Proof That Failure Is the Key to Success

INC.

By Peter Cohan

August 11, 2013

Updated From July 12, 2013

I teach strategy and entrepreneurship at Babson College. Its undergraduate entrepreneurship program has topped the U.S. News & World Report survey every year in the last 20. Babson asked me to create a new course: Foundations of Entrepreneurial Management.

And if a student asked me the most important thing the she had to know by the end of the semester, I’d tell her that to achieve start-up success; you must fail over and over again until you learn what you need to succeed.

Failure: The Cold, Hard Truth

Before getting into the details of why this is so important, consider these statistics. Based more on the collective wisdom of venture capitalists I’ve interviewed, your odds of achieving start-up success on a large scale -- meaning starting a company that is worth at least $1 billion -- are about one in 10,000.

The logic behind this is that I have spoken with many VCs who talk with about 1,000 entrepreneurs for every one or two that they fund. This means that the other 999 or so, either get funded by another VC, find some other way to get capital, or shutter themselves. And out of every 10 companies in a VC’s portfolio, the general thinking is that one of 10 ends up being extremely successful, two or three more do reasonably well, and the rest close down.

Since April 2011 when I started researching my book, Hungry Start-up Strategy, I have interviewed at least 200 start-up CEOs. And one of my favorite recurring themes from those interviews is how so many successful start-ups failed over and over again before figuring out how they could succeed.

Three such stories come to mind-- pay service PayPal, team productivity enhancement app-maker Collaborate.com, and recruiting software as a service company Bullhorn.

Case Study: PayPal

The first is PayPal. Surely you have heard of this e-payment service that eBay acquired for $1.5 billion in 2002. What is interesting to me about PayPal is that one of its co-founders, Max Levchin who is now chairman of Yelp, told me that he originally started Confinity -- one of PayPal’s predecessor companies, to provide operating and systems software for the Palm Pilot, a handheld device that was very popular in the 1990s as a place for people to store all their contact information.

One of Confinity’s features was the ability to make payments online. Levchin kept receiving emails from eBay users who asked him to develop that feature to make it easier to pay for items purchase on eBay more securely. But Levchin ignored those emails from users for six months because he wanted Confinity to be a Palm Pilot operating system company.

But ultimately he abandoned his idea and focused solely on the eBay payments technology. In 2000, he merged Confinity with another payments company, X.com, co-founded by Tesla CEO, Elon Musk and eBay bought PayPal two years later.

Case Study: Collaborate.com

On July 9, 2013, I heard the story of Collaborate.com from Matt Cutler, who started Kibits in January 2011. “We had a general idea that we wanted to create private groupware that would be a Swiss army knife of functions -- Dropbox, social networks, and work-related activities. We were ahead of the market on social but we found pockets of intense use.”

Those pockets were in the area of business collaboration. According to Cutler, “Business teams told us that it was great for collaboration. They said, ’It is organized the right way. Please add these features.’”

Now Collaborate.com is booming. As Cutler explained, “We are enjoying triple to quadruple digit growth. Active users, registrations, average purchase price -- all our operating statistics are up and to the right.”

Case Study: Bullhorn

On July 15, I spoke with Art Papas, CEO of Bullhorn, which provides software as a service to employee recruitment firms. Papas started Bullhorn in 1999 but it was not until 2008 that he really figured out what Bullhorn was good at.

He failed in his attempt to make it a platform for connecting freelance workers with employers and at turning Bullhorn into a provider of software to help procure creative services.

But Bullhorn stumbled onto a problem that led to a very successful outcome. Papas met “Mike O’Donnell in Woodbridge, New Jersey who was willing to pay us to build a database for his recruiting firm to keep track of his operations over the Internet. Based on that, we were able to raise $750,000 from our original investors.”

By solving that problem, Bullhorn put itself onto a path to a profitable sale of the company to a private equity firm that leaves Papas still in charge. “We now have 6,000 customers in 34 countries and after raising $26 million in 2008 we reached $40 million in revenues by 2012 and sold our stock to a private equity firm for over $100 million.”

Even after selling out, Bullhorn remains private and Papas is CEO. “I can now get access to the money I need to make acquisitions and add new products. By 2017 we should reach $150 million in revenues and be in a position to go public or be acquired," explained Papas.

These three stories bring to mind the famous saying of GE founder, Thomas Edison, “genius in 1 percent inspiration, 99 percent perspiration.”  For aspiring entrepreneurs this means that if you have an idea for a business, build the product, give it to customers, and see what happens.

If the customers don’t like your idea, try something new. If they like part of the idea, develop that. And if it fails, keep trying until you succeed.