Episode 29: Startup Pain: The Transformative Power of Failure

Ever wonder how setbacks can set the stage for monumental success? Join me, Shawn, as we delve into the riveting world of startup victories and woes. We'll dissect the reality that 95% of new businesses don't make it and uncover the myriad of pitfalls they face, from running out of cash to missing the market fit mark. With harrowing tales of personal sacrifice from founders who've risked it all, to the harsh negotiations that come with financial downturns, this episode is an unvarnished look at the underbelly of entrepreneurship. But hold tight, because we'll also illuminate how failures often pave the way to wisdom, and why some venture capitalists consider a flop a future success's prerequisite.

This latest installment of our podcast peeks behind the curtain of startup resilience and the profound personal growth born from adversity. I'll share my own battle scars, including the gritty details of remortgaging my home during rough patches, and offer guidance on navigating the legal maze of insolvency. In sharing the transformation journeys of Twitter and Slack, we unearth the revelation that a stumbling block can be a stepping stone to industry disruption. This heartfelt discourse is not just for founders and investors; it's a poignant narrative for anyone intrigued by the boundless possibilities woven through the trials of innovation. So, tune in and arm yourself with the knowledge to turn failure into your most potent ally.

Transcript

Shawn: 0:00

Hello and welcome back to Full Circle with Shawn. I am your host, Shawn, and today we're back into startup pain and failure. Now let's start with failure's tough right. It's very tough. It's also an opportunity to learn and grow. Every setback is a setup for a comeback right. Sounds like a football pun, but you should take the moment to reflect on what didn't work and why it didn't work, and maybe even how you can pivot and how you can persevere.

Shawn: 0:34

You are in the company of a lot of innovators and a lot of leaders, because they've all stood where you are standing right now and they've used their experiences and what they've learned in their failures to reach new heights. So you need to keep pushing forward, you need to adapt and you need to continue to innovate. It is about your resilience, it is about your creativity, and remember, most successful stories often begin with the most challenging chapters. So let's define failure. Failure is often seen as not meeting the set objectives that are necessary to sustain business operations and business growth. Now we can break that down a bit further, right? So we have financial insolvency and that's we run out of cash, and that happens to a lot of startups. And just before I get into all of them. Remember, 95% of startups will fail and it's the way it works. So, financial insolvency as we said, we ran out of cash, right, we couldn't secure additional funds or we couldn't generate sufficient revenue to cover our operating costs. We have market fit failure, so we've developed a product or we've created generate sufficient revenue to cover our operating costs. We have market fit failure, so we've developed a product or we've created a service and it fails to meet a substantial market need or attract enough customers. We have scaling challenges, so we get a good product or a good service, we have a few customers, but we have the inability to scale the business and this could be due to operational difficulties or financial strain. We have legal and regulatory issues, so we could encounter significant legal or regulatory challenges that hinder the operations or force a business to even shut down. We have ineffective management, so maybe we've made poor strategic decisions, maybe we've had inadequate leadership or maybe we lack the key skill sets within the management team, which would lead to suboptimal operation and growth advances in the industry we're trying to hit and it could result in outdated products or outdated services and we talked about that a little bit in delays right, when we have delays in our product or we're trying for perfection, and then finally, we have competitive disadvantage right, so we can lose significant market share to competitors due to inferior products, inferior services or even just our marketing strategies. So each of these different factors individually or for some startups, even combined or pieces of can be viewed as a failure in your startup.

Shawn: 3:19

So let's look at a couple of startups that have failed. Theranos right, so that was founded by Elizabeth Holmes and it promised revolutionary blood testing technology, and what happened was it collapsed due to fraud claims. Basically, its technology's capabilities were overinflated and it led to legal actions and disillusion. You have Webvan, so Webvan was during the dot-com bubble right, and it attempted to revolutionize grocery delivery, and they put a lot of money into infrastructure spending and rapid expansion, and that actually is what killed it. It fell due to overexpansion and lack of sustainable demand, so it went bankrupt in 2001.

Shawn: 4:04

You have Juicero, and that was a high-tech juicer and it raised about $120 million in funding, but it failed because the product was too expensive and technically unnecessary the juice packs could just be squeezed by hand and it made the machine itself redundant. And then you have Quibi by hand, and it made the machine, itself redundant. And then you have Quibi. So Quibi had nearly $2 billion in funding, right, and it aimed to redefine short form streaming content for mobile devices. But just after six months after launch, it closed its doors due to poor user adoption and the business model was quite challenging.

Shawn: 4:47

Another one, another victim of the dot-com bubble petscom right, so petscom. Because of an unsustainable model basically, they couldn't profitably sell pet supplies online at scale. And finally, just as an example, we have Segway. So, despite a lot of different pitfalls, like technology over promises, like mismanagement, premature scaling and misunderstanding market needs and that's why we go to MVP and I talked about that in a previous episode but they are very common themes in startup failures. Now, that's all fine and well, people have failed.

Shawn: 5:46

But what happens when you fail and that's a it's more of a personal journey, right, so you're going to have a lot of emotional issues, so stress and anxiety. So the high stakes and uncertainty in startups can lead to a significant stress and anxiety level, especially when you get faced with the failure. A lot of founders have identity crises, so they tie their self-worth to their startup success, so a failure could lead to feelings of inadequacy and personal identity issues, depression, right? So the disappointment and public nature of a startup failure can sometimes lead to severe depression, and then you have fear of future failure. So a lot of innovators who experience failures are later deterred from founding or pursuing new ventures. So this has happened. What are some strategies? Right? So we can embrace failure as a learning opportunity and we've talked about that a little bit so we can reframe the failure as a step.

Shawn: 6:54

Other professional networks that can provide emotional support and practical assistance during the tough times. We should have a work-life balance. So we try to keep our personal and professional lives balanced in helping to manage our stress and preserving our mental health. We can practice things like meditation or exercise or really focus on our hobbies. We should be setting realistic expectations, right. We should understand that we're in a high-risk game, right. The nature of startups and setting realistic expectations can prepare us emotionally for potential setbacks. And then what we really want to do is reflect, right, and I talk a lot about reflection. So we always want to reflect on both the successes and the failures, to understand what works and what doesn't work, and that can really help to build our emotional resilience and give us insight.

Shawn: 8:05

Now, if we go, let's go back to a Shawn story, right? So mindfulness and well-being practices. So when I'm going under lots of stress, I actually do big Lego packs, right? Or I write because I like to write, okay, and that helps me take my mind off of a lot of things. And if you heard, you know some of my previous podcasts. I do talk about sci-fi. So I might watch a sci-fi show or a sci-fi movie, but if it's high, high stress, then that won't help me and I know myself enough to know that I need to concentrate on something that really exercises my brain a bit more. I did the Millennium Falcon and the Lego pack in less than two days and it's one of the biggest Lego packs, so it's. I need that, that concentration, and I need to take my mind off of things. But that's all in knowing ourselves and what works for you and what works for you is obviously most likely going to be difficult. If you like Lego, fantastic, but if it's not for you, you should find out what works for you, because I've been through failure and these are the things that will keep your sanity Now when you fail, if you failed and say your business is winding up just because you are taking your mind off it.

Shawn: 9:32

You still will have consequences and the first thing I want you to remember is that time will sort them out for you. I didn't say it would be easy. I didn't say it won't be painful, but you will recover. And it could be that you know you go bankrupt. It could be that your personal liability right. So when you get into a startup, you should understand the scope of your personal liability, especially if you're making personal guarantees, which happens a lot with business debt. If you've got investors, you know you might have legal obligations to your investors and you need to make sure you adhere to those legal obligations, especially with the handling of the remaining assets or the intellectual property, and you stick by the agreement.

Shawn: 10:20

I guess the good thing about my failure is not a lot of good things about a failure. Right, I mean reflection. Sure, we all say that and I have reflected a lot and I've put in changes in the way that I operate because of decisions that I've made. But sometimes I mean mine was economic and decision, so mine was a mix there. But you know, you put in those things but I didn't have investors. Okay, it was, it was built from the ground up. I had no investors, so I didn't have anybody to answer to there.

Shawn: 10:55

But I did have some debt and what I ended up doing is I remortgaged my house. I fully remortgaged my house. I paid salaries, I paid all my contractors, anybody that was working for me and I even tried to settle my office. Because if I could have settled my office and I still had two years left on the lease, I think if I could have settled my office then I wouldn't have had to wind up the company, but the agent wouldn't settle. And I offered them a substantial amount of money but they wouldn't have had to wind up the company, but the agent wouldn't settle. And I offered them a substantial amount of money but they wouldn't settle. And it was early COVID, so they knew that they weren't going to get anything from it.

Shawn: 11:34

But then I was forced to wind it up and there are rules about that. You should look at the rules of solvency and insolvency and everything that comes with that. In fact, if you are going to be running your own business, then you really should take some classes on governance, right, because governance will teach you a lot of what you can and can't do and procedures for stuff like that, because when you're under that amount of stress and this has happened to you and you're deciding what you're going to do next, you need black and white directions. You're not going to be able to think outside the box on this one. You have to follow the rules and you need to know what they are, and your mind is going to be blowing up with all sorts of feelings, with all sorts of you might be beating yourself up, right. So the more you can get that straightforward, the better. And if you already know it and you understand it so you can plan for the worst day that could happen, you'll be better off. And just because you plan for it doesn't mean you know, you hope it'll happen or it will happen. It's more, you should know what will happen if you get to that point, and not just what will happen, but how it will happen. And then take some time to breathe, right. So don't just jump right back in the next thing. Take some time to breathe but then do jump into the next thing.

Shawn: 13:04

I see a lot of innovators who have tried and now work for somebody, and fair enough. But if you want to succeed eventually you're going to have to keep trying. If your first startup fails, then learn from it, identify it and move on to the next one once you've recovered from the failure. And if you have to get a job in between, I completely understand that. But if we look at certain companies that have failed, we look at Twitter and everybody's going to go, oh, but Twitter launched and it was massive. Yeah, but Twitter wasn't Twitter. It was part of a large company called Odeo and it was focused on podcasting. But when iTunes began to dominate the podcasting space, they faced failure. They were going to fail, and so this led the team to pivot and they came up with other forms of digital communication and it led to them creating Twitter. So they were going to fail in their business, and so that's what I'm saying is technically, odeo, the podcasting platform it was, has failed, but Twitter came out and now Musk bought it. So there you go right Slack. I've talked about Slack. I've talked about Instagram.

Shawn: 14:26

On a previous one, you got Starbucks right. So before Starbucks became massive, it was originally just selling coffee beans and equipment and they weren't doing very good. So the director of retail operations, mr Howard Schultz. He went to Italy and he was inspired by the Italian coffee culture and he really pushed the company to pivot. And there you go it transformed the business entirely. But Groupon Groupon used to be called the Point right and it was a platform for collective action and fundraising and it didn't gain momentum and it was well. Technically it failed right Because the team pivoted to apply the idea of collective buying to coupons and discount and that led to Groupon.

Shawn: 15:19

So there's plenty of stories of how people have turned failure into success. And it might not be your story. Your whole business could have failed. But then what comes out of the ashes of that and it's up to you to bring it out of the ashes it's your concepts and your ideas. I mean, you got somewhere already. Now it's time for the next step. And then it's time for the next step.

Shawn: 15:45

And I wouldn't wish failure on anybody. In fact, a lot of VCs. When I was talking to them quite some time ago, they said, ah, you know, but you haven't failed and we don't feel comfortable investing in a founder that hasn't failed because you don't understand it. And I don't agree completely. Like sure, when you fail, wow, I mean your perspective will change a lot, but it doesn't mean you have to fail to be successful. So I don't agree with that mentality completely, but, as I said, it does give you a different perspective and, in a way, it might make you more humble, and today's podcast is all about failure, so let's stick with that Now. So you failed and you've recovered, and maybe you went to work for somebody and now you're starting your next startup.

