Although nearly 95% of entrepreneurial efforts fail during the first five years, most books about management focus on nearly miraculous tales of success meant to encourage people to reach the top. Few authors concern themselves with studying the factors that are usually responsible for failure, so that others can avoid repeating them. “This is an imperfect approach — knowing why others are succeeding so that you can avoid failure. It is a lie. To avoid failure you have to know why people usually fail.” That is the point of departure for Fernando Trías de Bes, author of The Entrepreneur’s Black Book. The Spanish-born author is well known around the world, thanks to his best seller, Good Luck, written with Alex Rovira. Recently, he talked with Universia-Knowledge at Wharton and shared his views about how and why entrepreneurs fail.
Universia-Knowledge at Wharton: Is there a golden rule or magic formula for not failing in the world of business?
Fernando Trías de Bes: I don’t think any exists. At least, I don’t know of one. And if there were any magic formula for avoiding failure, it would have already been discovered. The business world is subject to a large number of exogenous factors that we cannot control. This is the main reason why it is impossible to articulate a single golden rule. The moment you found it and adapted it to your situation, the rule would automatically become useless and would no longer be the golden rule.
The fact that there is no golden rule does not mean that there is no combination of rules and considerations worth taking into account. The Entrepreneur’s Black Book is not a rule book, but it provides reflections culled from the wealth of experience of other entrepreneurs. People learn from their mistakes. Evoking the Pareto principle, this book attempts to identify the small number of mistakes that are made in most failures.
UKnowledge at Wharton: What factors are responsible for the entrepreneurial spirit?
F.T.B.: As I explain in the book, the reasons why someone becomes an entrepreneur are irrelevant. Everyone starts off with a reason, ranging from wanting to make a fortune to the fact that he or she cannot stand having a boss. There is virtually no end to the list of reasons. But that is not important, because your motivation does not explain whether you succeed or fail. You have to distinguish between reasons and motivation. The latter is what is important. The kind of entrepreneur who makes progress is the sort whose motivation is enormous, irrational and immeasurable. It is the fuel that keeps him moving ahead whenever stumbling blocks appear. You don’t go anywhere if you are not motivated.
I would answer you differently if you asked about the reasons why someone has the entrepreneurial spirit. It involves a combination of different factors. Normally, the entrepreneurial spirit comes from one of the following three things: your personality; your experience with adversity and shortages; or, finally, because your parents were also entrepreneurs.
UKnowledge at Wharton: When you enter the world of business, what essential “equipment” do you have to bring with you?
F.T.B.: If I had to limit myself to a single piece of equipment, it would be a spirit of sacrifice along with a capacity for dealing with pressure. When I started my first business at the age of 29, I asked an entrepreneur who was traveling next to me in an airplane to explain what was essential for getting ahead. He told me that in order to be an entrepreneur the important thing was to have endurance. After eleven years of business adventures, I think that he was right. Genius is not as important as perseverance.
UKnowledge at Wharton: Are partners necessary? What are the principal errors when it is time to work with them?
F.T.B.: I devote four chapters of my book to this huge topic. Let me try to summarize the key ideas: First, you have to distinguish between the sort of partner who is merely a source of capital – who puts money into your business – and the partner with whom you are going to share both capital and work. The former category may be necessary. In the case of the latter, you have to use a lot of tact because partners are one of the factors that best explain why entrepreneurs fail. The question you have to ask yourself is: Why should we join forces? The problem is that a partner is often a cheap way to expand your capability with money and help for getting started. This is actually a mistake because this kind of resource is cheap only in the short term. In the long term, the cost of this partnership is like the cost of a long-term loan at 22%. Having said this, I have established business partnerships that have gone quite well. This leads to the following warning: You can put up with a partner for many years only if your ethical values are in line with his. In those cases where that isn’t true, there is no partnership that can last more than seven years. The moment there are any differences of opinion, which inevitably will appear, your shared values guarantee that you can discuss your problems with confidence and generosity. In my particular case, if we didn’t have similar values and enormous trust, I would not have maintained (and continued to maintain) my relationship with my partners for eleven years.
