Failure is not a negative indicator
HBS shared an article in 2022 about "Why A Failed Startup Might Be Good For Your Career." For me, the key findings from the piece were:
HBS research found that entrepreneurs are much more likely to get a bump in seniority when they start a startup, even if it fails.
The stigma has been that if you've failed, people will not want to hire you, or you will need to accept a lower-salary job. Based on the research, that isn't true.
The grit that entrepreneurs have is remarkable. However, entrepreneurs often suffer a lot along the way.
I remember taking a job after my first startup failed. It was a confusing time: I had worked six years to get my startup into a stable position, made an excellent attempt at growing the company, and then was unable to raise a new round. I was full of grief and self-blame about what had happened. I had lost everything I'd worked for. It took almost two years to recover and start again.
I wanted to write this piece to cover how entrepreneurs should deal with failure.
How do you “feel” failure?
I've been speaking to many game founders who've had exits about angel investing in game companies. Many of these exited founders frown at games investing, saying they don't feel that gaming is where they should place bets. They feel that too many game companies fail and that it's tough to make a return on an investment in gaming.
I think more PTSD is going on here than what these exited founders realize.
A company failing is a single data point for an investor with several companies in their portfolio. In the long term, with several data points, not all of them will be failures. Some will be break even or "meh." And some will be data points of success. The power law is no different in gaming than in any other sector.
Let’s look at the founder's journey.
When you are a startup founder, there's a period called the "Valley of Death" that starts after the honeymoon ends, usually around year two or three at the latest.
For me, the Valley started when I realized that my runway would end in six months. The Valley continued until there was sustainable revenue.
When inside the Valley, each failure feels like a knife stab. Treating failure as a learning experience, a data point, and nothing else is challenging.
The negativity of failure comes from several mindset issues:
Loss aversion. You never take chances on big ideas; instead, you attempt to fix your broken product with minor adjustments or features. Loss aversion is the preference for avoiding losses over acquiring equivalent gains.
Sunk-cost fallacy. We've all been there, working on a product that isn't showing promise, even after several months of attempting to make it work. You hit the sunk-cost fallacy, the tendency to continue investing in something despite its unlikely success.
The solution: learn how to treat everything as small steps on a never-ending journey.
With Elite Game Developers, I intentionally wanted to start a business that could have a Valley of Death, but the existential risk of the Valley was non-existent. As I recently shared on the Naavik podcast, it is a one-person company that has a runway for me to get by and pay for website and newsletter hosting.
There's been a lot of intelligent people who've realized the tendencies and intricacies of failure.
In a recent video, Naval Ravikant said that failure is not a permanent state but rather a temporary setback. He suggests maintaining a long-term perspective and persevering through failures, knowing they are stepping stones to success. Maintaining resilience, learning from mistakes, and moving forward is crucial.
The failure of ambition
In another clip, Naval cautions against the "failure of ambition," where individuals set their goals too low to avoid potential failure. He encourages people to think big, pursue ambitious goals, and take calculated risks. According to Naval, fearing failure should not discourage you from aiming for significant achievements.
At F4 Fund, we often say that the best startups are wildly ambitious. Yet, they possess an achievable plan with a clear roadmap for how the company will eventually reach that ambitious goal.
Even with a great plan, there is uncertainty as you venture further. Fear, panic, and other emotions can influence decision-making and cause setbacks. Bad decisions are how failure turns into a mistake that might have been avoided.
To end this piece, here are some mistakes I've made in my career as an entrepreneur and investor.
Taking the first investor who said yes. It's hard to postpone the start of your venture by more months if you first received a dozen "NOs" from investors and then someone comes along with a "YES." You might not care about the terms or that you will be stuck with the investor on your cap table. I should not have been as emotional; I should have negotiated for better terms, gone out to seek other investors to compete to invest, and done reference checks.
I didn't understand what it takes to make a new product. I was in such a hurry to succeed that understanding what makes a great product in the category wasn't a priority.
Investing in a company without talking to other investors who are looking at the same company. I used to think that I needed to show strength and intelligence in making my own decisions to invest based on independently generated intel about the startup. The more I've invested, the more I've realized that collaborating with other investors to understand their rationale for being interested in a company or not being interested helps me observe and learn from argumentation, which I lacked before.
Final words
I’ve previously written about failure. Here are a few pieces: