I launched a website that features my collection of memorabilia from failed products and companies. Why? Because as much as we focus on success, there is a great deal to be learned from failure.
I’m not the only person who believes this. Lindsay Hyde, an entrepreneur and advisor to startups, teaches a class at Harvard Business School on “Avoiding Startup Failure.”
“As a founder, you aim to run disciplined experiments to validate or invalidate your hypotheses as quickly and inexpensively as possible,” she told me. “By learning from the failures of other companies, you can accelerate your learning and avoid repeating mistakes that have already been made. Particularly in the earliest days, this is an essential part of navigating the Idea Maze and coming out the other side.”
Most of the entrepreneurs I work with seek actionable advice, not only on what to do but also what not to do. They’re eager for suggestions that will help them avoid mistakes.
That is why I have created a two-part blog series about lessons I have learned from observing and working with successful and failed companies. This post deals with failed companies, the other with product failures.
What Can We Learn from Failed Companies?
Let’s acknowledge a harsh reality right up front: companies fail all the time. Some are startups, some are decades old. The specific circumstances around a given company’s demise can vary widely, but there are some common themes.
Lindsay Hyde offers some valuable observations: “Founders are often told to ‘fail fast.’ But failing in and of itself isn’t the aim. The aim is to reflect on the reasons for the failure, to learn from those experiences, and to ultimately grow from them. Learning from our failures is difficult. We may be inclined to blame others and we may struggle to diagnose the causes. What can be easier – and often just as effective – is to study and learn from the failures of others.”
Founders are often told to ‘fail fast.’ But failing in and of itself isn’t the aim. The aim is to reflect on the reasons for the failure, to learn from those experiences, and to ultimately grow from them.
Here are five lessons I have learned from analyzing failed companies.
1) Constantly monitor the performance of your business model
Rare is the company where everything always goes according to plan. The challenge is not to avoid all bumps in the road but to skillfully navigate around them.
Let’s look at the most worrisome deviation from plan: revenues falling below expectation. There can be several reasons, such as:
-
- You’re targeting a market that doesn’t have enough companies with adequate budget
- Your assumptions on pricing are too optimistic
- Customers/prospects do not perceive your value proposition the same as you do (your product is a “nice-to-have,” not a “must-have”)
- Incumbent vendors are well-entrenched
- Customer churn is too high and repeat business too low
- Weakness in the sales organization or distribution channels
Sometimes, variations in company performance can be traced to changes in the environment. So, you need to be alert to developments that you don’t directly control. Examples of such changes include:
-
- New technologies or disruptive approaches that offer customers an alternative way to solve the problem(s) you address
- The entrance of new competitors, or significantly enhanced performance by existing competitors
- Changes in your target customer’s business environment
- Macro-economic factors (e.g., COVID, war in Ukraine, or the 2008 downturn)
In some cases, the base business model may be fundamentally flawed. Two companies that succumbed to this disease were:
-
- Juicero, which sold an expensive juice press and proprietary packets of fruits and vegetables. The problem was that customers could bypass the machine and squeeze the packets themselves to make a glass of juice; and
- MoviePass, which offered an irresistible offer: users could see one movie each day in a theater for $9.95 a month. MoviePass would make up the revenue gap with theaters. It sounded financially unsustainable – and it was. The more customers used the product, the more money the company lost.
Finally, let’s not forget companies that fail due to outright fraud, such as Enron and Theranos.
2) Ensure that your business has legs
This advice is mainly for startups and young companies, although even mature companies can find themselves at a dead end after years of growth and profits.
It’s important to recognize that initial success doesn’t last forever, or even very long. No matter how encouraging the early days may be, every young company needs a second and a third act. There are numerous ways to maintain momentum. For example,
-
- Follow-on products with enhanced features and functionality
- New, complementary product lines
- Expansion into new markets (e.g., by industry, geography, company size)
- Additional sales channels
- Acquisitions (of technology, products, or companies)
Some notable examples of companies that have built upon initial success are:
-
- Salesforce, which started in CRM and expanded into marketing and service;
- Amazon, which used its internal ecommerce infrastructure as the basis for Amazon Web Services; and
- Workday, which started in HR and expanded into finance.
Another mark of a company with legs is one whose founder and/or CEO has a long-term vision. These visionaries see beyond current technologies, products, and markets to a day when the company could possibly look radically different than it does today.
That vision, however, must be matched with a realistic plan for how to get there. Long-range thinking always must be supported by excellent short-term execution.
Successful companies avoid stagnation. There’s no better example of a company with ever-expanding ambitions than Amazon, which started with a single product (an ecommerce bookseller) and today is practically everything to everybody.
