A Blog by Jonathan Low

 

May 12, 2012

The Most Dangerous Lie Entrepreneurs Tell Themselves

Life is short. Depending on your reference point.

We learn more from our failures than our successes. Maybe.

Humankind employs simple aphorisms to provide guidance. And sometimes to make ourselves feel better about our weaknesses and mistakes. But the results can be misleading.

Google Ventures leader serial entreprenuer Joe Kraus explains how thoughtless application of timeless wisdom is not always helpful. JL

Joe Kraus comments in Forbes:
One of the things I’m fascinated by are the small lies we tell ourselves. They usually take the form of aphorisms that seem to be true. Or more to the point, they have an important subtle message, but they’re perceived as whole truths. And, often they’re so ubiquitous we don’t even give them a second thought. But, these small lies end up having a pretty distorting effect on our behavior or our perceptions.

One example of this is the statement “life is short.”
I hear it all the time. I understand why people say it. What they mean is “live life to the fullest.” But we don’t say that. We instead say “life is short.”

Of course, life is not actually short. For most Americans life is actually long (knock on wood). Average male lifespan in the US is 75 and average female lifespan is 80. But, when you internalize, literally, “life is short”, you can lure yourself into behavior that is harmful (especially financially) where you play for the short term when you need to play for the long term. Einstein is famously thought to have said that the most powerful force in the universe is compound interest. I believe that our dual misunderstanding of “life is short” and our inability to appreciate the value of compounding combine to lure people to make very bad investing decisions.

In the world of entrepreneurship I think the most dangerous lie we tell ourselves is “I’ve learned more from my failures than my successes.” It’s simply not true and I want to talk about why.

What I believe IS true is the statement “I’ve developed more CHARACTER from my failures than my successes.” But, I firmly believe we LEARN more from our successes by far.

Let’s look at the data first. In the paper “Performance persistence in entrepreneurship” (PDF), Josh Lerner and his collaborators at Harvard University demonstrate that the success rate of a first-time venture-backed entrepreneur is about 18%. If that entrepreneur fails and tries again with another company, their success rate only improves to 20%. Not much. BUT, if that entrepreneur succeeds in their first company, their success rate for their second venture goes up to 30% — over a 65% improvement in expected outcome.

Why might this be? In my opinion it has to do with how large the information space that gets explored by a company over its lifetime. Let’s imagine an entrepreneur makes 5 decisions per day (some big, many small, and involving all sorts of things from partnerships, product features, marketing, hiring/firing, and how to allocate everyone’s time). Over the course of 3 years, that’s a HUGE decision tree with a massive number of potential paths (roughly 5^750 unique paths assuming a 50 week year and a 5 day workweek). 5^750 is this number, fwiw.

168850850305727091395186825713912447112441058150046927050324723890449107812858660398554055697372954299116776644433651870505231901712461662116793144847950712000881086630220426140201590160287572958546330981647561466586019225296753645395632352672757468805020446337326822341458269676821758973637253679519824654862828260183804589283422795141880659376822043675041721215149214186959669079228162626416267478638199550182946764747764607788135575613004500768632174606656508945368003981851086369760095440284430878818966448307037353515625

If you fail, all you know is that the particular path you took through that decision space didn’t work. But, it really doesn’t tell you much about which of the other paths might work.

But, if you succeed, you’ve created a pattern for success; a guide through that huge information space that can give you a sense of where to go next time. It helps you understand, at an intuitive level, what feels right and what feels wrong. In essence, it gives you what everyone calls a “gut feel” for success. And, it’s why venture capitalists hone in on past successes much more than past failures.

One of the things I tell folks who are early in their careers and who are thinking about joining a startup is “don’t go to a raw startup of 3-4 people. Go to a place that has perhaps 30-50 people and where there is a sense of momentum in the business.” The reason I say this is that I think it’s immensely valuable for people to participate in a pattern of success. That will shape the way you think and make you immensely more valuable to the next startup you go to or start yourself. The most important thing you can develop early in your career is a gut for what success feels like. The only way to do that is to be part of something successful.

So, please don’t tell yourself that you’ve learned more from your failures. We all get character from our scars, but we learn far more from our successes.

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