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The Tipping Point for Companies That Fail

I’ve been reading a great book, Ego Check: Why Executive Hubris is Wrecking Companies and Careers, by Mathew Hayward (Kaplan, 2007), which seemed to make its way to me at an opportune time. As a small business owner I constantly grapple with the magic combination of skepticism and confidence necessary to make smart business decisions. I’m convinced that company leaders with no confidence won’t make it; there’s simply too much competition for leaders who doubt themselves to prevail.

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I’ve been reading a great book, Ego Check: Why Executive Hubris is Wrecking Companies and Careers, by Mathew Hayward (Kaplan, 2007), which seemed to make its way to me at an opportune time. As a small business owner I constantly grapple with the magic combination of skepticism and confidence necessary to make smart business decisions. I’m convinced that company leaders with no confidence won’t make it; there’s simply too much competition for leaders who doubt themselves to prevail. On the other hand, as a “survivor” of the Web 1.0 irrational exuberance in Silicon Valley I also have to wonder, could a little bit of humility do a company good?

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Hayward reminds us that, of the 500,000 new companies started each year, two-thirds fail. That’s a lot of failure under what I presume must have been a lot of confidence. People don’t start businesses to watch them fail; so why, then, do we bother when the odds are against us?

The answer: Over-confidence. On the whole, even in an ubercompetitive business market, entrepreneurs are positive, but often nutty, people with more confidence than most. We go into our ventures knowing others will fail and assuming we’ll be the ones that come out on top. Put it this way, I’ve NEVER met an entrepreneur who said to me,

“Well, Company X really trounces us in sales and product quality, but we’re hoping that enough people won’t notice and that we’ll survive. If not, oh well.”

More likely I’ll hear:

“Company X? They’re good. They’ve got a good handle on the market, but we’ve got a better one.”

On occasion, I’ll hear this, which scares me:

“Company X? Never heard of them. Don’t care. We’re the only viable company out there.”

or,

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“We’re number one in the space.” (Said with no data, whatsoever).

or,

“We anticipate those numbers will double month over month.” (Said with no historical data, whatsoever)

or,

“We’ll be at (insert crazy number) in revenues by the end of the year.” (Said with no current revenues, whatsoever).

Of course, there’s nothing wrong with being Number One, or doubling your numbers, or blowing past targets, and there’s nothing wrong with being positive about your company. But somewhere along an entrepreneur’s journey lies a point of inertia and of reckoning, where the effort invested into a business begins to pay off, and where things grow beyond the entrepreneur’s individual capabilities. Not all entrepreneurs make it to this place, but all of us want to–this is our Holy Grail. And those of us who reach this point come to a critical decision: How do we want to handle it?

This initial plateau is bittersweet: There’s no going back to the ambitious and confident–but ignorant–state in which we started the business, and there’s no going back to a red-tape-less environment either. There are more people involved, and with each new “generation” of hires, a bit more of the original vision is lost, diluted. Entrepreneurs, borrowing from the confidence that made them successful in the first place, are compelled to impose their confidence on their teams, and in the process of “pumping up” the team, the press, and the public about their corporate babies, some entrepreneurs begin to believe their own exaggerations and, ultimately, minsinterpret their success as their destiny.

A friend of mine tells me of a start-up she worked for in the midst of the late 90s’ Start-up hoopla. She could check off every cliche on the list of the typical start-up existence–18-hour days, foosball, Krispy Kreme sugar binges. She was at a relatively low executive level at the time, a senior producer for her company (read: well aware of the company’s performance). But, of course, no potential partner wants to hear that you are “ramping up” to an appealing level of traffic. They want to know that you’ve already reached the sweet spot of popularity and ideal demographic before committing to work with you. The business development people in her company always assured the partners that they were already at this zenith, miraculously; and, even more miraculously, they weren’t questioned about it.

“These guys weren’t out and out lying,” she said to me, unwittingly defending them. “They truly believed that we would eventually hit these numbers. Problem was, they needed to close deals in order to get there.”