UKnowledge at Wharton: What about the never-ending problem of financing?
F.T.B.: The problem is not financing; there is always money available for good ideas. And there are now stock markets that are looking feverishly for good opportunities. Real estate and the stock market are not giving people much reason to be happy, and capital is thirsty for opportunities. The financing problem comes when a business idea is not mature enough or isn’t good, or if the entrepreneur doesn’t know how to sell it or explain its value to investors. I am being harsh, but that’s the reality.
UKnowledge at Wharton: What do you recommend more – looking for a market niche or attacking the broadest possible sector? And why?
F.T.B.: It depends on many factors. But I would say that an entrepreneur who has few financial resources will always do better in market niches. However, if financial muscle is available, the decision is not so simple. In my experience, the market trend is more important than the size of the market. Beyond that, a market that grows always winds up being better. Think of these two possible opportunities: Opening a video store in Spain or a real estate business in the countries of Eastern Europe. The answer is obvious. The important thing is not size but where you are in the cycle. Each [business] sector has its own moment. Regarding the question of financing, let me say that there is no better source of financing than your own sector of activity. A sector that is peaking is always overflowing with liquidity. You get paid earlier and better, and the margins are better by definition. It is as important to know how to invest as to disinvest. And to do that, you have to be very up to date about the business cycle in the sector in which you’re competing.
UKnowledge at Wharton: People always talk about the endless workdays of an entrepreneur. Is having a business compatible with having a family life?
F.T.B.: Naturally, but in the short term – that is, the first years of doing business – there is a significant imbalance. Getting a business started means spreading yourself thin until you can generate enough business, get customers, a name and a brand — until you acquire enough inertia to enable you to replace the brute force of the entrepreneur with the cruising speed that comes with accomplishment. Until that happens, however, it is a fairy tale and a deception to talk about balancing your personal and your professional lives. Getting serious about your business means making sacrifices. For the time being, it means turning your back on many, many things.
UKnowledge at Wharton: What is the difference between a businessman and an entrepreneur?
F.T.B.: The entrepreneur likes to create things and make them work. The businessman likes to grow businesses. Sometimes you can find these two different sorts of characters in the same person, but not always. You absolutely need to know if you are only an entrepreneur or a businessman, or if you are both. The answer you give determines the focus of your activity. For those people who are purely entrepreneurs, I recommend that they learn when to delegate their business, putting it into the hands of someone who knows how to make it grow despite the fact that he wasn’t the one who created it. The umbilical cord must be cut, and you need to recognize when you are not the most appropriate person for the next stage. Someone who is only a businessman is more likely to purchases businesses than to invent them. If you are one of those people who have both skills, you can enjoy both creating and growing. That means that you can do exactly what you want.
UKnowledge at Wharton: What are the early symptoms of a business that is not working out?
F.T.B.: Losses. The first symptom comes when the trends in your profits and sales start to change. Those are the first indicators. The important thing is that those things don’t occur all of a sudden. When you set up a business and it is operating and things don’t go the way you expect, there are enough symptoms that let you see this in advance. The problem is that you have to be humble enough to recognize that and quickly rectify it. Warren Buffet said once that he did not succeed as much as other investors; what differentiated him was that he corrected his mistakes more quickly.
UKnowledge at Wharton: What are the key factors in any failure, and how can they be avoided?
F.T.B.: There are a lot of key factors. In The Entrepreneur’s Black Book, I have identified fourteen. I’ve arranged them in five large categories: First, the nature of the person who starts the business and his or her capacity to ride out storms. Second, the idea of the business, which is something less important than the way you explain its value to customers (I call this the “form of the idea”), and how well people react to that idea. Third, your partners, a topic I’ve already discussed. Fourth, the business sector you choose and the degree of experience you have in it. Fifth, the way you manage your growth. This is where a significant percentage of entrepreneurs who survive their first year wind up failing later on.