How failure breeds success

For entrepreneurs such as Moshi Monsters's Michael Acton Smith it was the major setbacks they faced early on which sowed the seeds of flourishing businesses. Hannah Prevett reports on the turnaround tycoons.

by Hannah Prevett
Last Updated: 09 Oct 2013

There was a time when failure was a dirty word, but change is afoot. It goes without saying that failure is never the intended outcome when starting a business. But the reality is finally beginning to dawn that the happy-ever-after version of business success, presented by shows such as Dragons' Den or The Apprentice, is a myth. The unpalatable truth is it is rare that any business is an overnight success; much more likely it's going to be an incredibly long, hard slog with a fair number of false starts. In fact, for many, failure is just the beginning of the journey.

The word itself, 'failure', used in this context, is a slippery one. Just how should it be defined? For Alliott Cole, a principal in the early stage investment team at VC firm Octopus, it is a grey area. 'Success and failure are never that binary,' he says. 'Often, you'll find an entrepreneur has just had an absence of success. That isn't necessarily the same as failure.'

David Gann, professor of innovation and entrepreneurship at Imperial College, agrees that failure and success are rarely black and white. He cites the example of the Millennium Bridge across the Thames, which had to be closed after two days because of its famous wobble. 'Everybody said it was a big failure, but it was turned into a success because the engineering company behind it, Arup, learnt about what had gone wrong with the bridge design, published its findings and then actually won new work off the back of it. So it turned it into a business success as well.'

Adds Gann: 'Successful businesspeople and entrepreneurs tend to be the ones who have a broader appreciation of success and failure over time, and are also able to adapt to changing circumstances.'

There's that word: adapt. Thanks to the book with that very title by economist Tim Harford, 'adapt' is firmly lodged in the vocabulary of every entrepreneur, VC, bank and academic involved in the start-up scene. In Adapt: Why success always starts with failure (Little, Brown), Harford argues the virtues - and necessity - of trial and error. Another buzzword du jour is 'pivot'. 'To pivot is to change your business model,' says Oscar Jazdowski, head of origination at Silicon Valley Bank UK. 'If a business is not working you have two options: you wind it down or you pivot it.' Not that Jazdowski is necessarily a proponent of the concept: 'By and large, pivoting has resulted in failure; I haven't found repositioning all that helpful,' he says.

But there are many companies which have. Two of the case studies across these pages (Mind Candy and Spoonfed) are examples of where a pivot has proved to be game-changing. And there are other examples: British engineer and entrepreneur James Dyson famously described the inventor's life as 'one of failure' after it took him 5,127 attempts to get the prototype of his vacuum cleaner right. And there are examples further back in history too. Edison once said: 'I have not failed. I've just found 10,000 ways that won't work.'

Karen McCormick, an investment director at private equity house Beringea, has seen many examples of successful pivoting within her portfolio. 'A number of businesses have had to scale back as much as 70% of their overhead costs in order to continue trading, and have then managed to regroup, reinvent themselves, and come back to market very successfully,' she says.

This flexibility from VCs, allowing businesses to adapt and reposition themselves, is helping more start-ups to succeed. Anecdotal evidence suggests investors often see failure as an asset - not a liability - in an entrepreneur's past. Why? Because failure suggests a tolerance for risk and a hunger to succeed.

But it has taken a while for attitudes to change - and we are still not as generous as our American counterparts when it comes to the belief that failure is merely a pit stop on the road to success. 'One of the reasons Silicon Valley and the US system have been so successful,' says Jazdowski, 'is that entrepreneurs are allowed to fail quickly.' Indeed, failure is so central to the start-up model in Silicon Valley, there's now a sell-out annual conference dedicated to the topic.

'Keeping businesses going too long is the kiss of death. You look back and say: "You know what, we should have closed this company down a year and a half ago,"' says Jazdowski. Imperial's Gann agrees. His institution gives fledgling entrepreneurs the space (and crash mat) to try things and fail 'safely', he says.

And their success is our success. As we've heard from David Cameron time and time again, the UK's entrepreneurs could be the ones to pull us from the doldrums. And a true entrepreneurial economy can thrive only in a culture that allows people to make mistakes, learn from them, and try again. As Henry Ford once said: 'Failure is simply the opportunity to begin again, this time more intelligently.'

Charles Hunt - Duvet and Pillow Warehouse

In 1999, I set up Peacock Blue, a mail order bed linen and accessories shop with my former business partner. At its peak, it was a £7m turnover business. But then disaster struck when Royal Mail went on strike in December 2004. We were entirely dependent on mail order and the strike meant that none of our Christmas catalogue was delivered. We lost our entire trade for the festive period, around £500,000. There was no strength in the balance sheet, so it only took one big blow to knock us off track. My business partner pulled out so I was left at the helm, solo.

I eventually did a CVA (company voluntary arrangement) to try and rescue the business, but, although you have an initial bounce-back, unless you've got some proper capital in the business, you're always going to be living hand-to-mouth. So I brought in an investment group which bought 20% of the business for £300,000. At that stage, I thought we'd never fail again. But the model of the business wasn't right and we were competing with the likes of John Lewis and the White Company. They were miles ahead of us and we were never going to catch up.

