Causal reasoning focuses on expected return. Effectual reasoning emphasizes affordable loss.You can learn from someone else’s failure, but the only way to really get your money’s worth is to fail yourself.
—Randy Komisar, partner, Kleiner Perkins Caufield & Byers
Business failure is highly underrated. Too many people keep delaying startups because they fear they’re going to fail. I believe daring to fail is perhaps the hardest obstacle for potential entrepreneurs to overcome.1
—Rieva Lesonsky
Rieva Lesonsky is right. Fear of failing is not an obstacle only when one is starting up; it’s debilitating at every stage. It can be handicapping, even immobilizing. We live in a culture that celebrates success and perfection and makes everything a competition. It reduces even intangibles such as learning and performing to quantitative grades; only those who get the highest grades are considered worthy. We’re constantly organized “for someone else’s consumption: universities and employers evaluate young candidates on their grades, numbers based on scores from tests unforgiving to mistakes.”2
We are conditioned like this so consistently since childhood that it’s no wonder everyone presses early-stage businesses for the perfect idea (no such thing), perfect planning and execution on budget (don’t exist), on time (never happens), by a great team of superstars who all go the distance (in your dreams!). Entrepreneur wannabes are pressed by others, but often they’re pressed by themselves most painfully of all. Even the 22 chapters of this book have tried to lay out all the important things you need to think about to improve your chances and how to go about doing them, as if the only thing required for success is that you do them all and get it right the first time. You can’t do them all, and even if you do, there’s still no guarantee. No wonder so many people never try.
But there’s good news: You don’t have to get it right the first time. This next point is perhaps the most important thing you will read in this book. There is virtually no chance you will get it right the first time; hardly anyone else does either. It’s a truism in the entrepreneurial world, especially among professional investors and repeat-success entrepreneurs: Almost every start-up team that has succeeded has made at least one major course correction along the way, often more than one.
Intel was founded in 1968 by former Fairchild Semiconductor physicists Gordon Moore and Robert Noyce to make memory products. Almost at once Intel was approached to make a microprocessor chip: in 1970 by Computer Terminal Corp., a Texas company working on what was arguably the first design for a personal computer (that chip later became the 8008),3 and again in 1971 by Busicom, a Japanese calculator maker, to work on what became the 4004 processor.4 People from Computer Terminal Corp. recalled meeting with Robert Noyce in 1970 to suggest “‘that Intel develop the chip at its own expense and then sell it to all comers, including CTC. … ‘Noyce said it was an intriguing idea, and that Intel could do it, but it would be a dumb move. … He said that if you have a computer chip, you can only sell one chip per computer, while with memory, you can sell hundreds of chips per computer.’ Nevertheless, Noyce agreed to a $50,000 development contract.”5 For another 15 years Intel focused on memory, but by 1984, 40 percent of its revenue and 100 percent of its profits were coming from microprocessors and it was spending 80 percent of its R&D on memory.6 It was time for a course correction. Albert Yu, a retired Intel senior vice president, recalled, “Our strategy and investments were completely out of line with reality. … This was a very difficult option for us to swallow: admitting defeat on something that our corporation had created and was founded on.”7 “We finally overcame the emotional burden of letting go of a failing business that we had invented and focused all our energy on the business we would build our future on. It was tough. It was gut-wrenching. But it was right.”8 A year later, in 1985, Intel reluctantly left the memory business.
In 1975, Paul Allen was working in Albuquerque, New Mexico, as an engineer for Honeywell and Bill Gates was a sophomore at Harvard when they saw an opportunity to create a programming language based on BASIC (developed at Dartmouth) for MITS Computer’s Altair 8800 personal computer kits. They launched a product they called “Altair BASIC” under the name “Micro-Soft.”9 They made the famous licensing deal with IBM to create PC-DOS in 1981. “By 1983 Microsoft was facing competition from the just-released VisiOn and the forthcoming TopView. Apple had already released Lisa.”10 They created Windows 1.0 (announced 1983, released 1985), Windows 2.0 (1987), and finally a market success with Windows 3.0 (1990). Microsoft’s Web site says, “Many longtime PC users trace the Microsoft Windows operating system to the 1990 release of Windows 3.0, the first widely popular version of Windows and the first version of Windows many PC users ever tried.”11
Two of the biggest entrepreneurial successes of the last half century were course corrections that turned frustration into success by staying with it and listening to the market. That is true of almost every other successful business, big or small. There is an interesting implication of this nearly universal principle: How in the world can anyone accurately predict the true potential of a start-up idea? It’s almost surely not the idea that will make you successful. Some ideas are more promising than others, no doubt, but there’s always the course correction that takes you from close to a big success. Intel and Microsoft did it. The good news is that you have the opportunity every day to do it. There is no such thing as the perfect deal, at least not the first time.
