You Have to Be A Fool to Start a Company

If you really think about it, launching a business is pretty foolish. I don't have exact statistics but I'd bet at least 70% of start-ups are out of business after 5 to 7 years time (it's a highly contested debate: "failure rates"). Even if you are successful though, you have to have tons of resilience to make it. The stats are basically working against you and if you do the math you're bound to fail. Have I gone off the deep end to basically insult everyone I back as a VC? Well no, I like working with fools and never really believe in stats. 

Let me make a general comparison to get my point across. Go up to any couple shortly before they get married. No really, try this. Right before they walk up the aisle of the church (or pull up to the drive-thru in Vegas), ask them about their chances of success when it comes to their marriage. Of course they are going to say 100%. Everyone gets married on the back of the perceived 100% chance of success. It's foolish since almost half of all marriages end up in divorce (true and not a "stat") but people don't get married on the back of stats. It's all about heart. It's the emotions that make you take the plunge and even though you know odds are against you, you go for it. You're a fool, a "fool for love"! Ok, before I get too touchy-feely, let me get back to my point. 

When launching a business, you know odds are against you. Really, when looking at VC deals, the chances are so slim that it's a foolish bet. Again, I've said before and will say it again, it's about resilience when it comes to being successful. Yet, to take the actual plunge you better have heart or put in another way, you better be passionate about being an entrepreneur. It's not a "lifestyle" nor is it as glamorous as it's often made out to be. To go "all in" you have to be a fool and be ready to fail. You have to take huge risks and blindly march onward. You will never have a 100% guarantee. To be honest, you'll never even have a 50% guarantee. This is why I so love my job. The people whom I get to interact with are so foolish that you're bound to enjoy working with them, no matter how hard it is at times. The one's that aren't all that foolish really don't excite me and generally don't end up working with me. I'm fine with that. 

Comments

[Derek Licciardi]

Foolish is not reckless though. Even Dr. Doofenshmirtz has an evil plan to take over the tri-state area.

http://phineasandferb.wikia.com/wiki/Dr._Doofenshmirtz

Ok, that's probably US centric but the point is that foolish shouldn't mean jumping in without regard for the odds stacked against you. Perhaps it's calculated foolishness or the point at which a "get a job; save for retirement" person would tell themselves "There's too much that could go wrong." while the entrepreneur would say, "Crazy as it sounds, this might just work."...

[pwarden]

Everyone uses 'passionate' when talking about good entrepreneurs, but I prefer 'obsessed'. Everyone loves to think that they're passionate because it's got only positive connotations. A lot fewer people are willing to admit they're obsessed, but it's a much better description of the drive successful entrepreneurs seem to share. They're willing to sacrifice almost anything for their mission, and from the people I know that sometimes includes unattractive tradeoffs like losing marriages.

[Paul Jozefak]

It's definitely "calculated foolishness"!

[Paul Jozefak]

Can we agree on "possessed"? :-) Working like mad to get things done.

[BillNBing]

Aggregate stats are irrelevant in evaluating any 1 company. It seems a lot of folks try to find reasons to explain why they aren't successful:

-They live outside the Valley
-VCs are too risk averse/can't get funding
-Macroeconomic issues
-Overall failure rates

These are just reasons to rationalize giving up. If you build something valuable none of the above matters. If you don't believe in what you're building anymore, time to start over/move on. Either way, find reasons to succeed... not reasons to fail.

[Derek Licciardi]

There are certain types of projects that can't just be built; capital intensive projects. Movies, games and large construction projects come to mind. "Can't get funding." can be a reality to many of these projects. VCs are too risk adverse is a cop out though as long as you view can't get funding as being equivalent to haven't found the right person where the capital intensive project resonates.

There's an entire movement that thinks every and any business venture can be started for 500K US, released to the market and iterated. Don't worry, the market will pay you while you find a good product/market fit. It works some times but, don't fall into the aggregate trap by letting yourself belive that you don't have to spend money to make money. Can't get funding may very well be a legitimate reason why a startup never gets off the ground.

[Paul Jozefak]

Totally agree!

[Paul Jozefak]

Derek, I agree there will be start-ups that won't succeed because they can't get funded but this is something an entrepreneur has to work on before launching the business. This is the "doing your homework" part.

[Jon]

I hate to be annoying blog comment guy, but contrary to popular wisdom, half of all marriages don't really end in divorce. This conclusion is from badly interpreting statistics: http://www.nytimes.com/2005/04/19/health/19divo.html

Aside from that, I enjoyed the post!