In contrast, companies that don’t adapt to rapidly changing market conditions can fail. Think of Blockbuster, AOL, and Radio Shack, for instance. Each at one time was a market leader, yet ultimately the world passed them by.
3) Rigorously Enforce Financial Discipline
Most companies ultimately fail for one reason: they run out of money. So, let’s examine a variety of contributing factors.
Obviously, one is insufficient revenues: the company doesn’t sell enough product because too few potential customers have found a compelling reason to buy. Or, the product hasn’t been priced appropriately, a necessity for generating both sales and profit.
A common misstep is spending heavily on marketing and sales before a strong product/market fit is established. Any good marketer will tell you that strategy precedes tactics – and sound strategy requires both a clear picture of the target audience and a crisp, compelling message for them. That’s what I mean by a strong product/market fit.
Most companies ultimately fail for one reason: they run out of money.
A mistake seen over and over – in companies large and small – is a failure to closely monitor all aspects of spending, especially hiring. It never ceases to surprise me when highly successful companies suddenly find they can do just fine without 5,000 employees. The same discipline, though, must be applied in even the smallest business. When you’re only 20 people, you must fully justify every new hire and closely assess the expected outcomes.
Outflows on other expenditures – office space, supplies, travel, entertainment, off-site meetings, etc. – also can creep up until a crisis is identified. An example of out-of-control spending was Fast, which soared to unicorn status in 2020 and then crashed just two years later. Insiders blamed over-hiring and extravagant spending without results.
And then there’s debt, which sometimes is a reasonable option for financing but can also turn into a burden too great for a company to manage. The perils of debt have become strikingly evident during the sharp rise in interest rates since 2022. One of the worst aspects of debt is it limits your freedom to act. You do what you must, not what you’d like.
And lest you think only people naïve about finance get into trouble, consider that the four largest bankruptcies in US history have all been financial services companies.
4) Nurture Your Customers
If your company is off to a good start, be grateful – but keep moving. Complacency and stagnation can be fatal, especially in fast-changing markets like technology, consumer goods, and healthcare. Constantly ask “what’s next?” But always be mindful of the cost of any new initiative by running risk-reward analyses and demanding justification through fact-based business plans.
A cardinal rule in business is that it’s easier and less costly to make additional sales to an existing customer than to gain a new one. Complement new products with market-focused initiatives, such as:
-
- Identifying adjacent market segments – Look for new groups of customers that have similarities to your existing customer base but might need slightly different products or need to be reached through alternative marketing channels. Sometimes, these adjacent markets may exist in large enterprises you are already selling into, just in different departments.
- Adding sales channels – If you’ve been selling direct, investigate the potential for complementary methods, such as third-party resellers, OEM agreements, or retail partnerships. Conversely, companies that have been selling through channels may want to consider (carefully) direct-to-consumer sales.
- Complementing products with services – Many companies find new revenue streams and deeper customer relationships by adding services such as consulting, training, system integration, customization, and financing.
Another goal can be to move upmarket, reaching larger companies with bigger budgets.
5) Build the strongest team possible
Every CEO knows the power of a strong, cohesive management team. Hiring, supporting, and retaining excellent leaders in all key functions is essential for a company to succeed. That’s one reason many of our portfolio companies tap the resources and expertise of our Talent & People advisory services.
Your senior management team is only one part of your leadership, however. You also should tap the brainpower and experience of outside resources, including:
-
- Investors – Venture capitalists, private-equity firms, and angel investors have seen many companies through all stages of growth. Their experience and perspective can be invaluable in making sound decisions and providing guidance to avoid mistakes.
- Advisors – Lawyers, bankers, management consultants, and retired executives also can help you navigate change and develop strategies.
- Business partners – Capitalize on relationships with key business partners (if they exist), such as suppliers and sales channels, whose knowledge of markets can be of value.
Finally, maximizing your board of directors is vital. Beyond their statutory and fiduciary responsibilities, board members can be deep resources of expertise, experience, perspective, and contacts. Sadly, the opposite can also be true. Spectacular failures like Enron, Theranos, and FTX occurred right under the noses of reputable (but perhaps inattentive) board members.
Get the best out of your board members by assigning each one an area of expertise where they can be a key contributor to the company’s operations, such as finance, marketing, sales, or legal affairs.
A final thought from Lindsay Hyde: “While founders would prefer to avoid failure, it sometimes is unavoidable. In that case, founders will be remembered for how they honored their commitments to employees, vendors, customers, and investors.”
Running a company is challenging even in the best of times. In my experience, staying true to the guidance above will help you avoid failure. After all, I don’t want to see one of your coffee mugs or sweatshirts in my Failure Museum.
