KEY POINTS:
Chances are, if you've been in business for any time, you'll have realised that the old adage "he who dares wins" is not strictly true. He who dares often screws up badly would more accurately describe it. If you're an entrepreneur, failure is probably part of your DNA, a value-add for your next venture.
Canvassing local entrepreneurs for the lessons they learnt from failure produced several refreshingly honest accounts. A few were defensive; some seemed to find it downright cathartic. A couple even said they no longer felt there was such a stigma against entrepreneurial failure, that perhaps Kiwis were losing their enthusiasm for tall poppy lopping. Really? It's possible, says one of the country's most famous entrepreneurs, The Warehouse founder Stephen Tindall, but only to a degree.
"What makes a good story is a big success or a big failure. You get a lot of attention on the way up and on the way down."
The dotcom boom was a training ground for entrepreneurial failure: just ask ex-Bendon managing director Stefan Preston. Back in those heady days a fresh-faced Preston sank $100,000 of seed capital into a retail website he called FlyingPig. The name was an omen: Kiwis were slow to cotton on to buying their books, music and videos from a website, and the pig failed to fly. Preston rates the failed FlyingPig experiment so far above the education he got from Stamford Business School that he's framed a cheque for $1 and the words, "$999,999 business education" above a list of 20 nuggets of advice for start-up companies (see "Learning Curve", Pg 18). The $1 represents the amount of seed capital he got back from the company after it had crashed (although the amount is representative; in reality, he says, investors got most of their money back).
Preston and business partner Adam Keller wrote their words of wisdom after they'd sold out of the company, determined never to make the same mistakes again. They hired too many people too quickly and not enough of them were as skilled as they needed to be. Also, the company was still developing its web technology as it went along.
"We thought [FlyingPig] would be successful because at that time the flow from capital markets was saying, 'build an internet company'. It didn't matter what the company did, you got the capital first and made it successful later. Now I'd look at [the concept] and say is it real? It wasn't and we sort of knew that; it was a little like the emperor's new clothes. I was thinking it must be OK, everyone's into it, let's carry on."
Preston says he and Keller lost faith in the company three months before the board did. The board bought them out; the company limped on for several months and eventually folded. Making the decision to pull out was hard for someone who'd never failed on such a scale before.
"You think, it's always going to get better with just a bit more funding or a new market or product development. You need to have a discipline about standing back and making a call. It's hard because there's a psychology of consistency and commitment in business, and because you're leading it yours has got to be the greatest. You've got the responsibility of all these people's money."
What did he learn?
"You need to know what your personal values are and keep to them, that's your framework for success. When you're young you tend to go with the flow and that's not always in the direction of success. Often you've got to go against the flow and that's a lonely time, but that's when your framework and personal values carry you through."
Perhaps New Zealand's best known story of failure and comeback is provided by the late Sir Angus Tait, founder of Tait Electronics. Speaking at a conference on innovation in 2002, Sir Angus recounted how he "went bust" in 1967 after 15 years in business. No one rang him to say they were sorry or to inquire whether he was all right and, later at social occasions, not a word was said.
"It was as if there was a plague on my house. When you fail [in business] no one wants to know you." Some four decades later, Tait Electronics is a leading supplier of mobile communication equipment, making sales of more than $200 million a year.
Sir Angus put the cold reaction to his failure down to "a cultural syndrome that dictates we are all uniform persons and that we prefer mediocrity to achievement".
Business failure in the United States is not regarded negatively, says American expatriate and professor of innovation and entrepreneurship at Auckland's Unitec, Howard Frederick. In fact, US bankruptcy laws are structured so that those who fail in business are encouraged to continue entrepreneurial pursuits.
Some prospective employers might even consider an employee from a failed company to be more valuable because of the lessons learnt from the earlier job.
"The ability to start over is what makes some Americans willing to take risks in business, which can be good for the economy."
In contrast, New Zealanders attach an "unwarranted" stigma to entrepreneurial failure, he says. Bankrupts are barred from becoming MPs, magistrates, university lecturers, school board members and serving on local authority committees. Britain has recently cut the time needed before a bankrupt may be discharged from their pre-bankruptcy indebtedness - from three years to one year - and other countries including Japan, Italy, France and Germany are starting to make their laws more forgiving to promote entrepreneurialism and to fuel more active economies, Frederick says.
However, the US and New Zealand are so different in size that it's hardly fair to compare them, says local entrepreneur Nick Gerritsen, who works with start-up companies.
The US technology market is about capital growth and getting a proposition through to key milestones as soon as possible - for instance US$100 million ($143.78 million) revenue means that the proposition can be a candidate for an IPO - while the New Zealand market is still focused on dividends.
"It's still much easier to raise capital for dairy conversion/subdivision of land than it is for a technology company with a tested and unique global offering," he says.
