Lets be honest: nobody looks forward to failing at anything. We talk about the virtues of failure but the truth is that failure is painful for both the entrepreneurs that experience it and the funders that lose their capital to it.
Personally I have been on the short-end of the “failure” stick through entrepreneurs that I have funded more times that I care to remember. The truth that many VCs are not willing to tell you is how much of the personal wealth is eroded by the losses of investing in the dreams & businesses of entrepreneurs.
VCs (it seems to me) are profiled as these near celestial beings that are not fazed by losses and have a tolerance for pain et infinitum. This is simply not true. True wealth creation for the VC is not on the funds he/she manages or how much they disburse rather on the equity upside at the end of the transaction period. So losses are not only unpleasant, but they are also personal.
Recently I was speaking a conference for venture capitalist (specifically early-stage high-impact VCs) in Sri Lanka and rather than tell the fairytale of how many businesses I have invested in, I chose to speak about the true cost of venture capital: the pain of losing money, the reality of eroding your own personal wealth and the disappointment of often times realising that entrepreneurs themselves can sometimes be very economical with the truth. They often misrepresent sales, tax liability, stage of development (for tech businesses) and their own management and technical capabilities. We have had entrepreneurs misrepresent stock-on-hand figures to mislead us, the investors, and ultimately shore up the enterprise value.
What is most disconcerting is knowing that most the cases where we have discovered these motives, the intent was clear and deliberate. So the entrepreneur deliberately sort to cheat us out of our funds.
Yet, I continue to be bullish about investing in entrepreneurs.
What is it that keeps me going through the pain, the disappointment and the drama of venture capital?
What lessons can other entrepreneurs learn from the journey I have travelled with failure?
1. Master the ability to re-emerge
Conquering failure is less about scientific evidence that things will be fine and more about the sheer will and grit to get up and try again. It sounds fluffy I know but the tenacity that is required to win at this game we play called life and its mini-tournament, business, is something that you have to teach yourself. What I have learned over the past decade of business is that not giving up is less about finding the evidence that things are going to be fine, and more about believing — even without the evidence to prove it — that you will re-emerge at the other end and better.
So the emotional capital required to re-emerge is a key asset in the balance sheet of life.
2. Focus on development & learning
You remember that old cliched expression, “everything happens for a reason”?
Like many cliches, it is often used because it is often true. What clouds us to the lessons of failure is that we focus so intently on the pain and shame that is associated with that failure and forget that all pain is instructive. When you go to gym for the first time, the pain that greets you the morning following that gym session is untold. It is uncomfortable, unwelcome, undesirable and just plain unbearable. But (and yes I know I shouldn’t start a sentence with a conjunction) any gym-bunny will tell you that the quickest way to get rid of the pain is to go back to gym and train again. The more seasoned gym-addicts will tell you that their bodies don’t feel the same without that stiff muscle feeling of pain and growth.
Growth and pain are twin sisters born of the same womb: development.
So rather than wallow in self pity, take a moment to work through the lessons of that failure. Today we have a process in the business through which we work through the pain of failure. We do it at the exit stage of transactions. We ask, discuss and document answers to the following questions:
a. why did we not achieve our stated goal (often measured by IRR)?
b. what were main the forces that led to the failure of the investment?
c. how could have avoided these?
d. what do we need to implement internally in the business to ensure that we avoid the same outcomes in future?
Notice how the questions are inward focused and assume that we had the full powers to determine the end result. As a principle, we believe that we are in charge of our destinies not fate, “them” or the universe. We are.
3. Knowledge is a process not a finite commodity
(this is an excerpt from our internal tombstone book. It accompanies every single exit)
When we fail we hurt.
When we hurt we learn.
When we learn, we heal.
Healing brings wisdom.
Wisdom brings fortune.
This is the mantra of our investment team. So we are clear that VC by its nature is high risk. Whilst risk can be managed we are also clear that not taking the risk is not the same thing as managing the risk. Not taking the risk is choosing not to participate and that is not acceptable. So we are keen on updating ourselves as a leadership, our people -as our most important resource- and our business systems to operate and think through problems faster and better, each time at each iteration improving and learning. We can never know all the challenges that lie ahead but we can LEARN to think through them better and faster.
So knowledge is fluid construct. What we know today and what makes us market-leading today may well be obsolete tomorrow.
Remember: best practice is the most clinically correct answer to yesterdays problems.