Preface
by the Author, Dr. Ronald K. Mitchell
VENTURE SUCCESS THROUGH FAILURE PREVENTION
I take a rather novel approach to entrepreneurship. Instead of the "success tips" approach to venturing, I take the failure-elimination approach. And it is for this reason that I shall briefly explain the difference.
The difference is in the method. In a free enterprise economy, the market acts as the engine of an ecological system where "fit" organizations survive, and where the "unfit" do not. For years, scholars and entrepreneurs have searched for a checklist that, if followed, will ensure that a venture survives and prospers. As of this writing however, no master list has been found. Yet some ventures still succeed, while others fail. This phenomenon suggests that there may be systematic differences between the ventures that the market "selects for," and those ventures that the market "selects against."
The New Venture TemplateTM technology identifies these systematic differences, to show you how you can dramatically enhance the probability that your (or your client's) venture will succeed. The approach it takes is thus unusual in one key respect: This technology does NOT offer a success checklist. Rather, it will help you attack the known causes of venture failure and dramatically improve the probability of the venture's success.
Here an analogy is helpful. Let us compare the approach I take to extending business life to the approach that medicine has taken toward the extension of human life. We'll compare venture success to medical success.
Over the centuries there have been two basic approaches to medicine. The first and earliest, was a blend of pseudoscience, magic, and mystical philosophy - today referred to as alchemy. It attempted to find the elixir of life, a single substance that would cure disease, and lengthen life. The second and more recent (though less romantic) approach was based upon the scientific method, and consisted of systematically isolating the causes of human mortality, and working to eliminate them one-by one.
Alchemy failed completely, and medicine to date has only partially succeeded. But today we continue to rely upon the medical model, because it yields quantifiable results. In countries where modern medicine is practiced, for example, infant mortality is very low and individual life spans are significantly extended. In areas where modern medicine is not practiced, the mortality rate for new human beings is remarkably similar to the mortality rate of new ventures--far too high!
In my observation, two things are known about starting a new business. First, at least 50 percent of new ventures fail within a short time of their founding. Second, almost every would-be entrepreneur believes it won't happen to them. Achieving success in a business venture can therefore be approached in two ways. The first way is to change the "odds" of success. This approach examines the 50 percent plus failure rate, rejects this failure rate as too high, and seeks ways to reduce it. The second way is to trust only in luck--to flip the new venture coin so to speak. This method assumes that action is key, that venturers will be equal to the setbacks, and that the outcome is mostly uncontrollable anyway.
My approach is not about taking either the first road or the second. It is actually about taking both. It is about insuring your success as a venturer by tilting the "odds" in your favor, so that when luck makes its play, the probability that your venture will be "selected for" will be maximized. The big idea, therefore, advocates the scientific model, tempered by luck. It advocates the notion that new venture success occurs because of venture failure prevention. Of course, if you wish to trust to luck only--READ NO FURTHER. This could ruin your "fun".
But if you wish to systematically build a business venture that has a fighting chance of survival and prosperity in the ecology of the free market system, then READ ON! Yours will be an experience where the wisdom of the masters of new venture success will be transferred to you using the early failure diagnosis and prevention method. You have the opportunity to avoid a huge part of the "unproductive" waste and trauma that comes with the failure of a venture.
It should be recognized, however, that not all venture failure is unproductive. Nor is all venture failure preventable. In fact, there are four situations that are possible when the productivity and preventability of new venture failure are considered. Figure 1-1 below illustrates suggested approaches to intervention in each category of new venture failure. As illustrated, intervention to prevent failure is only possible and worthwhile in this one of the four cases shown. In the material presented here, our interest is only intended to address preventable, unproductive failure--Box 3 as shown in the figure below.
| Failure |
1. |
2. |
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| Value |
3. |
4. |
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Suggested Approaches to Intervention
in New Venture Failure Processes
The implications of this comparison are as follows:
Box 1 - Learning:
In Box 1, where failure is preventable, but where it is also valuable (perhaps as a learning experience), early intervention to prevent failure might prevent some short term losses, but over the long run could have the opposite effect--escalation. Instead of "losing a little to learn a lot," a venturer who is prevented, though early intervention from failing at an early stage, might instead fail much later, dramatically escalating the costs of that failure (losing a lot to learn [or not learn] a lot).
Also, to intervene in this situation would be to meddle. Policy makers have known for years that a certain amount of new venture failure is the "least cost way" to create the jobs and businesses of the future. Some failure may be good, if it is small in its impact and valuable as a learning tool. By applying the principles furnished here, you will learn to distinguish between valuable and wasted failures, so that you can benefit from the failure-cost-minimization method over the long run. The approach toward intervention in this case is "hands off"--Avoid disturbing the learning that is possible from the school of "hard knocks."
Box 2 - Growth:
In Box 2, where failure is valuable but cannot be prevented, then any time and effort that is consumed in coping with the failure process is turned to growth. Intervention efforts, should not be consumed in attempts to prevent failure. Rather, they should be directed toward the guidance and coaching that provide support and assistance to the venturer in "making sense" of the experience. Since prevention is impossible under the assumptions in this case, the approach toward intervention is to offer guidance, coaching, support, and assistance in "sense-making."