Sometimes, when things are going wrong, it's hard to hear the alarm bells, says angel investor and entrepreneur Scott Gilmour, who was an investor in SevenO, a father son start-up specialising in information on the ocean and aquatic systems.
Despite having already sold some products, two years after "I knew intellectually [we weren't doing things right] but you are running a company."
What went wrong? Sales were slower than predicted, due in part to the glacial speed at which the customers, mostly government departments, made decisions. The company was also underfunded. SevenO needed at least $1 million, an amount that angel investors now regard as the minimum to tide over any local company wanting to penetrate a market like the US.
A major mistake was the time spent developing and perfecting the product instead of selling and marketing it - a common trait among New Zealand companies who are too eager to please, says Gilmour.
"If you gave [a New Zealand company] $100 they'd spend $90 on further product development and $10 on marketing. If you gave an American company $100 they'd almost reverse that ratio. There are always 100 things you can do to a software product to make it better.
"And every time you sell it, you come up with another 100 because the customer says, 'oh, if only it could do this or that'."
It's a tough trade-off, he says, but that's where good management comes in - to make the hard calls to spend time and money in the right place.
"We probably didn't make some of those hard calls in retrospect."
Terry Allen, director of Auckand business incubator the ICEhouse's Accelerator programme, is used to making those hard calls. The Accelerator programme is a litmus test for start-ups: they have 90 days to prove their viability.
Why 90 days? Typically that's enough time for companies to analyse their market information and make intelligent decisions on whether they've got much of a future, says Allen.
Allen worked with a New Zealand company called Gazelle Systems, which created governance software for non-profit organisations and his experience with that company prompted him to adopt the 90-day programme.
The founders and directors of Gazelle - Andrea Defries, Simon Harvey and Colin Bass - said they had a string of green lights pushing them onward but, nine months after setting up in the ICEhouse under Allen's auspices, they had to shelve the project. Defries is a self-employed business consultant; Bass and Harvey run a business consultancy called BusinessLAB.
Last year, the trio set up Gazelle. It had everything going for it, said Bass: 10 not-for-profit organisations agreed to test the software and give feedback; Craig Fisher, a partner in not-for-profit auditing specialist Hayes Knight, came on board as advisory chairman; and the feedback from two initial focus groups was generally positive.
However, some feedback signalled that the software would be a hard sell because the purchasing decision could be complex, Defries said.
After six months, Bass said he was finding it hard to juggle his other business and the demands of the fledgling firm. Meanwhile, Allen was putting pressure on the three to show him the money.
Feedback from the third focus group was not a clear positive or negative and that, said Allen, was a clear signal there was not yet enough of a market for the software.
By that stage, the three had coughed up about $3300 each (they'd estimated that the total project would cost about $100,000). They decided it was too risky to put any more money into the company at that stage and didn't renew their ICEhouse office rental contract.
While there's still hope that Gazelle could eventuate through a proposed joint venture with another company that has designed a similar product, the three agree that the decision to shelve the idea at that time was commercially sound.
"It's a bit of a shame but if it doesn't work, it doesn't work," says Defries.
"We're not going to flog something when the information coming in showed there not to be purchasers at that moment in time."
If she could do it all again, she'd target a product with a less-complex purchase decision-making process and be better capitalised.
"I've learned how much money you need to throw at a technology business; it's a bit of a black hole."
Bass said he probably would not try to juggle two businesses at once, especially not if one was a start-up and required a significant investment of time.
But none regret their venture. "The opportunity to check out a large serious business idea that could be exported, how could you regret that?" says Harvey.
"To be able to make a solid business decision - the lesson was pretty cheap really compared with what some companies go through. And it's cheaper than an MBA."
Allen says the three made the best decision. "They made a decision not to go ahead at that time but that to me is not failure. The ICEhouse trains people to be entrepreneurs and part of that is good decision-making."
Richard Downs-Honey has a list of failure-themed quotes in his Albany office.
"The only mistake I ever made was when I thought I was wrong, but I was mistaken," reads one.
"A mistake isn't as good as a well-substantiated error," reads another. Downs-Honey has made plenty of mistakes in business, he says cheerfully, but isn't one to dwell on the negative for too long.
"If I didn't make a contract or a sale, I can feel really low, it spirals really quickly. But I've got a quick recovery period."
In his time as managing director and owner of Albany-based yacht engineer High Modulus, which he took on when founder Bob Rimmer died in 1994, he's experienced failure in the local and Australian markets.
"In the early days, you get told your business is going to fail because the number of companies that go under aged under five is big. But even when you get past five years you can still cock it up."
In the 1980s, High Modulus, which provides specialist expertise and materials to boatbuilders, was ready to either go offshore or expand its New Zealand market. Then based in Warkworth, the company didn't have much of an international view, Downs-Honey says, so decided to make and sell new products.