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A classic chicken and egg issue, indeed. Entrepreneurs become naturally adept at presenting the best sides of their ventures, this is a given. But at some point, the sales guys believed their own BS. When partners began to require accountability for the numbers they promised, they forgot they hadn’t told the truth in the first place and began to demand performance from their internal teams (including my friend), who felt a bit blindsided. Where did these expectations come from?

More and more stressed out with each passing day, my friend and her team tried to do what they could to optimize performance, short of committing click fraud. Though my friend wondered whether her team’s decision to use legitimate measures secretly disappointed the biz dev guys.

There wasn’t much more that the production team could do–the site was what it was, and no more. Partners felt they were tricked, and they were. Amazingly, the last to acknowledge what happened was the Biz Dev team. One of the team condemned his clients as “too stupid to get it,” another condemned her team for not meeting demand. But in the end, all of the stress and disappointment, and ultimately failure, could have been avoided if the Biz Dev team had presented their company differently–made a case, perhaps, for more reasonable growth, or even structured a partnership based on performance, so that the partner would have been encouraged by growth rather than disappointed when there wasn’t enough of it.

The story I tell is a classic case of confidence–overconfidence, even–crossing over into a business danger zone: hubris.

In his book, Hayward makes a great metaphorical point:

“Just as the cure for heart disease is to reduce bad cholesterol rather than all cholesterol, the cure for hubris is to fight the sources of false confidence, rather than to reduce confidence altogether.”

We need cholesterol, the healthy kind. Likewise, we need confidence to survive in the business world. But when hubris begins to gum up our thinking, bad things happen.

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Hayward points to a number of examples, including the fate of accomplished expedition leader Rob Hall, a man who had successfully summitted Mt. Everest dozens of times and built a following–and quite a living–leading others who aspired to summit the peak.

Hall was a talented mountaineer, to be sure, but he was paid to make sound judgements, to determine whether conditions were good enough to attempt summiting, and to decide whether his clients were able to reach the summit. In 1996, during his final climb, he broke his own cardinal rule of proceding no further up the mountain after 2pm, when conditions often became impossible for climbing, and he decided to take his client to the peak. Neither he nor his client made it back–they died near the summit. Anecdotal accounts suggest that Hall became overconfident in his abilities to climb Mt. Everest. He had done it so many times that he assumed anyone who went with him would, too.

In the business world this is tantamount to promising to make an impossible deadline or metric and “killing” your resources to get there. For Hall he learned too late how limited his resources were. But even for businesses with many resources, hubris leads to massive misallocations, for making claims that the company ultimately can’t support, for assuming endless supply or leverage, talent, or funds because leaders have come to assume that everything always works out. Famous last words, Dennis Kozlowski and Ken Lay.

Hayward provides guidelines for distinguishing confidence, overconfidence, and hubris:

Confident judgement reflects our belief about who we are, what we can do, and what we know and can predict. Confidence can be built on either false or authentic platforms.

Overconfident judgement arises when we overestimate what we can do, who we are, what we know, and what we can predict. It’s an everyday mistake to be overconfident about our abilities. When overconfidence reflects authentic confidence, it need not be costly.

Hubris arises when false confidence makes us overconfident with damaging consequences.

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I’ll add one more distinguishing point: Overconfidence becomes hubris in corporate cultures where any challenge or constructive doubt is immediately perceived as threatening; when people who provide the benefit of balanced analysis become enemies of the state, downers, or are no longer “team players”, and are slowly eased out of the organization like an infectious splinter. These people become only too lucky to get edged out because now the company has become toxic with hubris, drenched in paranoia, stupid and clumsy.

So what’s the happy medium? Personally, I don’t believe there is one. So long as entrepreneurs are successful there will have to be an overabundance of confidence. But I’ll go so far to suggest that into our overconfidence we inject some humility. We may believe we’ll be unreasonably successful, but we’ll employ reason anyway.

I like Hayward’s cholesterol metaphor: sure sometimes fat is good for you, but even successful entrepreneurs need to eat their vegetables.

Jory Des Jardins also blogs at Pause and BlogHer.org.