[BillNBing]

My point is that if you find a way to make progress on your own, you should be able to get to a product or proof point that enables you to raise capital. In other words, the problem isn't that you can't get funding, the problem is that you haven't built something good enough yet. Inability to raise capital is the result of a problem, not the cause.

For certain types of businesses (life sciences, cleantech, movies?) the dynamics of raising capital may be different -- I'm primarily talking about software/internet companies.

[Paul Jozefak]

I would still say it's in the 40% range which is bad enough if you're going to determine whether to get married based on stats or not. But it's not about that.

There's always room for annoying blog comment guys here as long as they're constructive! :-)

[Paul Jozefak]

"The problem isn't that you can't get funding, the problem is that you haven't built something good enough yet."

That's a great comment!

[Scott Lewis]

This is funny and encouraging to me. I am a fool for sure. Calculated? maybe. Passionate? definitely.

Thank you for your enthusiasm for working with fools. I've been trying to prove myself one by founding my first company all by myself and trying to do everything. I think it's working. I'm certainly aware of it. Now I'm a fool asking for help and that's starting to work too.

Giving up is the only failure that I would ever count and the stats for that are really low for me, at least for the moment.

Thanks for writing!

my startup: http://g-a-i-a.org

[Bill Bing]

Thanks -- in my conversations with other founders I've noticed a lot of people getting discouraged about fundraising or turned off to VCs in general, and it seems that their goals are misplaced.

Raising capital isn't the goal -- building something valuable should be. With that mindset, my conversations with VCs, partners, customers, employees, etc. have all been very productive, because (good) people of any profession want to help accomplish that.

When you turn the conversation into "can I get money from you" as I opposed to "how can I make my product valuable enough to interest you", you better hope that you've got a great product, because the outcome of the conversation is now binary.

In your post you say you have to be a fool to start a company, but IMHO the reason that most businesses fail is that the majority of people who start companies are foolish, or unrealistic (as you put it, they don't "do their homework") before they get started. The same could be said for marriage.

I know it's impossible to get this data, but I'd be curious to know what the failure rate is for founders who know what they're getting into. I guess that's part of the reason that VCs like repeat founders?

[Paul Jozefak]

Bill, it's definitely the reason VC's like serial entrepreneurs. I'm obviously misusing the term "fool" to make a point. You are correct in saying that the reason companies fail are foolish mistakes but that's only part of the equation. You can do as much homework as you like. There will always remain an element of risk and uncertainty. You can be a genius and out of nowhere, markets will turn against you, customers will go out of business, your VC-backers disappear and so forth. I've seen it all. Brilliant, highly-motivated individuals who I was happy to bet on failed. That's the nature of venture capital. In saying "you have to be a fool to start a company" I am only addressing that initial first step. When running a business, you have to do significantly more right than wrong yet you simply don't know ahead of time if many steps taken are the correct ones. When dealing with serial entrepreneurs, you at least know that they've figured out what they can do well and what they can't do. They then tend to focus on their strengths (if smart entrepreneurs) and hire people to focus on the things that are their weaknesses. This tends to at least somewhat increase their chances of success yet the odds are still completely stacked against them.

[Paul Jozefak]

Good luck Scott!

[steve]

It's true when you look at the statistics you are a fool to try, but it's got to be done.

"Better to try and fail then not try at all"

[Jan]

Hi,
have you read Michael Gerber’s E-Myth (http://buecherfuerunternehmer.de/2009/11/das-geheimnis-erfolgreicher-firmen-von-michael-e-gerber/)? He refers to interesting statistics: after 5 years 80% of all new companies are out of business. He put this into comparison to franchise licensees where after 5 years 80% are still active. Crazy to see what a proven business model is worth.
And regarding divorces: in Germany the current divorce rate is 54%!
-- Jan

[Bill Bing]

Thanks for the response Paul. I guess it all comes down to risk mitigation then, with certain risks, for example market risk, essentially being unmitigatable (probably not a word).

So if you can mitigate "unrealistic founder(s)" risk, technology risk (i.e. some beta version of the product is built), you can demonstrate SOME market risk by showing user adoption, what are some of the other key risks for early stage companies that people should think about? Team chemistry risk? Maybe it could be a subject for a new blog post...?

[Ben Milne]

"it's about resilience when it comes to being successful."

Agreed 100%

[Paul Jozefak]

And if you fail, try again!

[Paul Jozefak]

Jan, you just ruined my hopes of ever getting married and staying married in Germany! :-)

[Paul Jozefak]

Thanks