The closure of the business had huge financial implications for me. I had personally guaranteed most of the debt in the company, so I owed the bank a lot of money. The day we actually closed down was also the day that my first son was born. I lost my home, and my family and I had to move into rented accommodation. I lost everything.

The English belief is that failure is an absolute disaster. And the burden and stigma of failure are very scary. But once you get over the financial issues and you start looking forward, you are in a great position, provided you learn from your mistakes the first time around. The business I run now with Adam Prowse, Duvet and Pillow Warehouse, turned over £5m this year, has extraordinarily well-managed finances and we can make decisions with the complete understanding of how far we should go in risk-taking.

People say when you go skiing that if you don't fall over you're not trying hard enough. Similarly, in business, if you're trying really hard, you're focused and properly planned yet you do fall over, that's not necessarily a bad thing - providing you don't make a habit of it.

Michael Acton Smith - Mind Candy (Moshi Monsters)

When I was a kid, I read a book called Masquerade by Kit Williams, which was about an amazing treasure hunt, and the idea bubbled away in my head for years and years. I thought with the growth of the internet, it would be incredible to create an updated version for the digital age. We buried £100,000-worth of treasure somewhere in the world and then released clues across different media - there was a magazine, a website, a CD and live events with helicopters and actors. We created an entire story around the characters in the world of Perplex City.

Everyone was very excited: I raised about $10m, got a huge amount of press attention and won lots of awards. Creatively, it was amazing. The problem was, though, that commercially it was an utter disaster. It just didn't take off the way I had hoped. The main reason is that it was just too complex. We made something that was too niche and appealed to too small an audience.

It was a very painful decision to put Perplex City on ice, because I had massive investors behind me and everyone was still telling me I was a genius. But as an entrepreneur, you've got to go with your gut instinct, and my gut was telling me that it wasn't working. I held a tense board meeting with my investors where I told them what I wanted to do, and then I gathered the staff in a conference room to tell them we were putting Perplex City on hold. I had to lay off most of them - we went from a team of more than 20 to just five. The players were horrified too. Even now I get emails asking me to bring it back. It was a horrible time, but, from a business perspective, it was probably the smartest thing I've ever done.

I learnt a lot from that failure. I learnt about how important it is to recruit the right people, to listen to your instincts, and then to be decisive. I learnt about working with different types of entertainment, as well as publishing and how to build a community - all lessons I have applied to Moshi Monsters, a social network for kids which we began development on in 2007.

But Moshi wasn't an overnight success: we spent our last bit of cash on development and in late 2008 we ran out of funds. It was a bad time to try to raise money but fortunately our existing shareholders put a little more in and we found an angel investor too, which enabled us to launch our subscription service in 2009.

Moshi will turn over $100m this year. We have 50 million registered users in over 150 countries and there is one sign-up every second. And we have recently launched our own record label. But even with Moshi we still screw up, albeit in smaller ways. That's how you build a business, especially in the entrepreneurial age. You try something quickly, you make a small bet, and if it doesn't work, you move on and try again and again until it does - and hope your money doesn't run out in the meantime.

Henry Erskine Crum and Alexander Will - Spoonfed Media

We met at the LSE where we were studying economics and we spent a lot of time talking about what we wanted to do when we graduated. We decided there was a market opportunity in the 'what's on' and listings domain. The biggest player was Time Out, but even though it was a fantastic brand, it hadn't done very well from a digital point of view and certainly didn't speak to consumers of our age.

We started Spoonfed and managed to raise £400,000 from angel investors in June 2008. But we soon realised that launching a consumer brand is very difficult - not least one that relied on advertising for its survival at a time when advertising rates were going through the floor. It quickly became apparent that if we didn't come up with something else we would be in trouble.

We used the relationships we had with 5,000 promoters in the UK to find out what they wanted from their online marketing. Through our research we were able to come up with the first iteration and concept of Bullseyehub, which is event marketing software-as-a-service. As a result we managed to raise a further £500,000 at the beginning of 2010, enabling us to launch last summer. We have actually just raised a further £600,000 for the business, all of which will go into Bullseyehub, which now has more than 400 customers, including household names such as Pizza Express, Hilton and Plaza Hotels.

We still have Spoonfed ticking along with its five editors - without it we never would have had the leads for Bullseyehub, and it continues to provide ammunition. We are looking at taking Bullseyehub to the States at the moment, but it's unlikely Spoonfed will go with it. We don't look at Spoonfed as a failure, but had we not iterated from that into something that was going to generate more revenue we would have hit the wall.

There are lots of examples of companies that weren't the success the founders had envisaged them being, or companies that started out wanting to be something different. It's about applying the right business models, as well as market opportunity. When you go straight into running a business out of university, you're a little bit green; you have this naive optimism. But when you immerse yourself in the business and you learn more about the markets in which you're operating, it sometimes emerges that there's a bigger opportunity available to you. That's how we managed to pivot successfully.

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