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Are You Suited to Entrepreneurship

2 Types of Failure and How Your Business Can Weather Them

Successful high-impact entrepreneurs take calculated bets almost daily. High risks come with high rewards, which in turn are the result of understanding that failure is part of the equation.

Allon Raiz

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Beekeepers know that the more they get stung by bees, the less painful the wound will eventually become and the less their skin will react to the venom in the sting. A beekeeper once told me that although he has always had a deep respect for bees, he no longer approaches a hive with the same fear he once felt when he started his career.

The same is true for entrepreneurs. The more we experience failure, the less painful it eventually becomes. In a weird way, experiencing pain is expected as part and parcel of the entrepreneurial journey, just as being stung by a bee is expected by beekeepers.

I am particularly interested in the psychology of surviving failure and the relationship successful entrepreneurs have with failure — especially the ‘calculated bets’ they take daily.

Making Calculated Bets

Most entrepreneurs will have you believe that they spend a fair amount of time thinking deeply about the decisions they make before making them and they will refer to them as ‘calculated bets’ that are in line with their strategy. A ‘bet’, even a calculated one, has a good chance of not succeeding.

Related: RocoMamas Founder Brian Altriche On Fabulous Failures And Visualising Success

To move forward and succeed entrepreneurs have to make bets (decisions) daily. Some decisions will be the right ones and others will end up being wrong, but not making any decisions at all is not a luxury that an entrepreneur has.

Two types of failure

overcoming-failure

Failure can be categorised into multiple categories, but I would like to focus on only two categories — above the waterline and below the waterline.

Above the Waterline (ATW) Failure: When this type of failure occurs, when damage happens above the waterline, there is damage to the organisation but no water is taken on-board and the ship (‘business’) still remains afloat. Bear in mind that too many ATW failures will end up damaging the ship to such a point that it will eventually take on water and sink.

Below the Waterline (BTW) Failure: When this type of failure occurs, the ship takes on water and sinks (‘fails’). BTW failures occur when an entrepreneur’s bet encumbers enough resources (for example money, reputation, machinery, IP etc.) that the loss thereof would mean the business cannot operate effectively any longer.

The relationship with ATW Failure: As you might expect, entrepreneurs eventually develop a healthy relationship with ATW failure. Like the bee keeper, they gain confidence with the knowledge and experience that they have always survived tough situations, and built resistance to the pain they produce.

As a result of this we see an increased rate in ATW bets over time — relative to the business’s size. This curve starts to flatten as the SME approaches corporate size and it then becomes complacent or scared, which ends up leading to the number of ATW bets decreasing relative to its size. This is a sure sign of the beginning of the end.

The relationship with BTW Failure: The relationship with BTW failure is different. When entrepreneurs are in the start-up phase, most of the calculated bets taken are BTW bets. Taking on a new staff member early in the journey and finding out that they cannot do the job could be a BTW event. Losing a single client early (and unfortunately too often with those businesses a few years into their journey) can be a BTW failure. Game over.

As a business grows and builds assets and reserves, so too do the calculated bets move from the BTW category to the ATW category. In a classic supply/demand-type graph, the number of ATW bets increases over time and the number of BTW bets decreases.

The relationship entrepreneurs have with BTW failure remains the same over time. There is deep fear around the outcomes of BTW bets and entrepreneurs avoid them like the plague.

Related: This 1 Crucial Business Control Will Determine Your Success Or Failure

The BTW Dilemma

But, here is the dilemma. There is a thrill experienced when taking on a BTW bet that you can never achieve by taking on an ATW bet. There is an upside to winning a BTW bet that can never be gained from multiple ATW bets.

The media is full of examples of entrepreneurs who cannot resist this type of bet. Elon Musk may be a good current example of this. Cornelius Vanderbilt is a great example from the 1800s. After many years of hard work, he became a shipping magnate and his dominance in the industry was well established. But in his 70s, in a surprise move, he sold his shipping interests and took a bet on the railway industry.

On the one side of the BTW coin is the thrill; on the other side of the coin is the increased probability of losing everything. Those with the guts to take the BTW bet end up living with the sword of Damocles over their head, and those without the guts, live with the pain of boring incremental wins that do not move the dial too much.

Failure is an academic pathfinding exercise

Over my time spent with entrepreneurs, I have observed that those with the healthiest and most resilient relationship with failure have the closest thing to an academic lens on the process that you can find. They take those bets as carefully as their situation allows, and whether a failure or success occurs, they analyse the ‘why’.

