Monday, January 19, 2009

Learning from failure.

Failure usually comes when the startup team doesn’t get along, the market doesn’t materialize, or the company runs out of money. Running out of money happens when the team either doesn’t make enough progress to generate investor interest or spends its initial money unwisely. When either of these happen, investors lose interest.

The following four patterns of failure were described by Geoffrey Moore in Red Herring:

The first kind of failure is the slow fail - not failing fast enough or explicitly enough. You can waste a lot of time this way.

The second kind of failure is failing to transition into the mainstream market. Technology markets begin with disruptive innovations promising unheard-of benefits wholly unavailable with the current market offerings. To transition to mainstream markets, vendors must win over pragmatic buyers who look at each other during the early introduction phase and hold back until they see others like them adopting. They also wait to see if a whole product is available. So the vendor sponsoring the new technology must recruit other companies from the industry to complete the whole product. They must, in effect, bring into existence a new value chain. But value chains don’t readily form in unbounded spaces. To get going, new technologies need to be incubated in confined markets where problems are manageable and the competition is modest. This permits smaller, more vertically focused players to pitch in like Aldus and Adobe did with the Macintosh in desktop publishing.

The third kind of failure occurs when managers and investors agree they don’t need a niche market to get started and dive right in. This is the hypergrowth phase of high-tech market development where markets grow at triple-digit rates for several years at a time. Two key ingredients are needed to start this kind of tornado. The first is a killer app - a universally compelling application that creates mass-market adoption across multiple sectors simultaneously (word processing was the killer app for the PC). The second ingredient is timing. The killer app must intersect with an emerging infrastructure at exactly the right time so that the two of them can race forward together. To get first mover advantage, managers target the missing pieces of the value chain to support the killer app in an all-out assault on the mass market. This usually involves a high level of risk as it’s very unlikely that all these conditions will come together at exactly the right time.

The fourth mode of failure is ending up in the dead zone.
Dead zone products offer good but not fantastic gains that can be adopted with discomfort but not excruciating pain - such as applications compromised by too much complexity or a nice-to-have item where the customer has to endure some pain in learning how to use it.

Failing means getting blocked on an intended course, backing out and restarting. Losing means persisting in failing ways, refusing to change the current course.

In high-tech ventures, expect to fail many, many times and get back in the game. But if you lose just once, you may never have another chance.

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