Quitting after the first try may be smart (fail fast), or it may be lack of perseverance. Course correction inevitably means perseverance. Of course, perseverance can be a virtue or a curse. At any specific time, how do you know which is which? You don’t. That’s what course corrections are for. You don’t have to get it right the first time. What you do need to do is get in the neighborhood of a valuable opportunity and then know enough to recognize it when you see it. Smart entrepreneurs position themselves for the course corrections that inevitably come. They look for them and try to make them as quickly, cheaply, and wisely as possible.
You can’t solve a problem you haven’t recognized. Will you know if there is a problem? Sometimes it seems that nothing is coming together and it’s clear as day that something is wrong: For example, Intel making all its money on processors and focusing most of its attention on memory. When problems are clear, you don’t need a lot of clues to make you think about things. Things can get off track in all kinds of places. Maybe you have the need defined correctly and the product is wrong. Maybe it’s the plan, the team, or the execution. Constantly look for obvious problems. Ask lots of questions. If there’s no need or market, sometimes you can switch to others. Most execution problems can be fixed once they’re identified clearly, but you have to look.
It may be the wrong product. In 2007 Dartmouth engineering doctoral student Ashifi Gogo had the idea to certify organic produce grown in Africa and marketed in Western Europe, tagging products with unique identifier bar codes that could trace products back to the farm of origin. He won lots of attention and prizes in international competitions with the idea, but within a year he realized he had missed the window of opportunity in the organic produce market and didn’t know how he could make money with the system. Looking at other problems in his home country of Ghana, he recognized there was a huge public health problem in the $75 billion market for fake medication: counterfeit drugs that have few or no active ingredients, often contain dangerous chemicals, and are responsible for hundreds of thousands of deaths in the developing world each year.
Ashifi thought he could leverage the widespread use of cell phones in Africa, enabling consumers to confirm the authenticity of a drug with a simple text message. His new company, Sproxil, guarantees the authenticity of safe drugs while helping genuine pharmaceutical manufacturers reclaim market share lost to counterfeiters. Ashifi bootstrapped Sproxil with $100,000 of his own money, funds from friends, and grants, including $10,000 from the Clinton Foundation. In January 2010, Sproxil won a $100,000 award from the Washington, D.C.–based African Diaspora Marketplace, a not-for-profit organization sponsored by USAID and Western Union that provides grants to African-American entrepreneurs who create jobs in Africa. By the start of 2011 Sproxil had 12 staff members in Somerville, MA, and Lagos, Nigeria, and in March 2001 closed a $1.8 million venture funding round.
It may happen that the market fails. John Bello, Tuck School class of 1972, launched the South Beach Beverage Company, Inc., in December 1995, marketing upscale noncarbonated soft drinks with an Art Deco Miami motif. Within the year South Beach flopped. John reconceived the company around health benefits and launched again in December 1996 with SoBe Black Tea 3G, “a reference to ginseng, ginkgo, and guarana, herbal derivatives that purportedly improved concentration, endurance, and energy.”12 The product was an immediate hit. Bello quickly expanded to a line of exotic teas, fruit juices and blends, elixirs, vitamin and antioxidant-enhanced water, and sports drinks and added a strategy focused on extreme sports and irreverent promotion. In the darkest hours of 1996 his shareholders doubled down on their investment and John invested almost everything he had, including his house. In all, he had about $9.5 million invested. In 2001 PepsiCo bought 90 percent of SoBe for $370 million.
It may be the wrong model. In 1999, Drs. Leslie Fall and Norman Berman were practicing pediatricians and codirectors of the pediatrics clerkship at Dartmouth Medical School. Frustrated with an outdated paper-based case study platform, they decided there had to be a better way to take third-year medical students through the required pediatrics curriculum. The system was fragmented, inefficient, and frustrating for instructors and students. Drs. Fall and Berman secured a two-phase $885,000 grant from the National Institutes of Health (NIH); signed up the best academic pediatricians in the country to write top-quality cases; found a small IT shop in Munich, Germany; and created CLIPP, an online system that made it possible for students around the country to work the highest-quality cases online, with follow-up tracking and instruction.