However, it proved difficult to stir up much enthusiasm among staff for the new products they were making: sewage tanks and Gib-stopping materials. The company was also up against stiff competition from existing players such as Nuplex and didn't have enough of a point of difference to compete successfully. It tried distributing its products direct to builders as it did with boatbuilders, but found it should have gone to the suppliers, such as Placemakers, Downs-Honey says.
"We didn't have a passion for [those products]. The company was built around boats and that's what the culture was. Not sewage tanks."
A decade or so on and High Modulus is again dipping its toes into new fibreglass markets, such as water tanks and motorhomes, but has employed people specifically for the job.
The small firm also suffered a setback when it tried to tackle the Australian market several years ago. Downs-Honey sent his key New Zealand employee to set up and run the operation; the biggest mistake, he says, because when he was overseas it left the New Zealand operations without management. He should also have employed a local to run the Australian venture.
"We learnt if you put a sales team in one area they tend to focus on that area and the customers they have, not on getting new ones. Also, there's only a certain percentage of people who'll deal with someone from offshore, they want you there and contactable all the time."
In the end, the company admitted defeat and shut its Australian operations. It has since returned to Australia and employs a local sales rep, while a general manager looks after the New Zealand market.
Downs Honey has a "floating" role, dabbling in design, prospecting for business and dealing with key customers.
The father of nuclear science, Lord (Ernest) Rutherford, once said: "We don't have the money, so we have to think."
Genesis Research boss Stephen Hall reckons that's still probably the situation for most New Zealand scientists. His company was the NZX's flagship biotech company when listed in 2000 and the market had high hopes for its psoriasis drug PVAC, which was in stage II trials. "A lot of people seemed to think it had success just around the corner and then it's going to be worth zillions of dollars. They thought that because it was in phase II, which is pretty advanced. They didn't recognise that although many phase IIs do succeed and go on to be valuable, many phase IIs fail."
PVAC failed to fire and Genesis' share price has followed a steady downward trend since.
Does science do enough to explain the risks? "It's a tough line between laying all the dirt out and actually trying to encourage people to stay with you and invest." To help investors, Hall set out percentage tables for stage one, two and three trials in Genesis' 2004 annual report to try to show the failure/success rates.
Last year, the Government said it would pump more money into R&D in an effort to lift New Zealand's investment in that area, which lags other OECD countries. However, its munificence is conditional, as Genesis discovered.
In 2001, Genesis applied for and received $6 million over four years from the Government's Foundation for Research, Science and Technology's Nerf (New Economy Research Fund) to research natural pest and drought resistance in plants. It didn't result in a commercial product and Hall says Genesis was "advised" that "a lack of success in one grant was held against you for future grants".
However, he disputes that the research was not "successful".
"We met every objective we laid out. We were reliable in our reporting, we kept them involved, we did everything by the book but you can't make science work. It's absolutely naive to expect that a) the probability of success should be 100 per cent and b) the timeline for achievement should have been in the four-year, grant period."
In response to questions from The Business, FRST said it had funded three more Genesis projects, none of which had delivered significant commercial returns to the company.
In its emailed response, FRST said it was "increasingly taking past performance into account in making decisions. All new applications for funding are treated on their merits.
"However, in making further investments, one of the things that the foundation takes into account is past performance, both scientific and commercial."
Tindall has no problem investing in a failed entrepreneur, provided he can see they've learned from their previous venture.
"If I was convinced that they'd learned from their mistakes then I'd definitely invest in them again, because failing is part of being an entrepreneur who takes quite big risks and, if you're lucky, it'll either work or you'll use what you've learned to change tack."
Through his investment company, Tindall has invested in 70-odd start-ups and companies, some of which he says have altered their targets, but he'd hate to call them failures.
"What they originally started with basically failed but, out of the ashes, grew something that has turned out to be very good."
Four years ago, though, one of his investments went completely belly up.
The company made LCD lighting systems for signs above motorways and had a "huge" contract with Sydney Motorways Systems.
Unfortunately, after the signs had been checked and installed by professionals, it was discovered that the LCDs were at the wrong angles, rendering the signs completely useless.
Tindall won't give exact figures but says the company lost "between $10 million and $20 million" and had to be wound up.
"I guess you learn that even with the best laid plans and advice and technical assistance, a chain of people can make the same mistake."
A bigger failure was The Warehouse's five-year foray into Australia, which culminated in the sale of its Yellow Sheds.
Yet in a speech to shareholders in 2005, he said he'd make the same decision again.
"Taking risks for growth is the right thing to do," he said.
Two years on, his attitude hasn't changed.
"We probably didn't research some technical aspects of the market well enough," he tells The Business.