Where did their decision-making serve them or fail them? What assumptions were true or false? Where did the execution fail or serve? Every failure is information of where not to move forward, every success is information on where to move forward. Failure and success are merely pathfinding inputs.

These entrepreneurs de-personalise the event (success or failure) as much as possible and see it as data that can be used for a better more successful next bet. This may be easier said than done. I have yet to meet an entrepreneur who never felt the sting of failure when they designed a product that failed, backed a team member that left for the opposition or invested in software that never worked.

All we can do as entrepreneurs is move slowly, over time, from a place of taking failure deeply personally to a place where we are coldly analytical and academic about the occurrence. And we might even fail at that.


TAKE NOTE

Businesses that don’t take bets become complacent which is a sure sign of the beginning of the end. 

Allon Raiz is the CEO of Raizcorp, the only privately-owned small business ‘prosperator’ in Allon Raiz is the CEO of Raizcorp. In 2008, Raiz was selected as a Young Global Leader by the World Economic Forum, and in 2011 he was appointed for the first time as a member of the Global Agenda Council on Fostering Entrepreneurship. Following a series of entrepreneurship master classes delivered at Oxford University in April 2014, Raiz has been recognised as the Entrepreneur-in-Residence at the University of Oxford’s Saïd Business School. Follow Allon on Twitter.

Are You Suited to Entrepreneurship

Build Solid Back-Room Basics For Business Success

What do South African entrepreneurs really know about what goes on behind the scenes building of businesses?

Marc Wachsberger

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South Africa has a vibrant start-up culture with great ideas starting out with a bang, but closing down with a whimper because entrepreneurs picture the glory at the destination, but not the nitty gritty of the journey to get there.

Be smart about scale

When I started out, I literally did everything myself. I negotiated and signed leases, I arranged the furnishing for our apartments and managed the interior décor process. When guests started using our apartments, I signed them in at reception, and then carried their bags.

At that stage, there was no money in my business to pay for attorneys, interior designers and decorators and there certainly wasn’t enough money for porters.

However, when we got to 70 apartments, it didn’t make sense for me to be a porter any longer, so I hired someone to do that job, explaining clearly what I expected of him. Before I did that, though, I spent time designing incentives for him so that he would be more affordable for me, and so that he could earn as much money as possible.

Related: Training Is A Two-Way Trick

Know your talents – and your limitations

There are certain things I’m really good at, but I know without a doubt that sales isn’t one of them – and without sales, you don’t have a business. I couldn’t afford a top-flight salesperson, but I knew that I could attract the right talent with the right business model. I set some high targets for Pamela Niemand, but offered her one third of the business if she met them. We both won: she earned a share in a successful, trend-setting business, and my trend-setting business became successful!

Use your skills – but know when to hand over

My background in corporate finance meant that I had all the accounting skills I needed when we first started out, but I knew that the time would come when I would need someone focused on that side of the business full time. Doing it all myself first meant that I could brief my first full-time accountant clearly and with a deep understanding of what would be required – and that I could help that person find and fix any challenges based on my experience.

In summary, my simple advice to anyone starting out would be to bootstrap your business yourself without investors or staff for as long as you can, but don’t over-extend yourself. Know when to delegate tasks away so that you can focus on what you’re really good at – but don’t do it before you have a solid understanding of what’s required. Know what you’ll never be able to do, and bring in that resource from the beginning – but do it based on performance-based incentives, so that your fledgling business doesn’t lose out if your early hires don’t perform.

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Are You Suited to Entrepreneurship

The Myth About The Relationship Between Entrepreneurs And Taking Risks

This is the true relationship between entrepreneurs and the apparent illusion of risk.

Lisa Illingworth

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“I can’t be an entrepreneur or start a business. I don’t have the appetite for risk.” This line is spoken regularly to brave few that leave the perceived safety of a job, take the plunge and venture into the unknown world of being an entrepreneur. However, there is a gross misunderstanding in the appetite for risk that entrepreneurs are believed to have innately inside of them.

The little-known truth is that the majority of entrepreneurs don’t like taking risks and according to Luca Rigotti and Mathew Ryan in their paper that explores a model for quantifying risk and its translation into enterprising action, the results were very interesting.

