One step forward, two steps back

Howard Tullman has founded over a dozen startups, but not all of them have been successful. Calling himself a futurist and visionary, Tullman has also served as the president, CEO, and founder of private colleges and tech incubators in the United States. As an educator, he works with entrepreneurs to help them find how to turn their dreams into reality, with a down-to-earth view of the importance of being honest about failure.

What are the defining characteristics of a business failure?

Three possible scenarios lead to business failures. The first happens when you don’t pursue all the reasonable alternatives. Sure, with the new inexpensive technologies that we have, there are more and more choices. But often, we don’t look around enough; we don’t consider enough different viewpoints, or we tend to think of choices as binary, when they’re actually multifaceted. The second scenario occurs when you give up too soon: creating a new business or innovation is not easy at all—and it’s essential to persevere. The third is the flip side of the coin: not knowing when to stop trying. It’s always too soon to quit if you have a reasonable outlook. But a time comes when you need to take all the lessons into account and conclude that you haven’t achieved product-market fit, or created a value proposition for your potential customers.

It’s simple to analyze a business plan and say, “show me how this business plan will save me time or money,” or “make me more productive,” or “help me make better business decisions,” or “change my status.” If a business can’t make a compelling demonstration along one—or more—of those considerations, then it’s not a really going to become a successful business.

That’s a fascinating point, especially the thin line between persevering and realizing it is time to give up.

In that respect, startups and corporations are a world apart. If a startup doesn’t succeed, it fails. Instead, if a project in a larger corporation is not succeeding, it might still be funded much longer than it should be. The reason why so many mediocre corporate projects persist is that no one wants to say “no”. That determination—that transition towards when it is enough—is critical, and changes depending on the decision-making environment.

In recent years, there has been an increasing consensus that business failure is one of the most effective ways to learn and succeed. Is this true?

I don’t know if people learn that much from the failure of a new business or of an overall enterprise, because there are so many competing factors. But failure as a part of the innovation process is absolutely essential; there is no question that you learn from it.

One of my businesses developed computer games for several years. The way we designed our games was that 80% of the time, players were supposed to fail: that’s how they learned to succeed. They did it over and over again, and eventually mastered the level, and moved on. In our school systems, students with an 80% failure rate would be considered nothing but a complete failure. Yet, we know for a fact that mastery comes from repetition and from the constant process of trial and error. But that doesn’t automatically make it a learning experience: you have to know how to turn it to your advantage, and turn it into one.

Sometimes, instead, people just come up with ideas that are simply dumb, and their businesses fail. There’s no reason they shouldn’t fail, and there’s nothing to be learned there. But other companies may try with the same business for a number of years, and in the process of trying and seeking alternatives, they may learn a great deal and turn themselves into successful firms. In fact, a lot of the apocryphal stories about inventions that grew out of failures—think about Post-it Notes (stemming from a mistake in developing an ultra-strong adhesive for use in aircraft construction)—are just about people that could imagine a different application. Sometimes, failure is the inability to be open-minded about an alternative use for a discovery that you’ve stumbled upon, and to make it succeed.

How much should a person have failed in business to be considered an asset? What is the threshold between liability and failure?

In the United States, we have different perceptions of the value of failure as a badge of honor. If you’re on the West Coast, people walk around and brag proudly about how often they have failed. They’ve fought the good fight; they’ve consumed a lot of money: that’s regarded very clearly as a virtue in Silicon Valley and in some of the rest of the country. The Midwest, instead, is more conservative and less interested in failure.

Having said that, there are two facets that we should consider. One is to “fail fast,” which means to experiment and make investments, but without persisting too long. The other is to “fail forward” which is what you alluded to; and that is to make sure that you take away the lessons of the prior efforts, and learn from them. But I don’t think that it’s a numeric function: the fact that you failed more times or fewer times is very much circumstantial; a lot has to do with timing. There were companies that pursued past business solutions that we now take for granted—they were sadly before their time. So, it’s just as much a problem to be there too early as it is to be too late.

One of the areas where your record in business overall, whether it’s successes or failures, does very much come into play is when you are talking about hiring. And again, this is a different issue for startups than it is for large corporations. Not too long ago, I wrote about how precarious it is for an organization to hire a failed founder. The question is, has the founder burned out? Is he or she unhappy? Has he or she become sort of negative as a product of their own experience? Or were their failures experiences that have made them a better and more valuable founder? It’s hard for me to say whether someone will fail or not, without a full picture of all of their past experiences, including failures.

In the process of hiring, would you ever be wary of someone who has never failed in business? Or would this be a positive signal to you?

Everyone would be wary of someone who says they’ve never failed at anything. It either means that they’ve been frighteningly too conservative in everything they’ve done—which means they’re unlikely to be good at the process of innovation, disruption or entrepreneurship—or it means that they haven’t been challenged. Neither of those are likely to be credentials that would make someone an attractive hire. The worst part is that they might be so self-unaware that they wouldn’t know if they have failed.

How do you feel about the future of business?

I think we had 5 or 10 years of euphoria where everyone thought that they could start a business. Now, I think there’ll be a healthy trend in some businesses to be a little more interested in quality rather than quantity; in solid progress, rather than excessive growth. I think businesses will become somewhat simpler, and that’s going to be a good thing.

Twenty years ago, Japan came up with the concept of “just in time.” The idea is that you don’t need to have huge amounts of inventory: goods can be delivered only when required. And this changed manufacturing in major ways.