Within three years, more than half of all the medical schools in the country were using the CLIPP system to do pediatric case study work. The results improved. Schools across the country got onto a uniform system and collaborated. The only problem was that they built CLIPP with grant support. When the grant money ran out, Fall and Berman faced the real possibility that all their success would be lost for lack of resources to keep the project going. As MDs, they realized they had no idea what to do with their organization or how to do it. All they knew was that it filled a need, people loved it, and they didn’t want it to die. Rather than give up, they found help at Dartmouth College and turned CLIPP into a not-for-profit corporation, iInTIME. They created a going concern, built a commercial-grade product, hired staff, persuaded accrediting boards to recommend CLIPP, persuaded medical schools to pay for the product, expanded the offerings to cover family and internal medicine, and built a fully operational start-up company with a stellar board, six full-time staff members, and editorial boards made up of 25 part-time medical educators. Today more than 80 percent of all medical students in the United States are doing casework on iInTIME systems, and the company is expanding into broader medical education, including the interfaces between cultural, legal, ethical, and practice management issues and medical practice. They are exploring ways to make the system available in the developing world to bring state-of-the-art medical education to doctors struggling to get adequate education in their home countries.
What about if things are not going as well as they could? Before Windows, Microsoft tried any number of other approaches: menus at the bottom of the screen, pull down menus, and dialogues.13 Maybe your definition of the need is slightly off or you have the right need for the wrong customer. Would you know?
Getting it almost right happens often. Sales aren’t happening and calls don’t quite jell, but it’s not clear why. Tally Systems Corp, a Dartmouth IT spinout, was founded in 1990 to create a complete line of IT system management tools. Tom Cecere, a former vice president of marketing and business development, recalls that when they first took their line to the market, in one sales meeting after another he and the CEO would get a quizzical look from potential customers: “They would say, ‘Yeah, it’s all nice … but could we just have that one piece there?”’ That one piece was a utility to tell IT managers what was running on their systems and who was running it, something no one could do at that time. It had become a serious problem with the proliferation of networked desktop machines. Cecere said, “After about the tenth time we heard that, as we were getting in the elevator to leave, the CEO said to me, ‘Do you think they’re trying to tell us something?”’14 They went back and built out that component, and with it Tally launched a business that ended up a “leading supplier of full-featured asset management products” until it was sold to Novell Corp. in 2005.15
Many of the most valuable course corrections happen when you meaningfully interact with your market the way Tally did. As part of a research project, Saras D. Sarasvathy at the University of Virginia interviewed 30 founders of highly successful companies. She quotes one entrepreneur, who said that
instead of asking all the questions I’d go and say … try to make some sale. I’d make some … just judgments about where I was going—get me and my buddies—or I would go out and start selling. I’d learn a lot you know … which people … what were the obstacles … what were the questions … which prices work better and just do it. Just try to take it out and sell it.16
Occasionally the lab or the shop can help correct something in your product or its development, but most of the time course corrections happen when your customers begin telling you what they really need. This is why we devoted a whole chapter to validating the market and talking to customers. That chapter talked about doing it prospectively, before you invested a lot in getting started. Chapter 16 talked about doing it as you try to make sales. The conversation never ends. Customers will always tell you valuable things, but most of the time only if you ask. The more you ask, the more they will tell you. “No” is an important answer from a customer. “Not quite” is even more important. The most important questions you can ever ask are the ones you come up with after hearing one of those two answers. Never stop asking customers about what you’re doing wrong or what you might do better.
Remember, an entrepreneur focuses most on opportunity, not on process or control. Control is about taming the environment and circumstances to protect oneself from risk. The environment and circumstances can be problematic, but they are not the real threat. The real threat is not finding opportunity, and it’s always tragic when this happens, because opportunity is everywhere. The entrepreneur doesn’t stop thinking about opportunity and looking for it once the launch is under way. Stop thinking about opportunity and you change from an entrepreneur to an administrator, someone with the trustee mentality we talked about in Chapter 1. Course correction thinking means focusing even more deliberately and relentlessly on opportunities after you launch and being as ready to pounce as you were before you started.