Risk is explained by these theorists as taking action where the outcomes are unpredictable as well the factors leading to that outcome are unknown. One of the theorists in this area, Saraswati, who coined the term “tolerance for ambiguity” has a more accurate description of what the outside world deems taking a risk.

In simple terms, entrepreneurs don’t go head-first into the shark infested water because they like the idea of danger and potentially being eaten alive; or the thrill of being able to say that they survived whilst others perished in a pool of maimed flesh. They carefully calculate that the sharks have been fed recently, some of the sharks are ragged tooth sharks that whilst looking like they are set to devour a human being, are actually incapable of opening their jaws wide enough to bite. For those sharks that still have space or who smell blood and can’t resist the urge to kill, the entrepreneur has a cage set up that he can retreat into quickly and a knife with which to protect himself.

Related: 5 Infamous Risks Every Entrepreneur Must Face

Tolerance for ambiguity is the careful evaluation of what is known at the moment where a decision must be made and an open-mindedness for what is not known. This, coupled with the agility to change course when new information is presented, has earned the label of high risk appetite. The appetite is not for the risk, but it is the ability to move down a path, when all the information is not known.

I likened it to a person moving around in the dark holding a candle. The candle casts a light that illuminates a limited parameter around the person holding the candle. What is beyond the light that the candle casts, is unknown and potentially a risk. But as the person moves forward, the light reveals what was unknown and in the shadows. As the light reveals new information and new challenges added to what they have already learnt, the person can make better informed decisions. The tolerance is in not knowing what lies in the shadows yet to be illuminated by the candle and then the confidence in his or her own ability to act on what new information is discovered.

None of this behaviour is risky or irresponsible. There is careful consideration for what is known and a tolerance for what is unknown. And once there is more information available, a calculated next step is taken and more information is assimilated into what is now known. This is the true relationship between entrepreneurs and the apparent illusion of risk.

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Are You Suited to Entrepreneurship

7 Skills Every Entrepreneur Needs To Adopt Today

Want to know what skills can help you build confidence and your business? Here are seven…

Nicholas Bell

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For some people, becoming an entrepreneur is as easy as stepping off a bus. They have a big idea, they bring it to life, they hire employees and the next thing they are in a building smothered in branding and living the business dream. For others, the idea and the passion are there but they are unsure as to how they can make these into a sustainable reality. Entrepreneurial spirit isn’t like instant coffee – you don’t add ideas and suddenly get all the skills you need to thrive.

Want to know what skills can help you build confidence and your business? Here are seven…

1. Believable vision

Make sure that your vision is believable and achievable. It has to live in the realms of possibility, not as a blue-sky idea that looks good on paper but wouldn’t work in reality. You need to be able to live this vision so make it realistic and achievable. This will not only keep you on track, but your employees as well.

2. Be inclusive

You need to ensure that every person who works with you feels as if they are part of your vision and understand it. They need to relate to where the business is going and how it plans to get there. Many leaders don’t understand why employees are not engaged with their business and it’s because many of them don’t actually understand what the business does.

Related: 4 Ways To Improve Your Budgeting Skills

3. Communication is critical

If you don’t have fantastic communication skills, then now is the time to hone them. When it comes to building employee morale, commitment and engagement, nothing works as effectively as constant communication. The same applies to client relationships. You need to repeat the vision and ethos of the company at every opportunity and you need to be part of the team that does this communication.

4. Be visible and transparent

You are communicating, now you need to make that communication genuine by being both open and clear. People respond incredibly well to transparency. They feel as if they are part of something that recognises their value and contribution and it fosters a more inclusive company culture. Often toxic cultures come about thanks to a lack of communication and visibility. People know when things are being kept secret and react negatively to it, regardless of whether they’re an employee, a customer or a manager.

5. Be practical

You aren’t going to build an empire in a fortnight so focus on a realistic and practical business strategy that has clear benchmarks and even clearer goals. Communicate these with the company and keep everybody on the same page. Practical and achievable means long-term success.

Related: Crucial Skills You Need To Be An Entrepreneur

6. Build opportunities

As people become immersed in your company and part of its growth they will also need opportunities to grow. You need to tie their careers to the business and create opportunities for them.

7. Be human

It takes people to build a culture, a company and a future. It’s essential that you are human in your interactions and your treatment of others. The impact that a down to earth and authentic attitude can have on a company is extraordinary.

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