Tuesday, March 13, 2007

The falling price of failure

Josh Kopelman has written an excellent post on why it's cheaper and faster to fail in today's market and the positive effects this can have on innovation.
"Companies used to waste millions of dollars of VC money – and entrepreneurs used to waste years of their lives – working on a failed hypothesis. Now, the cycle is much shorter."
Like Josh, I remember the cost of doing business in the 90s when it really did cost a lot of money to build a web business: Sun (or even worse, Digital) hardware, Oracle software and sky-high marketing costs were all significant drain on the bottom-line.

There are some key concepts to grasp.
  1. It's ok to fail - we are terrible at appreciating this in Europe where people are often so afraid of failure they end up not even trying
  2. The cheaper it is to fail, the more ideas we can test
  3. There's a big difference between an idea and a business
A few weeks ago in my long post about Y Europe can seed new stars I tried to make a similar point, which may have been lost but which I believe in very deeply:
Starting small doesn't mean that you're not going to need funding to hire and scale up if you have a real business to pursue, but what it does mean is that you can find out very quickly and cheaply if your idea has traction. There is a big difference between an idea (which is easy to discard) and a business that has taken on people, costs and commitments (which is very hard to discard both rationally and emotionally).

We have a great opportunity today to test more ideas, which we can do very quickly and cheaply, and start businesses which have a better chance of succeeding.
I really hope we can adopt these lessons and leverage the really exciting new funding cycle that Josh highlights in this very cool and excellent chart from Peter Fenton.

Let me know what you think.

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At 3/14/2007 01:01:00 am, Anonymous Fraser said...

I think you missed a major concept when you outlined them - it's that start-ups can (and should!) spend time testing and validating all assumptions in the business plan before raising large rounds; with mitigated risk, the round is a lot less expensive for the entrepreneur... allowing them to maintain a larger equity position.


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