OPINION: My first failed business is my badge of honour

It took me a long time to talk about why my first business failed, says Faisal Butt. But analysing why it didn't work is important.

by Faisal Butt
Last Updated: 21 Jul 2014

In some ways your first business is like your first girlfriend – and your first business failure is a lot like your first breakup. It leaves a permanent imprint and teaches you some deeply rooted life lessons. My experience with my first business had such a lasting impact on me that – until recently – I found it difficult to reminisce and talk about it. Setting up my own business at only 25 was a risk, and even though it eventually ended in failure, the experience has left me with valuable battle scars and intrinsic commercial savvy that help me navigate through the business world today.

My first breakup

I was stuck in the most uninspiring job and didn’t feel like I was tackling any big ‘world’ problems. I felt – as an inherent entrepreneur and ‘change-maker’ – that I had to do something more impactful. As someone who grew up on three different continents, I came up with an idea that married my tech passion with my internationalism. My business, which I called Tribal Monsoon to imply the change I was about to bring about, would help stimulate export trade in developing countries – through a cross-border e-commerce platform – connecting cottage industries in south Asia with global markets.

This was back in the days of Web 1.0 and around the time that eBay, Amazon, and Alibaba really started to take off. The business could have been huge, but unfortunately it didn’t turn out that way. There were a lot of big challenges that made it difficult to create a profitable business, but what I did get was a lot of acclaim for trying to tackle a big social problem through technology. I employed hundreds of artisans to meet high-volume international orders and won awards for entrepreneurship, which ultimately led me down my current path as a venture capitalist in London. 

Lesson one: assess the scale of the opportunity

Before you set up your business, look at the size of the market and assess the direction it’s heading in. Look at the last five years of accounts for the top 10 businesses in your sector.

A simple check of how turnover and profit has changed over that period will help you to see whether it’s a growing market and how big the margins are. My strategy professor at Oxford called it the ‘Fat Rabbit’ approach. You need to look for a lucrative market where the margins are fat. Just by being in that market, you’ve already secured one of the key components of growth and success. I recently looked at a business which seemed interesting on the surface, but when I looked at its competitors, I quickly discovered that only one had revenues in excess of £10m and there was a reason for it.

This is definitely an area where I went wrong. I went into an industry which had some inherent challenges – quality control and logistics being the main ones. I failed to anticipate how challenging it would be to safely transport delicate handmade products from one part of the world to another. A proper due diligence exercise would have exposed this as a major business risk that eroded margins.

Lesson two: start with a partner

You need to start with a partner. I was running Tribal Monsoon on my own for four years. I didn’t have a sounding board, a mentor, or anyone to share my fears or excitement with. There was no one I could call on the weekend to bounce around ideas with. There’s a really strong emotional and psychological dynamic that a team of two can bring and that was an impediment to my growth. There was no one to challenge me or tell me where I might be going wrong and in the end that impacted the business.

Lesson three: hire ‘rock stars’

The team I put together was not as experienced or knowledgeable as me. No one inspired or challenged me. They were ‘worker bees’ who weren’t thinking, just doing. I was responsible for all of the strategic thinking, commercial decision-making, and business-building. I didn’t have anyone to contribute and ‘rain make’ with me. If you’re going to build a superstar company, hire ‘rock stars’ – A-team players only. There is a saying in Silicon Valley that A-players go on to hire A-players, but B-players hire other B-players or even C-players because they are afraid of being shown up. The calibre of your team begins to weaken if you don’t start with the best building blocks.

Lesson four: minimise client concentration risk

It sounds obvious, but is a common mistake: you should never allow too much of your revenue to come from one or a concentrated group of clients. I made that mistake. I thought I had a diversified business with retail and wholesale clients from around the world, but 80 percent of my revenue was actually coming through one company. When that company ran into tough times in 2008 a lot of my turnover vanished. I hadn’t taken the time to build a diversified pipeline of clients and that hit the company hard. Today, I repeatedly ask my fellow founders how concentrated their pipeline is and remind them not to put all of their eggs in one basket. If you are looking to build capital value into your business ahead of a future exit, any investor is going to discount the value of your business if the client concentration risk is high.

Lesson five: keep tech in-house

Most businesses these days rely on technology. That function needs to be a core part of your business and kept in-house. Your CTO needs to be involved in commercial decision-making and be a key person in your C-Suite if the business is going to have the agility to evolve rapidly. At Tribal Monsoon, I outsourced my tech team and they weren’t able to deliver quickly enough. They have a saying in Silicon Valley that you should ‘just keep shipping’. It refers to the functionality of your technology and means you should keep offering your customers something new to improve their online customer experience. We were shipping products but we weren’t shipping software. As more players entered the market, we started to fall behind. Regardless of your sector, I think the ‘just keep shipping’ mantra holds true.

Final word

These five ‘golden rules’ apply to every business and have been instrumental to my success as a venture capitalist. To me, my first business failure has very much become my badge of honour. I can’t think of any successful entrepreneur who hasn’t got to where they are without failing at one time or another. Being an entrepreneur is about overcoming the fear of failure and turning failure into opportunity. When caught in the immersing winds of your own ‘tribal monsoon’, remember that those rough times in business really are like seasonal storms. If you pull the right strings and orchestrate your own rebirth, the blossoming of spring will be just around the corner.

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