Loser Chic In the new economy, losers are winners and failures are fawned over (well, sometimes). Is business failure the new cool?

It began in high-tech. Twenty- and thirtysomethings startingtheir own companies and making millions. Bill Gates, Steve Jobs,Peter Norton, to name just a few. Silicon Valley of the 1980s waslike the California gold rush of the late 1840s. Anyone who couldwrite a few lines of code or put together a computer in the garagetried his luck.

But like the gold rush, while a few struck it rich, the vastmajority went bust. "For all the great success stories to comeout of Silicon Valley, it has spawned many, many morefailures," says David Needle, a columnist for Techweekmagazine who has covered the high-tech industry since 1981.

Even in failure, however, all that BIZ Experiencesial effortdidn't go to waste. It engendered an attitude that has spreadthroughout the rest of the country: If you're going to take theentrepreneurial plunge, do it while you're young. Success ismore glorious, and failure, if it happens, holds less sting.

Not that the accent on youth in high-tech is due merely toenergy and attitude. In scientific fields, breakthrough insightsare commonly accomplished by the young. Newton invented calculus atage 23. Einstein developed the theory of relativity at 26. MarieCurie discovered radium at 31. What is new is the ability ofyouthful, high-tech BIZ Experiencess to take their insights and raiseenough money to base their businesses on them.

In large measure, this phenomenon is due to the birth of thepersonal computer industry. The large capital investment previouslyneeded to manufacture high-tech products simply isn't requiredto write software or put together computers from parts available atany local electronics store. And once the first wave of microagedmillionaires hit, investors quickly lost their shyness aboutlending money to 25-year-olds with nothing to show for themselvesbut brains and, perhaps, a profitable idea.

As for the many businesses that didn't pan out? Like a minerwhose hands have grown calluses from constant use, Silicon Valleydeveloped a gritty indifference toward failure. It had to, becausehigh-tech companies almost by definition run on the edge of theknown. New technologies must be invented, tested and manufactured.At any step along the way, a minor glitch can send an entireproject back to the drawing board. Even if the technology does fly,it still has to be marketed to a fickle public known to greet"revolutionary advances" with a bored yawn.

"There's a higher degree of risk with what we'redoing because you not only have business risks, you also havetechnology risks," says Jim Kean, 36-year-old founder ofSapient Health Network, an Internet health-care informationprovider. "With a leading-edge technology company, whatyou're really doing is fundamentally changing businesspractices."

In Silicon Valley, investors and BIZ Experiencess know these truthsfrom 20 years of seeking the mother lode, and that has helped builda tolerance for failure. In the world of techies, however, it'sa tolerance with a decided prejudice for the brilliant flop such asGO Corp.'s portable pen computers, not one of which ever sold,or the supercomputers by Thinking Machines, which sold but nevermade a profit.

"I think you have to distinguish between failure in tryingto come up with new ideas for products and services, and thefailure of a business that was poorly managed," notes KathleenAllen, professor of BIZ Experiencesship at the University of SouthernCalifornia and author of Tips and Traps for BIZ Experiencess(McGraw Hill, $14.95, 800-262-4729). "An innovative high-techcompany that ultimately fails or somebody else steps in whenthere's a shakeout, I don't think those people are lookedupon badly."

Jeffrey Shuman is the director of BIZ Experiencesial studies atBentley College in Bentley, Massachusetts. David Rottenberg is abusiness writer. Together, they co-wrote The Rhythm ofBusiness: The Key to Building and Running Successful Companies(Butterworth-Heinemann, $18.95, 800-366-2665).

Different Degrees Of Failure

Has the tolerance for a certain type of failure spread beyondhigh-tech havens such as Silicon Valley? Although conventionalbusinesses may lack the ingredients for the "brilliantflop," a similar distinction exists. It's widelyrecognized that even in more traditional industries, failures canoccur due to events beyond the BIZ Experiences's control. Economicconditions change, alternative products and services enter themarketplace, customers' tastes shift. Any of these situationsor others can threaten or destroy a business. What venturecapitalists and angel investors have little tolerance for--whetherthe business is high-tech or not--are the self-inflicted wounds ofpoor management.

