Tech IT Easy » failure

Hitchcock / Truffaut and experimentation

Vincent van Wylick — Wed, 08 Apr 2009 09:19:24 +0000

This week a Dutch commission on the banking recession to came to an end. Their conclusion: banks should be more customer-focussed (translated article). Wow… If there’s anything this crisis has shown us is that during times of crises, creativity takes a dive out the window. Because I’m pretty sure that people were talking about more customer-focus back when the Lehman brothers went out of business.

Just briefly, before I go on to a more pleasurable topic. Wired Magazine last month had an article on what they identified as the cause this whole crisis: the gaussian copula function (depicted above), invented by a man named David X. Li, which made it possible to model risk down to a simple number, allowing for any idiot out there to label an investment as an affordable risk. As the article states, Mr. Li won’t be getting a Nobel anytime soon, but it only serves to illustrate a simple point: money makes the world go round, and more specifically, money makes the world of finance go round. Banks, until recently, had a nice little formula that allowed them to make money. Now they don’t. Will that formula be found in increased customer-focus, I don’t know. But I do think that we need a better understanding of the complex variables that play a part in our globalised economy, and customer focus alone won’t do the trick.

OK, rant over. My stance for this recession remains: work harder and smarter… and don’t watch the news.

In Hitchcock / Truffaut, Hitchcock tells the story of One-Round Jack, a character in an early film of his, The Ring (1927). Here’s an excerpt from the interview:

A.H. In those days we were very keen on the little visual touches, sometimes so subtle that they weren’t even noticed by the public. You remember that picture started on the fairgrounds. There was a fighter, played by Carl Brisson, and he was called One-Round Jack.

F.T. Because he knocked out his opponents in the first round?

A.H. That’s right. And in the crowd, watching the barker, there was an Australian, played by Ian Hunter. As the barker in front of the tent urged the crowd to go in, he had a little flap and could look back over his shoulders to see how the match was progressing. He used a sign to indicate the round number to the people standing outside. We showed volunteer fighters going into the tent and then coming out holding their jaw. Until Ian Hunter goes in. The seconds were sort of laughing at him and they didn’t even bother to hang up his coat. They just held it, thinking that he would never last more than one round. The match started and I showed the expressions of the seconds changing. Then we showed the barker looking in at the match. And at the end of the first round the barker took out the card indicating the round number, which was old and shabby, and they put up number two. It was brand-new! One-Round Jack was so good that they’d never got around to using it before! I think this touch was lost on the audience.

We all know that Alfred Hitchcock went on to become a great filmmaker, but even he started small, experimenting with different effects, like the glass ceiling I wrote of last, until he understood the effectiveness of his medium. It’s an attitude that I greatly respect, and try to implement both in blogging and my work. You can’t achieve great things without breaking a few eggs.

There’s a pretty entertaining TED video here with the stereotypical mad scientist, Cliffort Stoll, in which he says:

“The first time you do something, it’s science. The second time, it’s engineering. The third time, you’re a technician. I’m a scientist, once I’ve done something, I do something else.”

That’s a philosophy I can also respect.

Back to banking. I think that what is customer focus has changed much over the generations. According to my father, customer focus is having a bank outlet + friendly smile in every neighbourhood. More deeply, back in his day, a bank would contribute more significantly to buying a house, funding well over 50% of the purchase price. I’m not sure how the latter has changed now, but I do now that what is called “customer service” has simply moved online. I haven’t seen the inside of a bank in months and I don’t miss it. To me, customer service is having more payment options, much more innovation, as well as for all transactions, no matter how small or large, to be free, instantaneous, and unencumbered by national borders or currency. I want to see the day where all transactions go via a single device in our pocket. I’d also like to see more funding for things like housing and startups, of course, but I know that a certain measure of reality needs to be in place for that, i.e. how credit worthy is your customer.

I think that won’t be able to count on banks much until they replace the faulty mechanism that was either the gaussian copula function or another one, allowing for banks to regain their profitability. I think that this will entail making mistakes and that room needs to be allowed for that. That banks are supposed to be customer friendly, goes without saying, but that banks are businesses that need a solid balance sheet, goes without saying too.

Went a little overboard there on the text. Sorry about that. Hope it’s readable / entertaining.

Vincent

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Why do startups fail?

Vincent van Wylick — Tue, 30 Sep 2008 18:52:30 +0000

Hi, my name is Vincent, a now-familiar face in Tech IT Easy’s blogging family, and today I’d like to write about my thoughts about startups’ reasons to fail (and as a consequence: reasons to succeed). This is my 3rd non-tech topic in a row, and if you hadn’t guessed it, I have little inspiration to write about tech these days.

