by Robert Steven Kramarz, Intelliversity

You’re more likely to win if you expect failure.

Question: After a bunch of calls/meetings with investors, why am I still hearing “No” and “Too early”? Why does it seem to take dozens, even hundreds of calls with investors? How many calls/meetings will it take to meet the right investor? How can I reduce the number of calls/meetings needed to find the right investor?

Why do I feel like I’m lost in the dark woods of raising capital, with no clear path out?
Why do most innovative startups and scale-ups fail to raise any capital at all? How can I beat the odds?

The answer may scare you at first, but provides a path out of the dark dark woods and into a clearing where your future lies waiting.

A clue lies in Elon Musk’s interview on 60 Minutes:

Scott Pelley: How did you figure you were going to start a car company and be successful at it?
Elon Musk: Well, I didn’t really think Tesla would be successful. I thought we would most likely fail. But I thought that we at least could address the false perception that people have that an electric car had to be ugly and slow and boring like a golf cart.
Scott Pelley: But you say you didn’t expect the company to be successful? Then why try?

Elon Musk: If something’s important enough you should try. Even if you — the probable outcome is a failure.

From CleanTechnica in 2020 (https://cleantechnica.com/2020/02/01/elon-musk-you-should-be-failing-if-things-are-not-failing-you-are-not-innovating-enough/ originally published in Evannex blog, written by Matt Pressman:

FOR ELON MUSK, FAILURE IS CRITICAL TO SUCCESS

Epic fail. That’s what first crossed my mind as I watched the window break (twice!) during Tesla’s Cybertruck launch. Instead, the unfortunate incident brought immediate worldwide attention to Tesla’s new truck — mainstream press, social media, and (of course) meme-makers all gobbled it up. Fast forward, and Elon Musk’s crazy concept for the Cybertruck is now considered a genius move.

Above: Elon Musk pokes some fun at his own gaffe during the Tesla Cybertruck unveiling (Image: Tesla)

In fact, Elon Musk actually forecasts failure at the beginning of his bold and audacious ventures. According to Marcel Schwantes (via Inc.), Musk demonstrates “a healthy amount of humility” when starting a project. For example, at an interview at an energy conference in Norway, Musk said, “You should take the approach that you’re wrong. Your goal is to be less wrong.”

As Musk points out, “When you first start a company, there’s lots of optimism and things are great. Happiness, at first, is high. Then, you encounter all sorts of issues and happiness will steadily decline and you’ll go through a whole world of hurt.” But, if you take your medicine and learn from your failures, there’s an upside. “Eventually, if you succeed… You will finally get back to happiness,” says Musk.

By acknowledging that failure is a likely outcome, Schwantes says, “you’ll be able to spot impending issues earlier and minimize the inevitable pain and suffering Musk describes.” In fact, Musk has a trick for keeping him abreast of potential pitfalls. He actively seeks out constructive criticism from close friends and confidants.

“A well-thought-out critique of whatever you’re doing is as valuable as gold. You should seek that from everyone you can but particularly your friends. Usually, your friends know what’s wrong, but they don’t want to tell you because they don’t want to hurt you,” says Musk. Even if you don’t agree with their feedback, Musk says, “You at least want to listen very carefully to what they say.”

In short, Musk believes failure is necessary on the path to success. He says, “Failure is an option here. If things are not failing, you are not innovating enough.” It’s something Elon Musk accepts and embraces. Don’t believe me? Check out this revealing infographic of Musk’s many failures as he built Paypal, Tesla, and SpaceX into the trailblazing companies they are today.

Watch Elon Musk’s philosophy of failure here;

The same goes for Elon Musk’s founding of SpaceX:

“I always thought we would fail,” Musk said of founding SpaceX during a press conference with NASA in March 2019 at the Kennedy Space Center in Florida. “So, this is … it’s all upside.” At the time, SpaceX had just successfully test-launched the Crew Dragon spacecraft, which it designed and built, on the Falcon 9 rocket at Kennedy Space Center.

And to hear Musk tell it, all of SpaceX’s success is the result of a tremendous gamble.

“I thought maybe we had a 10% chance of reaching orbit starting out,” he said.

Those around Musk were skeptical too. “When we started SpaceX, they said, ‘Oh, you are going to fail.’ And I said, ‘Well, I agree. I think we probably will fail,’” Musk said.

“They said I would … lose all the money from PayPal, I was, like, ‘Well, you are probably right,’” Musk said.

What has this “expectation of failure” got to do with raising capital?

Everything.

Musk believes that failure is key to success. He also implies that expecting failure is key to success. This is the clue.

