Why the Fail-Fast Approach Isn’t Right for Breakthrough Ventures20 November, 2015 / Articles
Failure has become de rigeur, particularly in software start-ups that initially require little capital and small teams. The idea seems simple enough: you start with an initial venture concept, put together a team, and launch the venture. You develop minimally viable products, keep testing different market and product hypotheses, and pivot based on the market feedback you get. You expect to fail repeatedly and hope to eventually get to a product-market fit.
This approach is successful for some ventures — mostly for software-related companies with modest initial operating expenses. Here are some common examples of this type of venture: one venture creates new icons for your smartphone screen; another is a service that connects to your calendar and makes calls on your behalf; another helps put shopping lists together.
But if you want to go after the world-changing opportunities, the required expenses and level of expertise can be high. For these ventures, there aren’t many chances to survive if you get your value proposition wrong.
Often, the “pivot until you succeed” approach appeals to technologists who are in love with their tech. You get your technology into the market and see who wants it. There’s nothing wrong with being in love with tech; we’ve all been there, because new technology enables innovative ventures. But there is a problem with basing your business solely on your love of a piece of technology (sometimes called “tech push” or “tech transfer”). Technology is almost always best applied as a solution to a defined market problem. It enables the product to function. It is almost never a product in itself. For example, natural language was Siri’s solution to giving users to access web services by voice without clicks. Natural language alone was not a product.
The hit-or-miss approach makes sense only when and if you have struggled with your existing value proposition, and it’s failing. Then, of course, you can and should change course from your original vision. Many great companies have achieved success after reaching a point of failure in their existing approach and then finding a new market to attack. But we agree with Mike Moritz, a leading venture capitalist at Sequoia Partners, who told us, “Pivot means you’ve failed. It’s not that you shouldn’t have to move on sometimes, but it shouldn’t be a strategy.” He went on, “‘Fail fast, fail often’ is marketing rubbish. Nobody likes failure. Constant pivoting is like having a compass without a bearing. You need to know true north.”
It’s also worth considering to whom this failure approach appeals — more to the investors than the entrepreneurs. Many venture capital investors like to have a broad portfolio containing lots of small bets, some of which have a greater likelihood of taking off but most of which will fail. This approach allows them to pick and choose the ones that show traction, and to spread their risk over many ventures. It also means they don’t have to invest too heavily in any one venture at the earliest stages. This approach makes perfect sense for them, but not for the entrepreneurs who must bear the cost — financial, personal, and professional — resulting from the culture of failure
Our process is fundamentally different because it’s a constructive approach, rather than a “fail fast, pivot often” approach. It guides entrepreneurs to building a breakthrough venture by combining four ingredients:
- A large market opportunity with potential for rapid growth
- An outstanding team capable of execution
- A differentiated technology or business solution that trumps the competition
- A value proposition and business plan that articulate the company’s value, strategy, and plan and attract the required capital
- Without every one of these elements, the probability of success is nearly zero.
Successful entrepreneurs know this. One serial entrepreneur we know had four successful start-ups to his credit (all of which were acquired by big companies), including one that provided key technology to enable wireless systems. He said, “Let me start with my goal in life — I want to leave a legacy where my endeavors have changed in a big way how people communicate and do business, and in this manner change the world of commerce and human interactions. Sure, I want to continue to be financially successful, but that I could do in other ways. It is the lure of world-changing ventures that keeps me going and motivated to work around the clock.”
He had chosen to sell each of his earlier companies after their products’ market potential had been validated but before they became full-fledged companies positioned for the public markets. Why? “I really never had the kind of investors who were interested in that,” he said. “I started these ventures, recruited excellent people to execute on my vision, but the kind of investors I had chosen were more interested in a short business cycle than the longer term. I never had a road map for going from the early-stage entrepreneurial company to a company that would be a long-term winning player and able to access the capital that would be needed.”
What do we mean by “world-changing” products or services? We mean those that meet great market needs in a way not done before. The enterprises that offer them reach a market of sufficient size to be perceived as major players, either in established markets or in new markets pioneered by the enterprises. Such companies start with a vision that reaches beyond the current market offerings with the aim of building a world-leading venture.
We think of the process of building great businesses as climbing a staircase with frequent exit points. Each exit point represents a milestone where the entrepreneurs and investors can choose to realize the value of the business by a sale. But to continue climbing the staircase to a billion-dollar market value, the business requires new resources, people, talent, courage, and commitment. It also often involves a public offering of stock (initial public offering, or IPO) to access capital.
If you keep going up the staircase, you can realize more value at the next exit level—but only if you have the resources and talent to continue building the business.