DAVID MARCUS HAS never taken failure lying down. In fact, this serial entrepreneur endured five failed start-ups before claiming his first business success — APEX Property Exchange, a consultancy that he sold to JPMorgan Chase Bank five years ago.
The first of Marcus’s many hard, entrepreneurial lessons occurred right after he graduated from college in the early 1980s. He and his parents started a food manufacturing plant called Specialty Foods of New England. They soon realized that they had underestimated the operation’s costs and by the time they sought financing, it was too late and were forced to sell the company to a larger rival. Then Marcus started a food marketing firm, Beacon Hill Salads. Two years later, its main client, the food manufacturer that bought Specialty Foods, went under — and so did Beacon Hill Salads.
Undeterred, Marcus turned to real estate. With financing from investors, he purchased an empty office building in the Boston area and started Dale Offisystems, an executive office suite he planned to rent out to businesses. Blame it on the weak housing market, his lack of real estate experience or the fact that he bought in a bad location, but three years later, Dale Offisystems was also history. So were two other real estate ventures he attempted to get off the ground at that time: turning a failed condominium complex into a retirement community and assembling a syndicate to buy distressed properties at auctions.
Such a string of failures would cause most entrepreneurs to throw in the towel and settle for a corporate job and a steady paycheck. But in 1988, Marcus tried his luck once more, co-founding the APEX Property Exchange with his father and brother. Over the course of 14 years, APEX became the leading like-kind exchange consultancy in leased vehicles, corporate aviation and real estate investment trusts. (Like-kind exchanges help companies avoid capital gains when selling old assets and acquiring new ones.) Marcus credits APEX’s success to the mistakes he made at his earlier start-ups. “I never would have done APEX if I hadn’t attempted my other companies,” he says.
In an entrepreneur’s career, failure is only too common. In fact, 40% of all start-ups don’t survive after three years, according to Bill Bygrave, professor emeritus at Babson College and former director of its Entrepreneurship program. Considering that, at any point in time, approximately 10% of Americans are trying to or have just started a business, that means hundreds of thousands — if not millions — of entrepreneurs simply fail.
The trick is learning from your defeats so that they’ll help your next start-up succeed. Failure, in fact, can be just as valuable part of your resume as success, venture capitalists say. “In many cases, especially if you think about the bubble era, entrepreneurs became successful despite themselves,” says Ajay Chopra, a partner with Menlo Park, Calif.-based venture-capital firm Trinity Ventures. “A lot of successful entrepreneurs didn’t really have a lot behind their success. Whereas, entrepreneurs that have started companies in tough times and weren’t successful, but learned from their mistake — they’ve learned a hard lesson.”
Here are some of the most common mistakes entrepreneurs make — and the lessons they have learned from them.
Lesson 1: Before you start a business, talk to potential customers
Even successful entrepreneurs stumble and Stuart Skorman is no exception. Between 1985 and 1994, he turned a hole-in-the-wall video-rental store in Vermont into a six-store chain and sold it to Blockbuster. He then founded Reel.com, an online video store that was later acquired by Hollywood Video for $100 million. His next venture? Skorman invested $10 million to start an online educational company called HungryMinds.com. It flunked. “We had online courses, but the courses weren’t very good, we weren’t selling very much,” he says. “It was a great idea, but ahead of its time.”
It’s a common mistake. And the best way to avoid making it is to test your idea with target customers, says Babson’s Bygrave. Big companies dedicate millions to market research, but for an entrepreneur, the best strategy may just be talking to people — your potential clients — and taking note of their reactions when you describe your new service or product. While that’s not something entrepreneurs typically think to do when they’re just starting out, Bygrave says, it’s an imperative first step. “If you haven’t talked to a customer, you’re not ready to start [the business], period,” he says.
Lesson 2: Go into business with a passion
After two successful start-ups, one of which was sold to AOL in 1999 for $33 million, Mike Ragsdale found himself wondering what to do next. He read in the local paper that a well-known neighborhood restaurant was going out of business and decided to buy, resurrect and, hopefully, turn it into a successful franchise. But after two years, he sold the still-struggling establishment, putting an end to his ambitions as a restaurateur.
His problem? While the place had a soft spot in his heart — he and his wife had gotten engaged there years earlier — Ragsdale didn’t have a soft spot for food and knew “literally nothing” about the restaurant business.
In hindsight, Ragsdale sees the fault in his logic. “When you’re working at 2 a.m. or 3 a.m. day after day, putting in the obscene hours that have to be put when you’re starting a business, it’s the subject matter that you have to be passionate about, not just starting that business,” he says. Or else, he notes, “you’re always going to be beaten by someone who lives and breathes it.” Ragsdale now does public relations for Alys Beach, a planned-community resort in Northwest Florida that is still under construction. He also spends time writing short stories and screenplays: Just last week, he says he was contacted by a “well-known” studio that wants to turn one of his scripts into a full-length film.
Lesson 3: Be realistic about your limitations
Just three years after starting her first company, an art studio and gallery in Massachussetts, Francine Kent, then in her late 20s and armed with a master’s degree, had to start waiting tables. The bills for her art gallery were overwhelming. Problem was, the 21-room Victorian mansion that Kent bought to house the galleries and art studios “consumed every cent we could bring in,” she says. When the commercial side of her business — graphic design work — dried up, she simply couldn’t sell enough paintings to pay the bills. So she rented out the building and eventually sold it, moving to Sarasota, Fla., with her husband and onto other ventures.
Now, nearly 30 years later, Kent has one piece of advice for young entrepreneurs. “Don’t bite more than you can chew,” she says. “When you’re young and naïve, you rent an office instead of working in a spare room, you spend money on logos and brochures and stuff that doesn’t give you any traction.”
And if you do start running out of money and need financing, don’t wait until the last possible moment to seek help, says Marcus, the entrepreneur who started APEX Property Exchange. “You think you’ll turn the corner faster than you do and you don’t mine up additional sources of capital before you need them. Then, by the time you do run out of money and start looking for capital, it’s a hard story to sell,” he says.
Lesson 4: Put together a strong team
The right business partner can make or break your company. Kent knows that all too well. One of her businesses in Florida, a cash exchange bureau, was a definitive success, but the relationship with her partner soon turned rancid thanks to conflicts with her partner’s husband. “He was very volatile and I thought, ‘This isn’t going to work. I’m going to get sued for sexual harassment or anger, among other things.'” They ended up selling the business.
In fact, if you seek venture capital, your management team will be among the most deeply scrutinized aspects of your business, says Len Rand, managing director of San Francisco-based venture-capital firm Granite Ventures. So be sure you’re working with a solid crew of people. And keep in mind that it’s not uncommon for venture-capital firms to even bring in outside management for the companies they invest in.
Lesson 5: It’s OK to take a break
When Ruth King’s first start-up — a company that designed animated logos — failed after only 18 months, she fled to the security of a steady paycheck at a heating and air-conditioning franchiser. The following year and a half wasn’t pleasant. “That’s when I realized I’ll never ever work for someone else,” she says. Nevertheless, it was the right choice. King learned about the heating and air-conditioning business, made contacts in the field and ultimately started her next, successful venture, offering technical training and consultancy for contractors. It’s a niche she hasn’t left since.
After closing her art gallery, Kent worked for a computer company. The experience gave her the technology skills she needed to start her next business, a secretarial service. Even if you’re an entrepreneur at heart, taking a break isn’t such a bad thing. “It gives you time to lick your wounds,” Kent says. And work up the energy needed to start your next adventure.
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