Why most startups have to fail, and why that’s a good thing

Some people think I’m a pessimist for pointing out the long odds against any particular startup succeeding.  It’s not fun to hear that even venture-backed startups have a 90% chance of failure.

But startup failure isn’t just reality; it’s also a necessity…and even a benefit.

1) The number of companies getting started far exceeds the potential market.  Long-term success is generally spelled “revenues of $100 million.”  The GDP of the entire United States was roughly $15 Trillion in 2012.  Each year, 500,000 new businesses are started in the United States.  If each one were to become a $100 million success, that would mean adding $50 Trillion in ultimate revenues.  Clearly, those numbers don’t add up.  Mathematically, most companies have to fail.

2) Market failure, while painful, plays an important role in the economy.  We’re not smart enough to allocate people and resources; the failures of all those startups let us reallocate their people to the companies that are succeeding.  If startups never failed, every other type of company would run out of good people!

3) Failure is a sign you’re trying.  It’s a truism among folks in the enterprise software world that a win rate that’s well above 50% is a bad sign.  That’s counterintuitive to most folks, who assume that winning all the deals you go after is the best possible result.

Au contraire–a high win rate indicates that you’re not in enough deals.  You’re people aren’t trying hard enough to get you in the door.

Failed ideas, even “nutty” ideas, are a sign that we are collectively trying new things, rather than simply rehashing the conventional wisdom.

I’ve failed plenty of times in my career.  It was seldom fun.  But the people from the companies I worked with have gone on to do great things.  And I’ve succeeded enough to keep me excited about trying that new new thing.

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