What the Losses Taught.

Nobody's Ever Handed Capital Back

I raised the easiest money of my career in five days. Not long after, I gave it back. I negotiated the financing in December 1999, while everyone else was scrambling over Y2K. We launched in 2000. In 2001, I handed the capital back.

I can still see the board meeting. My team and I had spent months looking for a way to put that capital to work in a market that had turned on us. We had not found one. So I told our backers the truth. We did not think we could make a good push. We wanted to hand the capital back.

“Nobody's ever handed capital back,” said the founder of the buyout firm that had backed us. “You sure you want to do that?” I was sure. We returned it, and then we shut the company down. That was Internet Venture Works. It was my first real dose of failure, and it taught me more than any of the exits that came before it.

The Core Idea

A win confirms what you already believe. A loss breaks something, and in the break you can see how the machine actually worked. You pay for that in money, in sleep and sometimes in your sense of who you are.

A loss without a debrief is just a cost. Skip the debrief and you paid full price and left the goods on the counter.

The Easiest Money Is the Most Dangerous

Internet Venture Works went to private equity buyout firms and built the dot-com version of each of their brick-and-mortar companies. The firms had the customers, brands and inventory. We had internet talent and speed. Our backers were serious institutions, and the response to our raise was immediate.

That speed felt like validation. It was not. The market was telling me the market was hot, not that the plan was right. Easy capital hides problems. Nobody asks the hard questions, including you. You do not test the timing. You assume the next round will be as easy as this one.

The Vision Was Right. The Market Was Not Ready.

In 1999 shipping a heavy bag of dog food through the mail looked absurd. Pets.com went public in early 2000 and shut down before the year was out. Webvan went bankrupt in 2001. Within two decades, Chewy built a large public company selling pet food online, and grocery delivery became ordinary. The punch lines turned out to be previews.

Those companies were wrong about when, not about what. Internet Venture Works was a failed vehicle. The destination, bringing established businesses and their customers online, arrived later on other vehicles. If you know the vehicle failed, you can grieve it, keep the destination and look for a better ride.

Giving the Money Back Was a One-Way Door

The real decision was made over months, inside me, before we ever walked into the board meeting. We cut back and skinnied the company down, and the layoffs went across the board. The leader carries each of those conversations long after the people being let go have moved on.

Handing back the capital was a one-way door. I am still not sure it was the right call. Given time, we might have found something else to build. But I could not take a buyout investor's money with no real plan and ask him to wait while I searched. One of the investors who lost money with me then is involved in my business today. Reputation compounds like capital.

Was it the right decision? I still do not know. Was it the decision of the person I want to be? Yes.

Judge the Decision, Not Only the Outcome

Annie Duke calls it resulting: judging a decision only by how it turned out. Founders result all the time. In 1999 a lot of bad decisions looked brilliant. In 2000 a lot of reasonable ones looked foolish.

A good debrief asks what you knew at the time, what you could reasonably have known, and whether the decision made sense given both. Only then does it ask how things turned out. A founder who cannot hold both will either never forgive himself or never learn anything.

Simplicity Always Trumps Persuasion

At Lycos we launched Lycos Clubs, online communities around shared interests, before Yahoo launched its version. We were early. We had the audience. And the product was very, very complicated. It did not get much traction. About six months later, Yahoo launched Yahoo Clubs. It was simpler, it did less, and it took off like wildfire. That was 1997 and 1998.

A complicated product needs a lot of persuasion. A product that screams what it does needs almost none. I saw the lesson again at Vivox, where I was chief product officer. Our voice platform was powerful and monolithic. Twilio broke similar functions into small building blocks a developer could pick up one at a time. Vivox was sold to Unity, a base hit, maybe a double. Twilio was a home run. The difference was the shape, not the technology.

The question is never what features you can deliver. It is what fundamental value the customer needs, and how simply you can deliver it.

Early Only Works If You Can Outlast It

People think linearly. Technology moves exponentially. The curve is slower at the start than anyone expects and much faster at the end. I would rather be early than late. Late is a closed door. Early is a door you can hold open, if you can afford to stand there. That takes staying power, capital and people willing to trust you before the market proves you right.

A Debrief Turns a Loss Into a Tool

Every flight I flew ended in a debrief. A good one is blameless: rank goes quiet and the point is the next flight. Here are the four questions, applied to my first failure.

1. What did we intend?To build online versions of buyout-owned businesses, with the funds' capital and customers and our team's speed.
2. What actually happened?The market broke. Demand for dot-com businesses vanished almost overnight.
3. Why was there a gap?The vision was right and the timing was wrong. The ease of the raise hid that from us.
4. What will we do differently?Choose investors as carefully as they choose me. Read the board before moving. Build moats from the start. Treat easy money as a warning sign, not a compliment.

My father was a manufacturing engineer. He used to say it is easier to build a tool that makes something over and over than to make it by hand each time. Stamp and repeat. When the Rochester Institute of Technology named me a Distinguished Alumnus of the Kate Gleason College of Engineering in 2002 and asked me to give the commencement address, I built the speech around what I learned from him. Every debrief should end with a tool: a checklist, a rule, a question you will ask before every raise or launch. The debrief finds the lesson. The tool keeps it.

If You Have Never Failed, You Are Not Pushing Hard Enough

Losses are part of the loop. They are the observations that hurt. A founder who avoids every loss is not running the loop. He is standing still and calling it caution.

Losses Teach You to Read the Board

The most common way good founders lose is by being right too early.

This page is an overview of the chapter. The full chapter is in The Creator's Journey.

The Practice

These exercises ask you to look at your own losses directly. Some of them will sting. That is how you know they are working.

1. Debrief your biggest lossUse the four questions. Write it without blame, including blame of yourself.
2. List the beliefs that turned out wrongAbout the market, the customer, your team, your investors or yourself. Next to each, write what you believe now. Keep adding to it.
3. Turn one lesson into a toolA checklist, a rule or a question you will ask before every similar decision. Put it where you will see it. Stamp and repeat.
4. Run a simplicity auditList every feature of what you are building. Circle the one that delivers the fundamental value. Could you ship that alone?
5. Write a letter to the founder who has not failed yetOne page to yourself before your biggest loss. Then name your supporter, the one person you would call first. If you cannot, that is your first task.