Psychology researchers studying entrepreneurs talk about entrepreneurship as an enactment process in which acting precedes thinking.17,18 In Chapter 6 we talked about Saras Sarasvathy’s causal and effectual reasoning. Causal reasoning begins with a predetermined goal, and a specified set of means is used to determine the optimal alternative to achieve the goal. We’re taught causal reasoning all our lives, virtually everywhere, especially in business schools. Here’s what Sarasvathy says about this:
Effectual reasoning, by contrast, does not begin with a specific goal. Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and people with whom they interact … effectual thinkers are like explorers setting out on voyages into uncharted waters (Columbus discovering the new world).19
It’s interesting that Sarasvathy chose Christopher Columbus as an example of an effectual innovator. Columbus’s story is all about course corrections. Remember your history? He was one of the best navigators and sailing captains of his time. He had a well-defined plan. It took him a while, but he got good financing and a great deal: the title of Admiral of the Ocean Sea, viceroy of all the lands he found, a 10 percent perpetual royalty on the revenue from all those lands, and a one-eighth buy-in option into all future ventures in those lands. It just turned out that his plan was a little off. He calculated the circumference of the earth at 19,000 miles (it’s 24,901 miles) and overestimated the size of Asia, giving him a sailing distance to Asia of 2,400 miles, just about the range of a sailing vessel at that time (it’s more like 12,000 miles). Only by sheer luck did he find something even more valuable where he thought Asia would be. He changed the plan to meet the opportunity and became the first governor of Hispaniola, the first colony in the New World. He was on his way to riches when he and his brother blew it with their mismanagement of the colony. Worse, he later made a disastrous fourth voyage to Central America in which he missed discovering the Pacific Ocean by mere miles, ending with mutiny and arrest. He returned to Spain in disgrace and died in poverty, forgotten for generations. Sometimes even course corrections can’t save you from yourself.
In Sarasvathy’s model of effectual reasoning, life becomes essentially a never-ending course correction:
Plans are made and unmade and revised and recast through action and interaction with others on a daily basis. Yet at any given moment, there is always a meaningful picture that keeps the team together, a compelling story that brings in more stakeholders and a continuing journey that maps out uncharted territories. Through their actions, the effectual entrepreneurs’ set of means and consequently, the set of possible effects changes and gets reconfigured. Eventually, certain emerging effects coalesce into clearly achievable and desirable goals—landmarks that point to a discernible path beginning to emerge in the wilderness.20
Causal reasoning is not course correcting. It’s analytical, rational, and conceptual. In its essence, effectual reasoning is course correcting. Sarasvathy defines three important contrasts:
Causal reasoning focuses on expected return. Effectual reasoning emphasizes affordable loss.
Causal reasoning depends upon competitive analyses. Effectual reasoning is built on strategic relationships.
Causal reasoning urges the exploitation of preexisting knowledge and prediction. Effectual reasoning leverages contingencies.21
When you launch, even if you think you are carrying out a well-defined plan, you are in reality embarking on an exercise in turning the unexpected into the profitable.22 It’s ready-fire-aim, and fire-aim, fire-aim, fire.
The best course-correcting culture discourages overchampioning any single idea. Remember the definition of insanity: repeating the same action over and over, expecting a different result. There is always more than one solution. Don’t anchor on things previously resolved. It may not be the product that’s off target. It could be anything: the market, the value proposition, the business model, even the need. Course correcting works best when you have an environment that consistently encourages consideration of multiple alternatives, even alternatives to things already in execution (remember Intel!). Diversion of effort and lack of focus are always a danger, but so is the kind of myopia that misses opportunities to change direction such as the ones we’ve discussed in this chapter. The fact that you’re always looking and considering doesn’t mean you have to follow every lead and opportunity.
