Friday, January 30, 2009

Achieving a failure

We spend a lot of time planning. We even make contingency plans for what to do if the main plan goes wrong. But what if the plan goes right, and we still fail? This is the my most dreaded kind of failure, because it tricks you into thinking that you're in control and that you're succeeding. In other words, it inhibits learning. My worst failures have all been of this kind, and learning to avoid them has been a constant struggle.

See if this plan sounds like a good one to you:
  • Start a company with a compelling long-term vision. Don't get distracted by trying to flip it. Instead, try and build a company that will matter on the scale of the next century. Aim to become the "next AOL or Microsoft" not a niche player.
  • Raise sufficient capital to have an extended runway from experienced smart money investors with deep pockets who are prepared to make follow-on investments.
  • Hire the absolute best and the brightest, true experts in their fields, who in turn can hire the smartest people possible to staff their departments. Insist on the incredibly high-IQ employees and hold them to incredibly high standards.
  • Bring in an expert CEO with outstanding business credentials and startup experience to focus on relentless execution.
  • Build a truly mainstream product. Focus on quality. Ship it when it's done, not a moment before. Insist on high levels of usability, UI design, and polish. Conduct constant focus groups and usability tests.
  • Build a world-class technology platform, with patent-pending algorithms and the ability to scale to millions of simultaneous users.
  • Launch with a PR blitz, including mentions in major mainstream publications. Build the product in stealth mode to build buzz for the eventual launch.
I had the privilege, and the misfortune, to be involved with a startup that executed this plan flawlessly. It took years, tens of millions of dollars, and the efforts of hundreds of talented people to pull it off. And here's the amazing thing about this plan: it actually worked. I think we accomplished every one of those bullet points. Check. Mission accomplished.

Only this company was a colossal failure. It never generated positive returns for its investors, and most of its employees walked away dejected. What went wrong?

This company was shackled by shadow beliefs that turned all those good intentions, and all that successful execution, into a huge pile of wasted effort. Here are a few:
  • We know what customers want. By hiring experts, conducting lots of focus groups, and executing to a detailed plan, the company became deluded that it knew what customers wanted. I remember vividly a scene at a board meeting, where the company was celebrating a major milestone. The whole company and board play-tested the product to see its new features first hand. Everyone had fun; the product worked. But that was two full years before any customers were allowed to use it. Nobody even asked the question: why not ship this now? It was considered naive that the "next AOL" would ship a product that wasn't ready for prime time. Stealth is a customer-free zone. All of the efforts to create buzz, keep competitors in the dark, and launch with a bang had the direct effect of starving the company for much-needed feedback.

  • We can accurately predict the future. Even though some aspects of the product were eventually vindicated as good ones, the underlying architecture suffered from hard-to-change assumptions. After years of engineering effort, changing these assumptions was incredibly hard. Without conscious process design, product development teams turn lines of code written into momentum in a certain direction. Even a great architecture becomes inflexible. This is why agility is such a prized quality in product development.

  • We can skip the chasm. As far as I know, there are no products that are immune from the technology life cycle adoption curve. By insisting on building a product for mainstream customers, the company guaranteed that they would be unhappy with the number and type of customers they got for the first version. Worse was the large staff in departments appropriate to a mainstream-scale product, especially in customer service and QA. The passionate early adopters who flocked to the product at its launch could not sustain this outsized burn rate.

  • We can capitalize on new customers. As with many Silicon Valley failures, a flawless PR launch turned into a flawed customer acquisition strategy. The first version product wasn't easy enough to use, install, and pay for. It also had hardware requirements that excluded lots of normal people. Millions of people flocked to the website, but the company could only successfully monetize early adopters. As a result, the incredible launch was mostly wasted.

