New Entrepreneurs Need To Spend More Time Studying Failure

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You don’t need an MBA to become an entrepreneur. Many successful businesses were founded by people who came from diverse backgrounds. Some didn’t even have a formal education.

The qualities that contribute to success in business can be taught. It’s just that a degree program isn’t the best place to learn them. Often, entrepreneurs figure things out as they go along. The willingness to learn may be more important than any knowledge you already bring to the table.

But when you embark on your entrepreneurial journey, ask yourself: are you studying the right material?

The problem of survivors

The common perception is that starting a business entails taking on a considerable amount of risk. And studies seem to support this conclusion. Figures from the Bureau of Labor Statistics show that 20% of small businesses fail in the first year, with the number rising to 50% in the fifth year. After 10 years, only about 30% will have survived.

Not a problem, you might think. After all, it could be easily viewed the other way, with classic glass-half-full optimism. If you launch a venture now, there’s an 80% chance you’re still in business next year and a coin flip’s odds of sticking around after five.

Many people would fancy those chances. But survival isn’t the same as success. You want business efforts to deliver a return on investment: not only for the investors who funded you but for the sweat equity you and your team have invested.

Making it to a milestone like one, two, five, or ten years can be a significant accomplishment. But that doesn’t necessarily mean your business will be profitable at those checkpoints. The need to pivot rather than persist might even find you operating in a completely different territory than where you set out.

There’s a strong tendency to study business success stories because we want to emulate their key attributes and make the right moves just like they did. But due to survivorship bias, success stories are the exception rather than the rule. There are limits to the value of what you can learn by analogy.

Filtering through narratives

Our tendency to focus on success is linked to another problem, which the author Nassim Taleb calls ‘narrative fallacy.’

Humans have evolved to be wired towards pattern recognition. As a species, we’re physically unimpressive. We lack the keen senses, speed, and strength of both predator and prey animals. We had to compensate by hedging our bets in the wild: recognizing danger signs and opting for safety or figuring out which species we could cultivate or domesticate.

Narratives are how our brains make sense of seemingly random events. They are a powerful survival tool for everyday living, even in the modern age. But they don’t help make business decisions.

In “Thinking, Fast and Slow,” Daniel Kahneman argues that the narrative fallacy reduces complex realities to simple explanations and places undue emphasis on individual talent and intentions. In fact, business success largely comes down to having a little extra talent plus a large amount of luck.

The narrative fallacy is responsible for the exaggerated reputation of great CEOs and the myth of do-it-all startup founders. Entrepreneurship may call for many skills, but you don’t need to master them all.

For instance, with Google’s algorithms crunching over 250 different criteria to rank websites, and over 100 factors affecting user interaction with your site, are you comfortable handling SEO? If you’re out of your depth, better work with a digital marketing agency than handle something that’s not your expertise. In practice, you’ll find that your results more often depend on the consistency of effort and the talent at your disposal.

Studying failure

stop falling pieces

When we study the outcomes of entrepreneurs who’ve succeeded against the odds, we’re really looking at business outliers. This satisfies our desire for narrative comprehension but is often lacking applicable insights.

Those same entrepreneurs reflecting on their journey often fall victim to the narrative fallacy, attributing their success to personal skills and decisions they got right rather than luck. What they did gets more attention than what they didn’t do or the times and context in which they operated.

The real job of an entrepreneur is to enter the market, having invested as few resources as necessary, testing what works through a minimum viable product. You embrace the risk of failure because you aren’t actually risking a lot of time, money, and effort.

Whatever challenges you face will have elements unique to your venture, so it’s vital to learn from first principles. If you must study those who came before you, study those who failed. Learn the factors leading to entrepreneurial exit, and you can further reduce risks, losing only what you can afford.

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