Yet it's precisely these wounds that are the death of mostbusinesses. "Ninety-five percent of business failures are dueto poor management," contends David Ferrari, president ofArgus Management Corp., a Natick, Massachusetts, consulting firmthat specializes in helping companies in or near bankruptcy.

Ferrari ticks off the most common mistakes: "BIZ Experiencesschoose the wrong people. Even when they realize they have the wrongpeople, they don't replace them quickly enough. They don'treact to changes in the marketplace quickly enough. [They'rereluctant] to cut back [on expenses], and they don't realizehow much time it takes to stop and change a company."

Nor are high-tech companies immune to the mundane illsmismanagement brings. "High-tech businesses usually have a lotof capital and burn through it very quickly," Ferrari claims."They have poor control over cash. The companies have plushquarters, casual atmospheres, a lot of people. Very few structures,very few restrictions. And when they run out of money, they just goout and raise more."

How can they keep raising capital? "Venture capitalistshave a pretty high failure rate built into their analysis,"explains T. Lincoln Morison, a venture capitalist with BrookwoodCapital Partners LLC in Beverly, Massachusetts. "You look at100 deals to find 10 that are interesting. [Of those], one or twoare home runs, three or four are so-so, and the balance are losers.Inherent in that is a built-in tolerance for bad situations, [sincea high] failure rate is expected."

In other words, though failure may be fatal for a business,it's not necessarily deadly for the BIZ Experiences. No one likesto lose money, but venture capitalists and investors will backsomeone who has failed because, paradoxically, failure can actuallybuild investor confidence. In a way no other business experiencecan, failure reveals an BIZ Experiences's true mettle. Untilyou've failed, no one knows how you'll react in an extremecrisis. If you get through it in an honorable manner, venturecapitalists and investors know at least two truths: one, you'retrustworthy and two, you've had some invaluable businesslessons seared into your soul.

In 1995, Sapient Health Network founder Jim Kean faced such aneducation. His Portland, Oregon, company's original businessplan was for a subscription-based health service providingindividuals with information on medical treatments over theInternet. Unfortunately, Kean found that no matter how valuable theinformation was, people didn't want to pay for it. Afterspending millions of investor dollars to develop his Web site andsophisticated information-gathering software, his company faced anuncertain future.

At the time, Kean says, all he could think was, "If thiscompany fails, my investors are going to hate me, and I'm nevergoing to get a job anywhere else." However, when he actuallymet with investors, he found their attitude quite different."I was pretty straightforward, and most of my investors saidthey'd be unhappy to lose their money, but they were fullyaware of the risk and were surprisingly supportive."

Encouraged, Kean sat down with his board to analyze thestrengths and weaknesses of the company. "[We decided] what wewere really good at was putting together communities of patientsorganized around [particular health-care] topics, and that we couldsell the aggregate insights of those patients to differenthealth-care provider groups," Kean says. "We reallyturned the business on its head." Today, Sapient HealthNetwork provides information free to consumers and billshealth-care organizations for profiles of its subscribergroups.

Turnaround Time

What worked for Kean can help any BIZ Experiences turn failurearound. When a company is in difficulty, stresses venturecapitalist Child, "The most important thing for theBIZ Experiences is to be honest. Outside directors can't helpunless they understand the situation. Figure out what'simportant, realize capital is a constraint, and stretch scarceresources. Those are the things you hope [an BIZ Experiences] learnsfrom a tough experience."

More than others, young BIZ Experiencess are in a position tosurvive such tough experiences and even to make failure work forthem. When you start a business in your 20s or 30s, the outsideinvestment level is usually low, so you're not risking asignificant amount of investor capital. Typically, your personalassets are small. Often, you don't have a mortgage or familyresponsibilities, so it's easier to recover financially fromfailure.

Jennifer Kushell, president of the Young BIZ Experiencess Network,a Marina Del Rey, California, BIZ Experiencesial Internet community,and author of No Experience Necessary: The YoungEntrepreneur's Guide to Starting a Business (PrincetonReview Books/Random House, $12, 800-793-2665) asserts,"BIZ Experiencess in their 20s will usually start a series ofbusinesses throughout their lifetime. I know a lot of people whoare 25 and are already on their third business."

