. After nine months, the site had less than ten thousand users, and many weren’t using it very frequently. “It was like stealth without us trying to be stealth,” he said. But he found the idea of telling people he failed to be too embarrassing, so he continued to tinker and improve the site. He obsessed over making it right, and after some media attention in June 2011, the site began to reach a tipping point. Today, Pinterest has more than twenty million users and is one of the fastest-growing social services in the world. Ben Silbermann’s investment in making the site better and his “how can I?” attitude transitioned him into a successful entrepreneur,
Maybe you have an idea, but it hasn’t achieved the traction you anticipated. How do you know whether to keep going or to make a change? You might modify the product, change how you market or distribute it, or examine how external events (technology or regulatory changes, for example) affect it.
Ben Silbermann made incremental changes to improve Pinterest, but he kept the vision and didn’t pivot from the idea of a social bulletin board. Marc Benioff evolved Salesforce.com by bringing popular consumer trends to the enterprise, but never pivoted away from his idea of making software easier, more accessible, and more democratic for businesses.
Other entrepreneurs have executed a “big pivot,” changing everything about the product. Instagram, which started as Burbn, a mobile social check-in app with game features, saw that the photo sharing feature was where the majority of its user engagement came from, and pivoted before launch; Fab, the popular design-focused e-commerce site, was a daily deal site before it became a design-focused storefront. Switch Video started as Switch Fuel with a vision to make energy out of switchgrass, but its explanatory video opened up new opportunities, and producing videos became the new business. Badgeville was originally called Credd and was a consumer website focused on online reputation. “People weren’t really excited at all and thought it was a dumb idea. I had to go back to the drawing board,” says Kris Duggan, CEO. Kris thought about his strengths, which were more in the enterprise space than the consumer space, and transformed the company to play into his “superpowers.” He also talked to leaders at more than one hundred companies to investigate what kind of service they needed. He used that insight and research to create a product that people wanted.
Amazon founder and CEO Jeff Bezos calls this investigate-everything process the “regret-minimization framework,” urging you to explore all the plausible possibilities–spending extra time figuring out if the idea is worth it, rather than later regretting that you gave up too early or didn’t delve deep enough.
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Excerpted with permission from the publisher, Wiley, from Rebooting Work: Transform How You Work in the Age of Entrepreneurship by Maynard Webb. Copyright 2013.
–Maynard Webb is the founder of the Webb Investment Network (WIN), a seed investment firm dedicated to nurturing entrepreneurs. Webb is currently the chairman (and was formerly the CEO) of LiveOps, a cloud based call center with a community of 20,000 agents, and a board member at both salesforce.com and Yahoo! and was previously COO of eBay.
[Image: Flickr user Jeannie]