"We thought the town planning regulations in Australia were the same as in New Zealand. When we bought our fleet of stores and did due diligence on them, from what we could see and the legal advice we received [it looked like] there was no problem.
"We didn't realise competitors could challenge us. That was a huge learning experience and one of the main reasons why we decided to pull out."
For companies operating in the public market there's no patience for failure, he says.
"Had we been a private company we'd have been prepared to stay in there for the long haul and wait for the recovery. The public markets want every quarter to be better."
In the end, says Gilmour, it's a matter of failing faster.
"Maybe one of New Zealand's problems, [is] that the personal network is too small and it's hard to [pull the plug on a company].
"So the bottom line is, let's figure it out more quickly and pump in the money to those that have a good chance [to succeed] and cut off the funding stream to those that aren't.
"It's having that honesty, are we making it guys? And if the answer is no, do what you have to do."
Learning curve
Stefan Preston keeps a framed cheque for $1 in his downtown Auckland office. That's how much he got back from the $100,000 seed capital he received to set up online bookstore FlyingPig in 1999. FlyingPig crashed to earth about two years later and although Preston eventually paid back most of the seed capital, he framed the cheque as a reminder of his "$99,999 business education".
Below the cheque is a list of his "20 ways to avoid turning $100,000 of seed capital into $1":
1. Start with a strong business case and a business that makes money now or will.
2. Be clear on core value proposition and differentiation.
3. Avoid building markets from scratch.
4. Structure the financing carefully from the outset.
5. Have a clear personal framework for deciding to go in.
6. Have a clear walking-away point on every deal.
7. Raise capital in favourable market conditions when you can, not when you need it to survive.
8. Raise more than you need if the business is burning cash.
9. Avoid technology businesses or understand the technology yourself.
10. Choose your business partners carefully.
11. Ensure that the values, interests and commitment of other stakeholders are aligned with yours.
12. Follow a traditional VC model - use your currency to build the valuation round by round.
13. Grow at the speed of your customer base.
14. Listen to your market.
15. Hire slow and hire right.
16. Keep costs down.
17. Develop strong disciplines, systems and metrics along the way.
18. Don't leave too much leverage/control in the hands of one party/shareholder.
19. Have wide powers as management to make decisions.
20. Have a plan B.
And regardless of the outcome - never lose your sense of humour.
Let's try that one again ...
Business history is strewn with failures. Here are a few of the more spectacular examples.
* The Ford Edsel was one of the automotive industry's biggest lemons and a costly flop for Ford. When it came out in 1957, people flocked to car dealers in record numbers - but to look, not buy. Instead of tail-lights set into vertical fins - as on Chevys and Cadillacs of the time - Ford gave the Edsel horizontal wings. Some critics said they looked more like bushy eyebrows. Others said the car looked like "an Oldsmobile sucking a lemon".
The Edsel soon became a laughing stock and lost the company US$250 million. The model was named after a former company president - a son of Henry Ford - but the name has become synonymous with the proverbial lead balloon.
* When New Coke - Coca-Cola's answer to competitor Pepsi - appeared in 1985 it scored well in taste tests, being voted more popular than the old Coke formula. But changing an American icon met fierce resistance among many nostalgic consumers, prompting lobby groups such as The Old Cola Drinkers of America to try to sue the company.
Coca-Cola eventually re-released the original Coke formula as Coca-Cola Classic and used the opportunity to revitalise the brand.
* Gerald Ratner's 1991 speech rubbishing his own jewellery company's products is rated as one of the greatest gaffes in business history. Ratner, whose name underpinned a British chain of cut-price jewellery shops, killed the company in a speech to the Institute of Directors in which he joked that one of his products was "total crap" and some of the earrings were "cheaper than a Marks & Spencer prawn sandwich but probably wouldn't last as long".
The share price nosedived, Ratner lost his job and his name was expunged from the company's title in 1994. He later collaborated with jeweller Goldsmiths in a much smaller online business called Gerald Online.
* Hoover will never again underestimate the power of the word "free" after a promotion - which relied on the laziness of its customers in Britain - backfired. The customers were offered free flights to Europe and New York for every £100 spent on Hoover products. The company had been relying on customers not bothering with the complicated application but was inundated with responses. It cost £48 million to honour many of the deals but many customers never got their flights. The company endured years of bad publicity and senior staff involved lost their jobs.
* A typing error in 2005 caused Japanese brokerage giant Mizuho Securities to sell 610,000 shares in new stock J-Com Co for 1 rather than the intended one share for 610,000. Problems at the Tokyo Stock Exchange meant Mizuho couldn't cancel the order for 10 minutes, during which traders from domestic and international investment banks bought large amounts of the wrongly priced shares. Mizuho lost about US$347 million on the mistake.
