The Top 10 Best Ways to Fail as an Entrepreneur

Last Updated Jan 31, 2011 2:37 PM EST

True or false: If you haven't failed miserably as an entrepreneur, then you're simply not trying hard enough.

If you answered false, you're not a true entrepreneur. Failure indicates that you're stepping out of your comfort zone and trying new things. Embracing those "failures" as learning opportunities -- and not crushing defeats -- is a defining characteristic of entrepreneurs in general, and of American entrepreneurs specifically. Nowhere else in the world will you find a society so tolerant of business failure.

So if you haven't made one of the following mistakes and lived to tell the tale, you had better try a little harder.

1. Manage partnerships poorly. Thomas Farrell,
 founder of 
PEO Spectrum, started his first business right out of college, selling mobile outdoor advertising that was placed on commercial vehicles. Farrell started the company with an old friend, leaving the partnership loose and undefined, which worked well -- until it became clear that Farrell was the big revenue generator. At that point, the friendship became "painful." Because the two had no contract and could not come to a mutually acceptable buyout agreement, Farrell left the company. Ultimately, that business failed but, says Farrell, "I don't see that I failed. I learned a very good lesson at a young age and vowed never to let it happen again." His current business is growing and profitable.

2. Under-capitalize your company. "If I had to do it again, I would start with three times as much cash as I thought I needed," says Heidi Ganahl, the founder of Camp Bow Wow, a pet services company with over 200 franchisees. "I did not have a clear understanding of all the costs involved in staring a franchise business. Looking back, we could have been much more efficient about building systems, processes, and sales strategy if we had a healthy amount of working capital." That said, Camp Bow Wow is now one of the largest woman-owned franchisers in the world.

3. Make it all about you. "My biggest failure was creating a business that revolved around me," says Laura Harris, who has her own Allstate Insurance business. "The first time I went on vacation, I was lying on the beaches of San Juan petrified that my business was falling apart," she says. "I went back and immediately redesigned my business so that it worked without me, not because of me." She defined every job in writing, cross-trained everyone in the office, and started spot checking employees to make sure things were running smoothly. "I still work very actively in my business," she says. "But now I enjoy my vacations."

4. Hire too fast. Joshua Steimle, CEO of MWI, an Internet marketing company, started his first company as a college student and made the common mistake of over-staffing. "Right out of the gate I hired a CFO and a VP of Sales, and gave them each 10% equity in the venture," he says. Those two hiring mistakes drained the startup of precious cash during its most vulnerable phase. "I should have hired a single person as a normal employee to handle sales." Eventually, he let the CFO go, but it cost him dearly to get his 10% back. Steimle sold the company a couple of years later at a significant loss and still remembers the valuable lesson: Be slow to hire and quick to fire.

5. Be a show-off spendthrift. When Cheni Yerushalmi opened the doors of Zoomgo, an online gaming network, back in 1999, he and his partner invested in posh office space and pricey furniture to woo corporate clients and big advertisers. A year later, the company was bleeding cash and struggling to survive. His lesson: "Control your spending and don't lock yourself into a long-term commitment you may not be able to afford." To make ends meet, Yerushalmi subleased space to other entrepreneurs; that act of desperation led to the creation of Sunshine Suites, which offers on-demand office space for startup companies in Manhattan.

6. Over-promise and under-deliver. Shortly after CrowdSpring co-founders Ross Kimbarovsky and Mike Samson launched their global marketplace for creative crowdsourcing in May 2008, the site crashed. "We were an ecommerce business and we couldn't handle our traffic or customer service," say the partners. Their customers were understandably frustrated. "We eventually worked 24/7 to rewrite everything, take a couple steps back and do it right." Kimbarovsky and Samson learned how dangerous it can be for a Web company to fail to deliver on its promises to customers. But they also learned that being fully transparent about their failures -- the CrowdSpring team posted a heartfelt apology and explanation of their troubles -- built trust and respect among those customers.

7. Grow too fast. Coppy Holzman, a founder of webvan.com, learned a host of lessons from the spectacular rise and consequent bust of his online grocery company in the late 90s. Holzman says his venture partners convinced them that they could quickly scale up, uniting the volume of Wal-Mart with the home delivery efficiency of FedEx. "Opening too many markets simultaneously turned out to be our biggest downfall," he says. With his newest venture, charitybuzz, an upscale online charity auction site, he says he's focusing on slow growth. "Perfecting our core services and 100% customer satisfaction are a bigger priority than conquering the whole market."

8. Delegate sales. CEOs should always be selling. Scott Stropkay and Richard Watson, the co-founders of Essential, a product and service innovation consulting firm, found that out the hard way. They hired a top-notch professional sales person but, says Stropkay, "we underestimated the level of knowledge required to sell the wide range of things we do. We didn't appreciate the difficulty a non-practitioner would have knowing how to impress a buyer with our skills." When they finally let the salesperson go, Essential's partners and directors reclaimed sales, and the company had its strongest year ever in 2010. The big lesson, according to Stropkay: If you want to win against the big guys who have pro sales and marketing teams, "leverage your deep personal experience in the sales process and follow through by delivering on the promise that the person selling will actually be significantly contributing to the project."

9. Mismanage supplier relationships. Monique Hayward relied on her management team and other restaurant owners for advice on suppliers for her Beaverton, OR, restaurant, Dessert Noir Café and Bar. The upshot: She found herself doing business with large food corporations that were unforgiving when her business faltered and she had trouble making payments; one company even reneged on a payment plan when Hayward stopped placing new orders so that she could focus on paying down her debt. "I went through a miserable period in collections hell," she recalls. So Hayward started buying her food at local farmers' markets, and small wholesale distributors. "Because we had no credit with a food company, we were forced to pay COD for everything, which meant we had to be lean and mean about inventory management," she says. "We could no longer hide behind aging invoices, so we began to manage our food and beverage inventory on a daily basis and instantly realized a decrease in our expenses."

10. Bungle customer relationships. Chargify, an online billing service run by Grasshopper Group, operated for its first year on a freemium model that allowed startup companies to get the service for free. Then, last October, the company sent customers an email announcing that the free ride was over and that they would be charged $99 a month. Users revolted and negative press ensued. CEO David Hauser wrote a long blog post entitled "How to Break the Trust of Your Customers in Just One Day" in which he explained the reason for the price increase but apologized profusely for how poorly the company handled communication with customers. "We broke your trust," he wrote. "Trust that took massive amounts of time to build, and now we may never get it back... We have learned more from this mistake than from anything before and will use that knowledge to change the way we think about everything related to Chargify."

Have you made any of these ten mistakes (or others that we haven't noted)? What did you learn from them?

If you liked this post, you might also enjoy these: Image courtesy of Flickr user pixie_bebe, CC 2.0
  • Donna Fenn

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