  • We know what quality means. All of the effort invested in quality, polish, stability and usability turned out to be for nothing. Although the product was superior to its competitors in many ways, it was missing key features that were critical for the kinds of customers who never got to participate in the company's focus groups (or were represented on its massive QA staff). Worse, many of the wrong assumptions built into the technical architecture meant that, in the real world outside the testing lab, the product's stability was nothing to write home about. So despite the millions invested in quality, the end result for most customers was no better than the sloppy beta-type offerings of competitors.

  • Advancing the plan is progress. This is the most devastating thing about achieving a failure: while in the midst of it, you think you're making progress. This company had disciplined schedules, milestones, employee evaluations, and a culture of execution. When schedules were missed, people were held accountable. Unfortunately, there was no corresponding discipline of evaluating the quality of the plan itself. As the company built infrastructure and added features, the team celebrated these accomplishments. Departments were built and were even metrics-driven. But there was no feedback loop to help the company find the right metrics to focus on.
These shadow beliefs have a common theme: a lack of reality checks. In my experience, great startups require humility, not in the personal sense, but in the organizational capacity to emphasize learning. A good learning feedback loop trumps even the best execution of a linear plan. And what happened with this ill-fated company? Although it failed, many of the smart people involved have accomplished great things. I know of at least five former employees that went on to become startup founders. They all got a tremendous first-hand lesson in achieving a failure, all on someone else's dime (well, millions of dimes). As we move into a new economic climate, it's my hope that our industry will stop this expensive kind of learning and start building lean startups instead.

The interesting thing about an analysis like this is that it seems obvious in retrospect. A lot of people say that they know that they don't know what customers want. And yet, if you go back and look at the key elements of the plan, many of them are in subtle conflict with the shadow beliefs. Understanding that tension requires a lot of reflection and a good teacher. I myself didn't understand it until I had the opportunity to view that failure through the lens of the customer development theory. I had a big advantage, because Steve Blank, the father of customer development, got to see the failure up close and personal too as an investor and board member. A much less painful way to learn the lesson is read his book: The Four Steps to the Epiphany.
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  1. Once again, a fantastic post.

    Although I wasn't there, I suspect there's another mistake that runs through this: believing that perfection doesn't require practice.

    In my view, both people and organizations can only be good at what they have been doing a lot. I'm sure if you'd asked anybody, they would have said that as soon as they launched, they'd listen eagerly to customers, adapt quickly, provide world-class service, etc. But they spent years doing something entirely different.

    Even if they hadn't hamstrung themselves from both technical and product perspectives, people would have build up years of habits and working relationships that had little relationship to what was to come. I've seen a few different companies try to make this transition from fantasy-based development to reality-based development. The personal and cultural changes are incredibly difficult, especially for a large number of people who have been working for a long period.

  2. Good post.

    Seems like all of these problems can be to some degree addressed with agile development methods. Most of the issues in the posts are actually addressed in the Agile Manifesto itself. :)

  3. Great post! I can't agree more.

    Actually, I recently experienced the exact same situation in a startup.

    Everything was in place, from agile methods to proper planning and executing but it didn't prevent us to fail.

    We were lacking those reality checks that would have avoid us to take the wrong path and building the wrong thing -- but the illusion of progress was perfect.

  4. My experience (3 time founder, 6 startups, 1 IPO, 5 colossal failures) is that we spend too much time looking for what we do wrong, when in fact, we may have done nothing wrong. My thought on the evolution of the entrepreneur:
    * Green: "The idea is what wins!"
    * Tenderfoot (1 failure): "OK, idea is fine, but you need the right team"
    * Battered (2 failures): "OK, the right team AND the right execution."
    * Hardened (3 failures): "Well then, idea, team, execution and TIMING."
    * Wizened (4 failures): "I think I got it: idea, team, execution, timing and funding terms" (this one really hurts, you think you succeeded, and then find out due to preferences you don't actually get any money)
    * Sagacious (5 failures): "It's luck! If you do everything right, you've got maybe a 25% chance"

    So then how do you succeed? Fail faster.

    Great post, thanks for sharing.

  5. Great post!!!

    @Chris I agree, it is weird but it seems that fail faster is the real key to success...