Failure Is Not an Option

Failure is not an option
31/08/2005. Source: IVCJ. Dr. Arielle Lehrmann

What makes the entrepreneurs backed by venture capital firms believe that they will be the one to beat the statistics? What traits, value system or faith is necessary in order to think a portfolio company will make it despite the sometimes-gloomy numbers? Dr. Arielle Lehrmann looks at the delicate dynamics between entrepreneurs and their private equity backers.
Organisational psychologist and former high-tech entrepreneur Dr. Arielle Lehrmann delves into the mindset of the entrepreneur and finds a highly motivated person committed to succeed and much more.

Statistics on successful start-ups imply that a high-tech entrepreneur works hard and dedicates years of his or her life "against the odds." What makes an entrepreneur believe that he or she will be the one to beat the statistics? What traits, value system or faith is necessary in order to think one's business "will make it" despite the gloomy numbers?

As an organizational psychologist as well as a former high-tech entrepreneur, I've long been interested in the "entrepreneurial spirit." Is it a spirit that sees a learning opportunity where most people see a dead-end, or is it the spirit of megalomania, of a certain detachment from reality?

The psychological study of entrepreneurship is not a start-up. It began long before many of today's active entrepreneurs were born. As early as the 1950s, researchers tried to map the personality factors that determine who is - and who is not - likely to become an "entrepreneur".

In the 1960s, it was found that entrepreneurs had a higher need for achievement than non-entrepreneurs and were, contrary to popular opinion, only moderate risk takers. A great deal of research on the personality characteristics and socio-cultural background of successful entrepreneurs was conducted in the 1980s and 1990s.

In an analysis of more than 50 studies, there was a consensus around six general characteristics of entrepreneurs: (1) determination; (2) leadership; (3) opportunity pursuit; (4) tolerance of uncertainty; (5) creativity; and (6) motivation to excel.

It is agreed then that entrepreneurs are "determined". But what is the state of mind, which underlies their determination? In other words, what kind of thoughts and beliefs enable an entrepreneur to carry on when others burn out? Do entrepreneurs have a special relationship with what we call "reality"?

This is quite a tricky point as studies indicate that the vast majority of people have a special relationship with "reality". In fact, intriguing psychological data suggest that the people who are the most precise and realistic in their judgment are those who have been diagnosed as clinically depressed. In particular, studies found that depressed people are realistic as to whether they can control uncontrollable events, while non-depressed people exhibit an illusion of control over the same events.

This phenomenon, known as "depressive realism", means that being realistic about your capabilities is actually not a very healthy thing. Apparently, in order to function well, we need to believe we are capable and in control even when we are not. So it seems that a certain detachment from reality is necessary for normal functioning. May a further detachment from reality be required in order to become an entrepreneur?

"An entrepreneur must have an absolute trust in himself and in his ability to change the world around him. He is very high in what we call in psychology self-efficacy", says Amir Rubin, partner and chief psychologist at Tema, a recruitment and placement firm. "Optimism is a must for entrepreneurship, but optimism is just the external manifestation of an exceptionally high self-confidence. Such a confidence is very appealing, but it comes at a cost. The costs may be megalomania and losing touch with reality", Rubin warns.

"Entrepreneurs have the energy of creating a breakthrough. The challenge is to think beyond the breakthrough - on the day after the 'big bang' - how to channel the energy into a useful and profitable business?"

For VCs who interview entrepreneurs, Rubin has a word of advice - "make sure the entrepreneur is listening, open for discussion, interacting with his environment. See if the charisma is balanced with some humility and readiness to learn. Check whether the entrepreneur is exchanging views with you or only seeks to impose his own point of view. If he is open to learning, he's not only an entrepreneur but also a manager - which is, of course, what VCs are looking for."

A learning curve, the accumulative result of years of experience, is incompatible with the culture of most Israeli start-ups, says Yifat Reuveni, a researcher at McGill University, whose doctorate examines the organizational culture of high-tech industry in Canada and Israel.

Reuveni recalls a huge sign welcoming the visitors in one of the start-up companies she studied: "Failure is Not an Option". "Most high-tech entrepreneurs are probably more optimistic than the average man", says Reuveni, "but it is easy to be optimistic when you come from a favorable socio-economic background and do not risk your own money."

Reuveni notes that frequent job changes in the high-tech industry make it easier to deal with failures. "These days when a start-up company shuts down, the entrepreneur will seldom have the patience to explore what went wrong. Instead he is more likely to say 'next please'."