Box 3 - Conservation:
Where new venture failure is preventable, and where the learning value of that failure is low, conservation--the goal of the New Venture TemplateTM technology--is possible. Here, early intervention in the processes of wasted failure creates long-run savings because early assessment of venture weaknesses can assist with the minimization of failure costs. Early intervention can accelerate "creative destruction" (Schumpeter, 1934; Timmons, 1990) to minimize the premature waste of resources in flawed new ventures. The objectives of this intervention are therefore assessment and minimization, as they are defined below:
Assessment - Over the years, entrepreneurs, academics, politicians, financiers, family members and other stakeholders in the venturing process have learned a lot about the venture, the venturer, and the venturing environment. In the first step of the assessment process, the tools of knowledge that come from this learning should be given to would-be venturers so that they can set a higher standard for their venture. In the second step of assessment, the methods that are available to help these venturers compare their venture as it is presently conceived, to the standard that they have set, can then be applied.
Minimization - The knowledge that is gained in the assessment process can be applied to minimize the vast amounts of wasted money, effort and emotion that accompany unproductive new venture failure. Remember, two things are known about starting a new business. First, at least 50 percent of new ventures fail within a short time of their founding. Second, almost every would-be entrepreneur believes it won't happen to them. With knowledge in the right hands, the 50 percent plus group who have a very unpleasant surprise coming, can be reduced to a smaller, less wasteful size. Venturing resources thus conserved, are ready and available for application to more sound ventures.
Box 4 - Loss:
In every system there is a zone where all the skill and resources can neither prevent the "great fall," nor can they put the "Humpty Dumpty" loser venture together again. For whatever reason, there are some failures that are neither worthwhile nor valuable. In the worst case, all that can be done is to "cut one's losses," meaning get out now and get out fast. In the best case, such failures can be converted to learning, growth, or conservation outcomes. Since new venture failure in this quadrant is neither productive nor preventable, losses should be minimized through an attempt to convert the situation to one of the more productive cases.
In these pages, we will address the first of three venturing foundation elements within which success enhancement through failure prevention can have a real impact on the conservation of the money, effort, and emotional resources that are all too scarce in the 1990's. (In fact, just to try and get a handle on what the impact of this type of conservation might be. I projected the effects of a one and two percent net annual increase in the retention of new ventures in the U.S. economy. With a two percent net increase, the number of net new jobs created could double every 10 years, instead of the 25 years it is currently taking.)
The three places in which early intervention to prevent unproductive new venture failure is possible, are as follows:
- The venture itself,
- The venturer, and
- The venture stakeholder environment.
Where a model of decreased new venture failure is devised to include all three venturing foundation elements, the risks of ignoring any of the above becomes much clearer. As shown in Figure 1-2 below, minimized venture risk depends upon preventing unproductive failures in each of these critical areas:
Figure 1-2
Risks of Ignoring Critical Venturing Foundation Elements
The first volume of this three part series will explore Area (1), by demonstrating tried and proven ways to reduce the risk of a wasted venture. The second volume examines the venturer using a dramatic new approach to address Area (2), and reduce the risk of a wasted entrepreneur. The final volume in this series looks at Area (3), the social context or stakeholder environment of the venture. It defines for you, the venturer, a practical model that will help you be properly attentive to your key (I call them "salient") stakeholders.
As the model in Figure 1-2 clearly demonstrates, working on any one of the areas in isolation is insufficient to minimize venturing risk. If any area is underemphasized or omitted, the predicted consequences are sub-optimal. This is illustrated by Areas (4), (5), and (6).
Consider an example where the venture is well structured, and is operating in a supportive stakeholder environment, but lacks a venturer with sufficient expertise. In this situation, as represented by Area (4), we run the risk that the venture will suffer from lack of leadership--thus experiencing leadership risk.
In another case, the ventures may be well-constructed, and venturers have the necessary expertise, but the stakeholder environment is not supportive. We then run the risk of wasted opportunity known as liabilities of newness (Stinchcombe, 1965: 148). Here ventures are selected out of their environment because there is no room for them in the social resource space we call the venturing stakeholder environment.
Finally, when venturers and stakeholders are sound, but the venture is poorly constructed, we run all the risks posed by flawed new ventures, as represented in Area (6).
When ventures have a balance of preparedness in all three areas, the probabilities of new venture failure is reduced in the maximum amount, as represented by Area (7). Though this approach to venturing DOES NOT eliminate all risks, it does drastically reduce them. In fact, if unproductive new venture formation failure is drastically reduced, more healthy ventures should result. The number of new jobs, the wealth produced, and the level of future opportunities should thereby be enhanced. It should be clear then, that a venture can proceed with fewer built-in limitations, and thus a lower chance of failure. Elements needed to reduce failure include: A) pointing specifically to the missing components of a venture, B) learning how to acquire those components, by identifying the exact areas where a prospective venturer can focus to reduce failure prospects, and C) providing a practical means for mapping and acting on stakeholder salience.
The main purpose of this work is to help prospective venturers reduce or eliminate the incidence of unproductive new venture formation failure, by working on the venture itself. The guiding logic: "If the answer is not YES! don't go on", is intended to help conserve emotional and financial resources--NOT to dissuade one from venturing. Six key questions are posed, to assist you in examining a venture according to this logic.
As illustrated in Figure 1-1, despite everyone's best efforts, some ventures inevitably fail due to circumstances that even the failure-reduction approach cannot anticipate. As discussed, unpreventable but productive venture failures can add to the experience and to the expertise of the venturer in future endeavors. The failures become the living case studies that hone and perfect the skills of active new-venture formation experts. With time and thought, these studies form the basis for new learning about starting successful new ventures.
But learning from the "school of hard knocks" has always been the default-approach when systematic diagnosis fails. There is no reason why it should be viewed as acceptable over the long term. Just as W. Edwards Deming called for "continuous improvement" in the quality of production domain, so this manual calls for continuous improvement in the quality of the venturing sphere. You are invited to join the long term battle against venture failure, by attacking its known causes. The three volumes in this series merely define a starting point.