For such BIZ Experiencess, failure is often the stepping-stone tosuccess. Paul Wenner's Gardenhouse restaurant failed when hewas 37. Undaunted, Wenner took the best product from hisrestaurant--the vegetarian Gardenburger--and turned it into a $57million business. His Portland, Oregon, company, Gardenburger Inc.,now sells frozen Gardenburgers to restaurants and supermarketchains nationwide.

Business failure will never be something to brag about. It'stoo costly to be cool, too painful to be chic, too embarassing tobe hip. Just ask anyone who's had to face angry creditors, layoff loyal employees or write letters to disappointed customers. Butit can profoundly help those willing to face the challenge withhonesty and learn from it. So if you're thinking about startinga business, don't let fear of failure hold you back. Go aheadand jump.

Famous Failures

• After failing miserably at his job as a Florida real estatesalesperson, Ray A. Kroc started selling milkshake machines. On thejob, he met the McDonald brothers, owners of a San Bernardino,California, restaurant serving low-priced hamburgers. Kroc was soimpressed with their business, he started selling McDonald'sfranchises. In 1961, Kroc bought out the McDonald brothers for $2.7million. Today, McDonald's is the largest food-service companyin the world, with more than 20,000 restaurants.
• Masaru Ibuka and Akio Morita were both failures in post-WorldWar II Japan. Ibuka, who had failed his exam for lifetimeemployment at Toshiba, partnered with Morita to make an automaticrice cooker. But the machine burned the rice, and only 100 of thecookers ever sold. Desperate, the two teamed up to build aninexpensive tape recorder they persuaded Japanese schools to buy.From that successful tape recorder grew Sony Corp.
• Henry Ford's first business, The Detroit AutomobileCompany, failed within two years due to partnership disputes.Ford's second automobile company also failed. Proving "thethird time's the charm," his third business, Ford MotorCo., made him a multimillionaire.
• Nike founder Phillip H. Knight came close to failure twice. In1971, his company, then called Blue Ribbon Sports, distributedTiger athletic shoes. When the shoes' manufacturer demanded 51percent ownership in Knight's company, Knight refused. Therefusal left him without a product to sell, so Knight took his ownidea for a waffle-sole shoe design to another Japanese manufacturerand began selling his own sneakers. A year later, Knight survivednear-failure again when a dockworkers' strike and Japanesecurrency fluctuations almost put him out of business.
• Rick Rosenfield and Larry Flax, co-founders of California PizzaKitchen, failed plenty before their successful restaurant chain wasborn. They co-wrote a screenplay they couldn't sell, started anItalian restaurant that went bankrupt, and launched a mobileskateboard park that died a quick death. It wasn't until 1984that they hit pay dirt with pizza. The national chain has itssights set on surpassing Pizza Hut's sales.

Stayin' Alive

More than twenty years of experience teaching and interviewingsome of America's greatest BIZ Experiencess has taught ussomething about failure: It's part of the process.

That's right. In some ways, businesses always fail.No matter how good your business idea is, no matter how well youexecute it, your business is always going to change. No one can getit right the first time . . . or the second, orthe third.

People you counted on won't want your product or will wantit ways you didn't count on. People you never even knew existedwill demand your product and want you to deliver it in entirely newways. In short, millions of things will go right and millions ofthings will go wrong. This simple business truth means that if youwant to succeed, it's up to you to quickly identify yourmistakes and correct them.

It's also important to understand that change occurs notonly when a business begins. Due to economic, cultural andtechnological developments, change is a constant throughout thelife of every business. The ability to adapt your business to thechanging wants and needs of your customers is a skill everyBIZ Experiences needs in order to succeed.

Contact Sources

Argus Management Corp., 207 Union St., Natick, MA 01760,(508) 651-3777

Brookwood Capital Partners LLC, 55 Tozer Rd., Beverly, MA01915, (978) 927-8300

Gardenburger Inc., (503) 205-1500, http://www.gardenburger.com

David Needle, dneedle@sjm.infi.net

Sapient Health Network, (415) 512-0770, http://www.shn.net

Young BIZ Experiencess Network, jennifer@yenetwork.com,http://www.yenetwork.com