Reuveni clarifies that optimism and determination are not synonymous: "Israeli entrepreneurs may be optimistic and keep high spirits, but they seldom need to show determination and persistence in the long term. In North America, entrepreneurs aim at building solid, lasting businesses. In Israel, the dream is the exit - the sooner the better".

Rony Ross, executive chairman and founder of Panorama, should know something about determination and persistence. When she started her high-tech career more than 25 years ago, there were hardly any role models around, let alone female role models. For Ross, the creation of some-thing out of nothing defines the entrepreneurial experience.

"When you're making the first steps, " she says, "you're alone. You come to investors on your own. You give all those presentations on your own. Ninety-nine percent of the people around you don't know what you're talking about and can't understand why the hell it's important. You have to generate an extraordinary amount of energy to make it happen. Risking other people's money is far from easy. They risk money, but you risk something much more fragile, because your honor and ego are at stake".

When Rony Ross started her entrepreneurial journey she was aware of the difficulty. What came as a surprise to her was the elation brought by success: "An entrepreneur's life is extreme - very long hours, crazy travels, extraordinary efforts. But when you actually make it, the satisfaction is huge. I didn't know a professional achievement could be so uplifting, so fulfilling… I didn't realize how it was going to affect me. Like extreme sport, it's addictive, which is why entrepreneurs tend to become serial entrepreneurs."

But what if you don't make it after all? What crosses your mind when things go wrong? "It's the other way around. I fear the easy way. Because when it gets hard, this is exactly when you find your strength. It's almost like an instinct. The need to fight sharpens your view. You see things more clearly. You become focused. I discovered I'm at my best at tough times. A business partner used to say, 'I see we're in trouble' whenever he saw a really big smile on my face!"

"Entrepreneurs focus on the next steps instead of falling down", agrees Gil Hecht, founder and CEO of Novus Interactive, a provider of business continuity testing and monitoring solutions.

"The real world is bound to put obstacles in your way, but you believe in your idea, in your business, in your team, and you just keep on. Entrepreneurs know the statistics about start-up successes, but they put them aside the same way we put aside statistics on car accidents when we're on the road." Hecht emphasises that in our volatile business world, no one is immune.

"Companies shut down all the time - not only start-ups, big corporates too - but this fact does not stop people from building, creating and making business, does it?"

Hecht indicates that there is a well-known duality between vision and realism in companies, typically represented by the CEO and the CFO. "The CEO wants to fly, while the CFO has to remain grounded. The CEO is a doer who wants to do this and that, while the CFO will explain why this and that are not currently possible." Hecht points out that the management role shapes the perception and behavior of the entrepreneur.

"You can be sober and disillusioned in the middle of the night when you're on your own or perhaps with your spouse," he says, "but during the day, when you're surrounded by business colleagues as well as competitors, you have to express hopefulness, you have to sell. With time, these selling skills become part of you - you need to be optimistic, so you become an optimist."

Shay Ben-Asulin, co-founder and chairman of m-Wise, a wireless middleware technology provider that recently completed the listing of its shares in the US, says real entrepreneurs realize the way to success is hard and long. "At m-Wise we say half jokingly, 'if it was easy, everyone would be doing it'", he says. Ben-Asulin thinks the vast majority of start-up failures in recent years are due to "people who were not really entrepreneurial, but got somehow tempted to start their own high-tech business, fantasizing it would rapidly make them rich."

Ben-Asulin comments that "being an entrepreneur sounds appealing and sexy, especially as people believe they are going to risk other people's money rather than their own. In reality, entrepreneurial life is much more challenging than the common perception. You have neither job security nor fixed income. You may live without a salary for a significant period of time. On rainy days you may need to use your own pocket and sustain your business. People should take this into account when they consider becoming entrepreneurs."

Ben-Asulin believes the compensation is more in ego than in financial terms. "Entrepreneurs," he maintains, "do what they do because they're in love with the idea. Usually they're in love with their own idea, but at times they fall in love with an idea that originated from someone else, but they were the ones to recognize its business potential. The gloomy statistics seem irrelevant for them. They think that their idea is so wonderful that it must work out."

Failure is therefore not an option. And optimism is a must. On an optimism scale of one to ten, entrepreneurs would probably score not less than nine. At the same time venture capitalists would probably score not more than seven. Contemplate this difference, and you will under-stand something about the delicate dynamics between entrepreneurs and their investors.

Dr. Arielle Lehrmann

Dr. Lehmann is affiliated with the Zofnat Institute for Organizational Research and Consultancy - www.zofnat.co.il