Failure…an important stop on the path to success

Over the years I’ve worked with and/or evaluated hundreds of early stage companies. Their ideas have ranged from a new way to identify internal cyber threats to a concept for recycling used nuclear fuel. In one notable experience long before YouTube, I was flown to Texas to take a look at a company that had a way to post video clips on the internet (loved it, the lead engineer didn’t want to work for a woman).

We often talk about the successes, and it’s become cool to talk about the importance of failure, but what makes a failure a worthwhile experience? Could you be laying the groundwork for future success?

Early in my career, a colleague approached me about starting a company. My initial response was “no thanks”…I wanted the security of a solid opportunity.

Instead, without a safety net, I started my first company.

The idea was hatched at a local bar - we would build-out a nationwide network to support data streaming (this was 20 years ago). The first order of business was to find out how to raise money. I quickly found a seminar on raising venture capital and signed up. Tech companies are known for being super-casual but I wore a suit; it was important to come across as serious, we weren’t Harvard prodigies, we were hardworking people willing to take a risk and unfazed by the need to prove ourselves.

The first presenter talked about raising angel money and the second about venture capital. When they finished, I asked each of them if I could schedule a meeting to present my business plan. I was sure they would say no. Both said yes.

Oh *#&*! As I drove home, I called my business partner and told him we needed to write the business plan. Using a credit card, I bought a laptop and it became our first corporate computer. Then we added his laptop and networked them together so we could share a printer. The smallest bedroom in my house was turned into an office. There was barely enough room to fit the two folding tables, which we used as desks.

Within days, we had enough of an outline to present our idea. What we didn’t have was a name for our company. Our first business plan was called “The Company” Business Plan.

As I sat in the office of the angel investor, at a small table, he gave good advice and was willing to help. In fact, it was surprising how generous many were with their time and resources. Other entrepreneurs shared their slide decks and there was real camaraderie working in the start-up community.

The next meeting was with the venture capital investor. It turns out there are many kinds of institutional investors. He was the early stage kind who had less money to invest but took more time to work with the company. We wrote and rewrote the business plan as we prepared for each meeting. We laid out our idea, addressed the market opportunity and finished off with our bio’s. It was bold.

I took my newfound self-assurance and called a bigger investor who had a strong track record of successful exits. Venture capitalists are usually cautious at first but they are equally concerned about missing out on the next big thing.

Every investor meeting was used to get a connection for another meeting. Each presentation brought feedback and the 3-pager became a binder. The early success emboldened me to spend money on things like binders, printers and a few new outfits (you can’t wear the same power suit to every meeting). We were spending more than was coming in as we moved to the edge of the cliff.

We took pride in our new designation as tech entrepreneurs as we prepared charts and financial projections, signed NDA’s and asked others to sign ours. Eventually we worked our way up to the largest venture capital firm in the country.

Within six months of launching our new venture, we were offered a term sheet for $25 million in venture financing and another $70 million in equipment financing to pay for the hardware needed to build our company. We were negotiating terms on valuation, liquidation preference and clawback provisions. It was becoming clear that our big plans required someone with more experience to lead our company so we hired a search firm.

The very first meeting was with a prospect in northern Virginia. As we sat in this esteemed gentleman’s living room, discreet glances were exchanged as we tried to stifle ourselves. We maintained our composure but when we were back in the car, we both started howling, bent over in laughter. Our candidate was so…not executive-like…normal. He seemed just like us, only a little older and with more experience.

The search firm eventually produced the perfect candidate. It was the big leagues. We met with him and quickly realized we needed him much more than he needed us. We offered generous equity in our company to offset the stock options he’d have to give up in his current company but we also sold him on ambition. He was number 2 and we knew he wanted to be number 1, he wanted to be CEO.

When his employer got wind of the conversations, they put a better offer on the table. He’d have to leave $7 million on the table. In retrospect, we probably provided him an excellent opportunity to negotiate a better package with his current – and well-funded - employer. We kept interviewing candidates, and our potential investors stuck with us, but we finally had to accept the window of opportunity was starting to close.

We found another great candidate and he liked the idea, in fact so much that he became CEO of a similar company. He offered me the position of Chief Strategy Officer in exchange for our business plan. The offer included a good salary and a million shares of stock. It was a big deal and I definitely felt like I had hit the big leagues. I should have said yes right away. I didn’t.

I asked a lot of questions. Who did I think I was? I’ll never forget sitting in his office, appreciative of this wonderful offer, but finding myself asking things like “can you define the class of stock and capital structure, how many shares are outstanding and how do I benchmark against the rest of the management team?” I really thought he was thinking I should just say yes and thank you.

Instead, like a bad date, I never heard from him again. It felt like a failure - the start-up and the follow-on opportunity. At the time, it was impossible to consider I might be laying the groundwork for future success.

Everyone says failing is part of success, but it definitely doesn’t feel that way when you’re in the middle of it, it feels like failure. There is much to be learned when things don’t go as planned, about business and about ourselves. These are the experiences that provide the most valuable lessons.

In the end, it prepared me for my next venture – as CEO!

Can you reframe what you considered a failure and see it as a step toward success? Will the experience help you reach your goals? Will it open new doors? Is it laying the groundwork for future success?

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