Shawn: 16:38

So you want to really analyze why your previous venture failed. Okay, I know it's painful and I know that. You know you might shut down a little bit when you're, when you're trying to think of things, but you got to get through that if you're going to to learn from it and move forward. So you want to look at the any specific mistakes, any, any missteps you made, because you don't want to repeat them again. Right, you want to refine at any specific mistakes, any missteps you made, because you don't want to repeat them again. Right, you want to refine your business model. So most likely you're doing something else, but if you're doing the same thing, especially, use the insights you gain from failure and refine or even completely overhaul the business model, but that'll give you a chance to make it more robust and adaptable to the market demands. What you probably need to do is add in a bit of risk management, so you need to develop stronger risk assessment and management strategies and you need to learn to anticipate potential problems earlier so you can have contingency plans in place that'll actually get you through that. Improve financial control so you can have contingency plans in place that'll actually get you through that. Improve financial control, so you can implement tighter financial controls and better monitoring. So this really helps.

Shawn: 17:50

What I did is I brought on my break, so I call it my break, right. So the CEO of my robotics company helps me to keep my direction. So if I come up with all these really awesome ideas right, because all my ideas are awesome, so humble, right. But if I come up with a new idea and I run it by him and it either aligns or it doesn't align, and if it doesn't align at all or we don't have the money to do it or something like that, it goes in the journal and we might take it out someday and we might not, right. And then he also helps me weigh up should we be spending the money here right now? Should we be spending the money here right now? And he's more than a mentor. He's my break, right. I'm the gas, he's the break. So it's good to have people like that in your life and identify them and and utilize them. I mean, they want to be part of what you're doing. Then, then utilize that and then you can use, say, strategic networking, right. So leverage more networks and more strategically and use the relationships that you've built in your past venture to gain further insights or partners, or or even investors.

Shawn: 19:00

So what are the, I guess, key elements that we want to take out of this conversation? So we want to look at reframing failure, right. So we want to view failure as an opportunity for reassessment, an opportunity for growth, and we don't want it to be a stop signal in our entrepreneurial journey. We want to evaluate our vision, our team, the market we're trying to go into and even the product acceptance, to try to understand the roots of our challenges.

Shawn: 19:36

Perseverance in startups is key, right? So the failures can be, you know, inevitable and we need to persevere. We need to have persistence, right. We need to, uh, we need to look at our emotional impact and the resilience that we have. Um, obviously, there's a lot of psychological effects of failing and there's, there's stress, there's identity, there's uh, there's so many things that you will go through, that I went through, but you will get past it. We need to look at the legal and the financial implications and consequences, because we will have consequences of failing. And again, it's not the end of the world, right, it's the end of a part of your life. Yes, that startup is gone, but it's not the end of the world. It's another chapter of your story is about to start.

Shawn: 20:35

We want to look at pivoting. So maybe we didn't lose the whole company. Maybe we lost our market share, maybe somebody's come out and displaced us. So what can we do? Do we do what Twitter did? Do we do what Slack did? What do we do? And if we identify early enough, will we still have the resources to pivot? We could be another big success story.

Shawn: 20:57

And finally, we want to make sure we have a support system. So we want to make sure that we have mentors, you know, from family to friends, to peers and we communicate. We communicate what we're feeling, what we're going through, and I'll tell you right now, most of them will not understand to the extent that you're feeling, but they are there and they will listen and that's what you'll need. You know, like they say, you need a shoulder to cry on and you might need that, and that's okay, it's perfectly fine, but just don't let it stop you. Don't let it stop you from picking up that next thing, because the world needs innovators. Okay, and the big thing about innovating is we're going to fail because we're creating new products and we're creating new technology and we're creating new services and we're testing those in market and we're being innovative and not all innovation is.

Shawn: 21:57

I mean you could be really early to market and I've done that with a couple of things. I was way too early in market. You could be. It's not the right product. It needs to be a different level. There's so many things that could be going on that you need to stop and reflect and refine and keep moving, because the world needs you, the world needs your founders. That's it for this chat, and the next episode we'll be talking about critical thinking. So thank you for joining me on Full Circle with Sean and I look forward to chatting next time.