The "American Idol" Theory of Business is Just Plain Wrong


The elephant in the room when it comes to entrepreneurship and small business is FAILURE.

The statistics are only debated to their degree but not their overall thrust –  a very small percentage of businesses ever become meaningfully profitable and a smaller percentage still are ever sold for a meaningful price.

In other words, the vast majority of businesses – by objective, financial measures – fail.

Even worse, a lot them fail badly –never achieving even one dollar in revenue and / or go so deeply in the hole that they have significant and negative financial spillover effects.

Like business and personal bankruptcies and investors losing all of their money. 

In a word, business failure is traumatic. Now it is not the kind of trauma that survivors of war and natural disasters experience, but in the world of work it can be about as bad as it gets.

Yet…Americans today are starting businesses at a greater rate than at any time in the last 15 years. 3% of the U.S. adult population annually start one, and a multiple of that dream about doing so.

So what gives?

Well, in a previous column I offered the financial view, namely that the rewards of a business sale are so great and life-changing that having any probability of their occurrence make the grave financial risks of business - building more than worth taking.

This I call the “American Idol” theory of entrepreneurship and small business….:)

But this, at best, only explains half of the story. 

No, there is something else going on here, and new research regarding of all things – Post Traumatic Stress Syndrome, points to what it is.

Ground-breaking research, done by among-others Dr. Richard Tedeschi of the University of North Carolina, shows that strong, negative experiences like war and natural disasters are NOT as scarring as once thought.

In fact, the exact opposite is true. Statistically, most survivors of traumatic experiences – think prisoners-of-war and tsunami victims – come out of them stronger and on most measures, out-perform those in their peer groups unaffected by the awful events.

All I can say is wow.

Now everyday all of us should count our blessings dozens of times as “there but for fortune go I’ and offer nothing but great compassion and empathy for those suffering trauma, especially when it comes through no fault of their own.

But we also should take significant solace and inspiration from the rest of the story.

Life, as it does, goes on. And according to the latest research, the old adage is true of that which does not kill you REALLY does make you stronger.

Now it would not be proper to equate a business failure with the physical and emotional traumas experienced by survivors of war and disaster, but entrepreneurs and executives can and should draw important wisdom from them.

Such as if you “fail” at this particular business, you won’t be broken and scarred forever.

And that professional and entrepreneurial growth is a participatory sport – learned only by doing and trying and striving and not by watching and fretting and waiting.

And then there are the related ideas of diversification and iteration. 

Such as, in business, it is almost always far better to have four business “failures” and ONE success than it is to go zero for zero.

For the entrepreneur this does not necessarily mean running multiple businesses concurrently, but it does mean that the business strategy should be iterative and testing based. Successful internet companies get this intuitively – see Amazon and eBay and thousands of others - and you should too.

As for investors, they should take advantage of the incredible opportunity that the modern financial system offers to back multiple entrepreneurial companies, and not just one or a handful.

With the average return of the private equity investing asset class in some cases being over 27% annually (Right Side Capital), the odds are strongly in your favor if you both invest right and diversify properly.

So entrepreneurs and investors get in the game!

Failure is no way near as bad as advertised and if approached with the right spirit and strategy, it can truly be the ultimate blessing in disguise.

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