As I’m fond of pointing out, “If you do what everyone else does, you’re going to get the same results that everyone else gets, which is (for innovative entrepreneurs) very little.”

Most entrepreneurs expect success. You’re more likely to win if you expect failure.

Everyone else goes around expounding on how great their new company is, how different it is from all the others. No one seems to want to admit that the likelihood of success (of a startup) is around 10%. Or more to the point, no one wants to admit that the likelihood of success of THEIR venture is 10%. Somehow, you’re different; smarter, better, more ingenious. You’re going to beat the odds.

There’s clearly a bias working here: Most people believe they’re better than average at everything — intelligence, driving ability, looks, etc. This is known in psychology as the BTAE (Better Than Average Effect). See more about this bias in https://www.psychologytoday.com/us/blog/getting-along-and-getting-ahead/202001/people-think-theyre-better-average-how-much-better

So most people think their ideas and their company are better than average; in fact way better than average. While the average new company fails, yours won’t. And you have a lot of reasons for this. But no “good reasons.”

The BTAE (Better-Than-Average Effect) actually increases your likelihood of failure. Why? Because it prevents you from taking all the necessary steps to reduce the many causes of failure in business. BTAE has consequences:

You take shortcuts.
You avoid thinking about what can go wrong.
You try to serve every market segment at the same time.
You avoid thinking about what expenses could eat up your profits.
You avoid thinking about competition.
You avoid thinking about black swans.
You don’t plan far enough ahead.
You don’t build a team with a bench of backups.

The right way to think about business is the way Elon Musk thinks about it. No surprise there. He’s succeeded in almost every business he started. But what is that way of thinking?

“It’s likely to fail. But I can reduce the chances of failure by thinking about all the ways it can fail, and, one by one, addressing each one of those possible disasters.”

You may have heard this statement from the late Andrew S. Grove, co-founder of Intel: “Only the Paranoid Survive.” This was part of the title of his book. You probably think he means by “paranoid “a fear that other people are out to get you..” What he does mean is “a fear that things will go wrong.”

Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company and Career, Andrew S. Grove (New York: Currency/Doubleday, 1996).

This book is a must-read for innovative entrepreneurs, to graduate from visionary to Vision Master. In it, Grove offers up all his mistakes and close calls. Yet Intel is one of the few companies to survive the early days of personal computing. Its survival is attributed by Grove to his belief that the end of success is “only a disaster away,” and disasters are always just around the corner.

Well, most innovative entrepreneurs think exactly the opposite of this. “Not only am I better than average, but I’m also WAY better than average.”

Let’s call this the WBATE. (Way-Better-Than-Average Effect).

So what’s the problem when raising capital? You may be thinking, “Don’t I want to show myself and my company at it’s best, not it’s worse? Why scare the investor with all this failure talk?”

By now, you should see the flaw in this thinking. It’s what most entrepreneurs think and “If you think like most entrepreneurs, you’re going to get the same results as most entrepreneurs raising capital, which is zip, nada, nothing.”

Instead, think differently.

Realize that investors KNOW that entrepreneurs are biased (overly optimistic) about their abilities. We KNOW you’re suffering from WBATE bias. We’ve met hundreds or thousands of founders and see the pattern. It’s clear as day.

We KNOW that you overestimate your abilities.
We KNOW that you overstate the advantages of your business.
We KNOW that you underestimate the chances of failure
We KNOW that you ignore the possible causes of failure

Basically, we believe you’re either living in a fantasy world or deliberately hiding the risks and problems.

All of this is OUR bias as investors, against you.

Investors are biased against you, the innovative entrepreneur.

Any additional bias against you as a woman, as a young person, as an old person, as a racial or ethnic or sexual minority, etc just makes our bias worse.

You walk into the room, and we’re already thinking you’re living in a fantasy world or even deliberately evading reality.

THIS is why it’s so hard to win a second meeting let alone funding.

So you’re suffering from two biases, one is your own and one is ours:

You think you’re way better than average.
Investors think you’re delusional.

It’s a double-whammy of bias.

Add to this any specific bias or prejudice investors have about you. Ouch.

Bottom line: They don’t trust you.

No wonder it takes a hundred meetings to find one supportive investor.

So what’s the solution?

How can you smash that bias against you? How can you gain their trust?

You’ll find some hints above, and more in the next blog.
For now, start thinking about all the ways your business could fail.
Do you have a good business plan?

And feel free to set up an appointment with me to discuss them.

Robert Steven Kramarz, Executive Director, Investor, Author
Intelliversity – The Funding Academy for Innovators – Led by Investors