In the future, industrial processes will change because of what we’ve suffered through for the last two years across the world. And we will realize that “just in time” is less important than “just in case:” it’s more about redundancy and resilience than it is about hyper-efficiency. That’s going to change global supply chains. We are going to have a more conservative approach to supply, so we won’t worry as much about where goods will come from if one supply runs out.

I hope there’ll be a greater sense of realism about what is doable and when to be prudent in business. Maybe it’s important to take a step back, be a little more realistic, and then build. Once again, that’s the process of iteration: you take a few steps forward, and you measure in due course, correct, then you step forward again, but you don’t try to do it all in one bite. Or, as the taylors say, measure twice, cut once.

You have mentioned that failure is perceived differently across the United States. What about the rest of the world? Is the concept of failure the same across geographies and cultures, or are there significant differences in the way people interpret it?

In Israel, and in the United States, failure is regarded as much more of a neutral (often even a positive) factor. In most of Europe, instead, it is still a badge of dishonor. In India, business failure is a stigma that is shocking: you probably get one chance and, if you aren’t successful, you aren’t welcome anymore.

So yes, it is cultural, and it does vary throughout the world. This probably has to do, among other things, with the nature of the principal industries in a given country. In countries where agriculture is a huge component of the economy, there’s more of an understanding that that’s just how life works. While in a country that’s highly industrialized, such as, say, Japan, people tend to be intolerant of failure because they believe everything can be organized and controlled. This might prevent said country from being open to new ideas and to innovation.

When I say “innovation” I mean a scientific process that is quite different from inventions. And innovation doesn’t spring very often without a divergent collection of ideas. Innovation is a systemic, step-by-step process of getting a little bit better, incrementally, and constantly, gradually achieving better results. It is going through cycles of experimentation and measurement, and taking the next steps forward. It’s important to understand where failure fits in the innovation process. Innovation and failure are really sisters; you can’t have innovation without having a constant testing environment. Failure is going to be a very significant portion of that whole process.

Failure and fraud are often connected—I’m thinking, for example, of the WeWork scandal. How are these two phenomena linked? Can it still be turned into a learning experience?

On the West Coast, there is this saying, “fake it until you make it:” You need to pretend that you’re bigger, better, and more well-equipped than you actually are. That has been the culture from day one there: this strain between telling the truth and concealing the truth is very destructive and has caused a number of these recent scandals.

It is a complicated area that comes up often in the context of investment, where companies do due diligence. When it comes to raising money, I always tell my startups that they have to understand the concept of “materiality.” You can scare off inexperienced investors, by showing them problems and concerns in an excess of openness and transparency, but those are not material issues and they don’t really affect future business prospects. In that case, excess openness is not particularly smart.

If a startup is not willing to explain what its risk factors and issues are, and where the company honestly stands, it’s gone over the edge. If you want to build good business, you can’t have fraudulent behavior; you need respect, honesty, and integrity. Because ultimately, culture and how a business starts up becomes its heart.

An expression that I use all the time is “People who will lie for you will eventually lie to you:” if you encourage corner-cutting and selective omissions and “faking it until you make it,” there will come a time, fairly quickly, when your people feel reluctant to tell you the truth. That would destroy the fundamental components of what makes for a good, strong company.

Fraud is, sadly, a part of a lot of what goes on in the world of new businesses. But, at the same time, we’ve had countless instances of large-scale coverup and fraud among major corporations. It’s certainly not limited to the innovation process.

Have you failed a lot in your business life?

I’ve been fortunate because I’ve been able to move from career to career and from business to business. I’ve had more than a dozen different successful companies, made several public offerings, and done many acquisitions over the years. I’ve been doing it for more than 50 years. Some of the companies didn’t grow to the size that I would have liked; some of the companies did far better than I expected.

Surely, one of the things that I have always done as a business manager has been to understand when to quit. When I have quit, it has had a broad range of outcomes. Certainly, the furthest end of the spectrum would be to go out of business. I’ve never had to do that—I’ve been fortunate enough not to. I’ve had to prepare exit strategies to protect my investors, employees, and customers, to basically find a home for all of these businesses one way or another. And that’s the only way you get to continue to play this game: if you don’t demonstrate that kind of responsibility and protection of all the different stakeholders, the next time you try to do something, no one will be interested in supporting your efforts.

The way we measure failure is closely related with how we define success. And, as the definition of success shifts, the definition of failure must follow. In all these years of experience and practice in different businesses, what has been the failure that you have learned the most from? And what is the one you have learned absolutely nothing from?

The failure that you learn the most from is the one that makes you understand that business is business and that you can’t take it personally, to a certain extent. If you confuse yourself with the business, if you feel like it’s an extension of your personality, that’s always the worst kind of failure: it ultimately causes you to do things that don’t make business sense. It’s important for entrepreneurs to be passionate and committed, but it’s also important for them to understand that their personal identity is separate and distinct from that of the company.

I guess I’ve taken one action consistently over and over again, that has not served me well. It’s that I’ve been loyal to people, and kept them longer than I should have. That has held back business in two ways. First, it kept the business from growing, because I didn’t have the proper resources. Second, and much more painfully, it sent the wrong message to some of the up-and-coming people in the company: it made some of them leave and go elsewhere. You never get to take advantage of their tremendous talents and skills because they either feel underappreciated or that there’s not a path forward for them.

All my successes and failures, in a sense, come down to this. I measure them in terms of people because whatever the business is, it’s really about how well you manage people. How well you work with people determines how great a team you can build, and also how often people will perceive you as someone who they can trust and commit to and who will deliver for them.