The effect of business failure
In my last blog I looked at the attitude of VCs towards entrepreneurs who had experienced business failure. In this blog, the effect of business failure, I would like to consider how business failure effects business owners themselves.
Attitudes towards failure
If we believe some gurus who pontificate on the subject, business failure is not a failure at all. It is a form of success from which business owners learn vital business and life affirming truths. They say “It only makes you stronger” – and believe entrepreneurs are all the better for it!
Business owners should, therefore, have no fear of failure and can expect to rise up stronger and better for the experience. Is this true in the real world, or are these just platitudes?
Different types of owners
I don’t think it is possible to arrive at a simple answer to the question that applies to all business owners. Business owners come in all shapes and sizes. Consequently, and one would expect them to have different reactions to failure.
I hope the following hypothetical stories about two very different business owners will illustrate my point.
Owner No 1
The first hypothetical owner is a 22-year old computer programmer who considers herself to be a modern high-tech entrepreneur. She has launched a startup with VC funding aiming at the teenage market. None of own money has gone into the venture, largely because she has none. Her business is a website, which she herself has built. She is single with no dependents and she lives in a big city. She does not own a house and has put up no security for the funding secured.
The VCs who have funded her consider her to be extremely bright with a good understanding of the market she is aiming at. However, they installed a financial manger to oversee the growth of the business, retaining our entrepreneur in a senior technical and marketing role. She has 40% of the shares in the business.
The second owner is a 50-year old married man with two teenage children. His is a traditional engineering business, which he owns all of. He started thirty years ago with a loan from a high street bank. The loan is secured over the owner’s home.
The business has made losses over the last six years. To fund the losses the owner has used an ever-increasing overdraft facility from the bank, secured by second mortgage over his home. The bank also has a fixed and floating charge over the business assets.
The owner lives in a provincial town, where his children are at a fee-paying school. He is well known in his local community. He drives a smart car (on lease) and some in the community resent (and are jealous of) his apparent success.
The businesses fail
Let us assume that, despite their differences, both our businesses fail. What do you suspect will be the effect on our two owners?
I suggest the following is a reasonable assumption of the outcomes:
The high-tech startup
After two years trading the VCs decide that although the business appeared promising, its business model is fatally flawed. They decide not to advance further funding. The business is liquidated with the VCs suffering losses of £200,000. Some unsecured creditors also lose money.
The young entrepreneur is bitterly disappointed that “her baby” has been closed down. Naturally, she feels a sense of loss. Her pride is wounded and she feels some mild embarrassment among her immediate circle of close friends. But, the business was being run by a professional manger, so, perhaps, it wasn’t really her fault. She does not know the unsecured creditors personally and feels that their loss is just the risk of doing business. Consequently, she loses no sleep over them.
Although she is out of a job, she has suffered no capital loss and has sufficient savings to live without an income for a while. On the positive side, she has two or three other ideas for start-ups brewing. The VCs have expressed initial interest in these ventures. She has also had an offer of work from a computer programming company.
After a month or so she starts to regain her confidence and continues to mix freely with her friends and business associates. Her life has not changed. Her confidence and sense of well-being is boosted further by what she reads about failure being merely a steppingstone to success, etc., and from the support of her business colleagues. She accepts what has happened to her with equanimity. She has always considered herself to be a modern high-tech entrepreneur. After all, isn’t what has happened to her the same as what has happened to many other successful entrepreneurs? She feels confident her next business will be bigger and better and can’t wait to launch her next startup.
The engineering business
Inevitably, the lender bank becomes increasingly nervous about its outstanding loans. Following several unsuccessful attempts to find alternative funding, the owner is advised that he will be breaking the law if he continues trading and he instructs his accountant to call in a liquidator.
The bank replaces the liquidator with its own Receiver. The business is wound up. The Receiver, under power of the bank’s mortgages and charges, sells the family home and all the business’s assets. There is a substantial shortfall for unsecured creditors.
The family moves to rented accommodation. The business owner considers bankruptcy. His children are moved from their fee-paying school. The business owner’s marriage comes under severe strain and he separates from his wife.
He doesn’t read internet articles about the positives of business failure. Consequently, he feels ashamed of the failure of the business for which he blames himself. He is embarrassed about the losses of his creditors, many of whom he knows personally. As a result, he doesn’t mix as freely in his local community or with his friends (most of whom are business-related) as he had done in the past.
His doctor diagnoses him with depression. He believes he will never be able to regain his former social or financial position. One of his main concerns is that he is too old to get a job. In short, he is stranded in no man’s land.
What are the effects of business failure?
Yes, business failure can be a positive for some business owners. But it can also be a life-shattering disaster for many others. It is obvious that our hypothetical business owners will be affected in very different ways by the failure of their particular businesses.
So, what do you think are the effects of business failure? Do you think the outcome is dependent on who you are and the circumstances of your life and business? Can we generalise about the effects? Or do you think it is always negative for the owners? Are you convinced by gurus who romanticise the effects of failure?
Or is this a cultural issue, different in, say, the US than it is in the UK?
In my next blog I will continue with the theme of business failure and look at how different countries consider it.
You could also refer to FAQ 3.37: https://www.freeforumofideas.com/faq/37-what-is-the-survival-rate-of-small-businesses/