So, “why do startups fail?” seems to be a relevant question these days and I guess to everyone running or thinking about running or working in a startup. Depending on who you talk to, no actually pretty much everyone, over 90% of startups fail within 2 years of their launch. The stats vary according to whom the startup works with, it is much lower with venture-funded companies, as well as within certain incubators.

The Credit Crunch

One of the most popular reasons I heard while writing my thesis (which involved me interviewing over 200 tech-startups), is of course lack of money. That seems really relevant today, and is certainly a factor.

To give a personal example of how the credit crunch is affecting our lives negatively, back when I started a bachelor in Manchester, UK, about 10 years ago, I was able to get a student-loan quite easily at a British bank. You walk in with your details, get a 1000 pounds overdraft and a credit-card to boot. This was still the case until a few months ago. My brother, who just left for Lancaster, UK, was counting on a similar deal. But banks had withdrawn that service to non-UK citizen, rather abruptly, forcing my brother to find alternative solutions. Banks don’t care about who needs or deserves a loan, when they cut it off, we’re all screwed.

Fred Wilson pointed out that seed-funding will likely suffer most, and true, banks are, both directly and indirectly, an incredibly important source in that arena, as well as at later stages. The graph below showed my own results, for two measures carried out during 2005 and 2006 on the investment climate for high-tech startups in the Netherlands (a Dutch version of that report can be downloaded here).

What this graph also shows is that even pre-credit crunch, most startups didn’t use or weren’t able to use much beyond their own savings (the turquoise part) at the seed and sometimes the later stage (of course that still includes credit cards and similar bank-related funding sources). No way that this is something that should be generalised across all countries of course, I imagine that the distribution of investors will vary quite substantially from country to country.

Forget funding

I happen to think that funding is not the factor to focus on when talking about startup failure. In a perfect financial market, which, many financial people try to convince me, exists, you get funding if other conditions are in place. Receiving an investment is a validation of your idea, and if you can’t get investors to talk to you it’s either because:

Your idea is bad.
Your presentation is bad.
There are too many similar startups applying for funding.

The key here is then for 1. to improve your idea, for 2. to improve your presentation, and for 3. to stop being a sheep and reinventing the mousetrap. While this makes me sound like an asshole, the point is that none of these reasons have to do with funding, they have to do with the quality of your venture.

Non-financial reasons for failing

A startup is a machine that needs to be built, needs to operated and maintained, and needs to produce sufficient output/income to cover the costs that building, operating, and maintaining require.

Therefore, startup-failure is related to:

Too expensive a building-process (both in money, people, and time), which comes out of bad planning and insufficient skillsets to get results.
Improper operation and maintenance, which is really to do with bad HR-practices.
Insufficient output/income, which can be related to the quantity produced (bad planning, skills), bad pricing, and of course a bad market.

The “bad market” factor is an interesting one, because it seems very related to the credit crunch problem. My brother, who is forced to look elsewhere for funding, will be less likely to buy a laptop from the start now. Everything ties back into funding somehow.

Bad market or bad business-model?

The top business models, in my mind, are built to withstand recession. Some could argue that they are built during a recession. An example of this is discounters like Aldi, which was built in a poor Germany, many years ago, and has caused a revolution in European retailing. Im not 100% sure, but I think that the strength of European discounters here has even prevented monsters like Wal Mart from taking over the place.

Other streams of thought about this take you into “blue ocean” or “long tail” territory, both somewhat hip ways of saying that you should think outside the box.

A bad market can be a lack of desire on consumers part to pay for your product. And it can be that the market is simply to small, suggesting that it may be a good idea to think globally from the start. Certainly, investors like the idea of entrepreneurs thinking (realistically) big. Also when you see some of the industry-growth-stats in emerging economies, it makes sense to target those markets, instead of the many 0-2% growth economies in the Western world.

I guess what I’m saying is that a bad market is just an excuse for failure. If your business is advertising dependent, you should be aware that most advertisers cut their spending during recessions, a recession that has been predicted for years now. The same applies to certain luxury goods, etc. So, perhaps the market isn’t bad, perhaps the business-model is bad too.

In summary…

Yes, the credit crunch is scary, as are all recessions. Yes, we would all like our ideas to simply be output – input = profit. But the core of entrepreneurship is to think in opportunities, to not get stuck in ideas, and be market-focussed. It is about breaking rules and making new ones. And, while it is a harsh world where failure is accompanied by a high price, at the core of entrepreneurship is also optimism—the belief that everything can be solved with the right perspective.

So why do startups fail? By setting themselves up to fail.

Vincent out

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