Instead, evaluate alternatives objectively and look for the best long-term opportunities. Never get hung up on past costs.23 You can’t recover past costs by spending more money on a failing idea. Getting good at course correcting means getting comfortable with small failures. It means having leaders who create an environment that is safe for taking risks and who share stories of their own mistakes. People may fear failure, but they fear the consequences of failure even more. Breakthrough innovation and success require that well-honed organizations do what feels unnatural: explore, experiment, foul up sometimes. Then repeat. Most people naturally seek positive outcomes and set about trying to prove that an experiment works. But in their everyday professions, designers, inventors, and scientists—all models for companies struggling to be more creative—take the opposite tack. They try to prove themselves wrong. A focus on potential flaws makes failure and the lessons that come with it happen earlier—and cheaper.24
Mistakes and failure are a part of the process, not just at the end when you shut down a failure. They’re there all along the way, pointing you back toward opportunity. Rosabeth Moss Kanter perhaps said it best: “The middle of every successful project looks like a disaster.” Take comfort: The darkest hour may mean you are on your way to success. It’s the course correction that will get you there.
How can you put in place a culture that is always actively questioning the current plan but still is committed to carrying it out effectively until decided otherwise?
Would you know if you should change course? How?
If you had to change course, how would you approach the decision and get buy-in from all the affected stakeholders?
1. Lesonsky, Rieva, Start Your Own Business (Irvine, CA: Entrepreneur Press, 2007): 648.
2. Berkun, Scott, “How to Learn from Your Mistakes,” blog no. 44, July 17, 2005, http://www.scottberkun.com/essays/44-how-to-learn-from-your-mistakes/ (accessed September 11, 2010).
3. Wood, Lamont, “Forgotten PC History: The True Origins of the Personal Computer,” Computerworld, August 8, 2008, http://www.computerworld.com/s/article/print/9111341/Forgotten_PC_history_The_true_origins_of_t he_personal_computer (accessed September 11, 2010).
4. Anthes, Gary, “Happy Birthday, x86! An Industry Standard Turns 30,” Computerworld, June 5, 2008, http://www.computerworld.com/s/article/print/9090978/Happy_birthday_x86_An_industry_standard_turns_30?taxonomyName=Hardware&taxonomyId=12 (accessed September 11, 2010).
5. Wood, 2008.
6. Yu, Albert, Creating the Digital Future: The Secrets of Consistent Innovation at Intel (New York: Free Press, 1998): 124.
7. Ibid.
8. Ibid.: 130.
9. Microsoft Web site, “Microsoft Fast Facts: 1975,” http://www.microsoft.com/presspass/features/2000/sept00/09–0525bookff75.mspx (accessed September 11, 2010).
10. Alfred, Randy, “Gates Opens Windows a Bit Early,” November 10, 1983, http://www.wired.com/science/discoveries/news/2008/11/dayintech_1110 (accessed September 11, 2010).
11. “Windows Desktop Products History,” March 7, 2006, http://www.microsoft.com/windows/winhistorydesktop.mspx (accessed September 11, 2010).
12. “South Beach Beverage Company, Inc.,” in Reference for Business—Encyclopedia of Business, 2d ed., http://www.referenceforbusiness.com/history/Sh-St/South-Beach-Beverage-Company-Inc.html (accessed September 11, 2010).
13. Alfred, 1983.
14. Dartmouth Entrepreneurial Network workshop, October 2, 2002.
15. “Tally Systems Acquires Baran of Software, Forming Messaging Management Powerhouse,” Business Wire, October 21 1997, http://www.allbusiness.com/company-activities-management/company-structures-ownership/70163231.html (accessed September 11, 2010).
16. Sarasvathy, Saras D., “What Makes Entrepreneurs Entrepreneurial?” Darden Case Collection ENT–0065 (2004): 4–5.
17. Busenitz, Lowell W., and Jay B. Barney, “Differences between Entrepreneurs and Managers in Large Organizations: Biases and Heuristics in Strategic Decision-Making,” Journal of Business Venturing 12, issue 1 (1997): 9–30.
18. Gartner, William B., Barbara Bird, and Jennifer A. Starr, “Acting as If: Differentiating Entrepreneurial from Organizational Behavior,” Entrepreneurship: Theory & Practice 16, issue 3 (Spring 1992): 13–31.
19. Sarasvathy, 2004: 2.
20. Ibid.: 3.
21. Ibid.: 4.
22. Ibid.: 5.
23. Thurm, Scott, “Reconsidering,” Wall Street Journal, February 6, 2006: B3.
24. McGregor, Jena, William C. Symonds, Dean Foust, Diane Brady, and Moira Herbst, “How Failure Breeds Success,” BusinessWeek, issue 3992 (July 10, 2006): 4252.