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Fail fast, not slowly
A fast failure
A New York e-commerce incubator raised its money in December of 1999, and within three months it was effectively over, because there was never going to be more capital for e-commerce incubators in 2000. Its founder recognized that, failed fast, and the whole episode became a blip in his life.
Ten years of staying
Red Envelope went the other way. Its founder stayed with it for ten years, convinced he was bigger than the market and that if he threw everything he had at the company it would eventually succeed. The company folded in 2008, eleven years after it was founded.
Telling quitting from difficulty
Success is the best outcome and failing fast is the next best. Telling quitting apart from ordinary difficulty is hard from the inside, since most jobs and companies are awful at the beginning, with injustice to face. It is hard to read the label from inside the bottle, which is why a kitchen cabinet of trusted advisors can say whether to stick with it because the work is just hard, or to move on because the market is telling you something.
Why do slow failures last so long?
Part of the reason is the sunk cost effect. In a 1985 study by Hal Arkes and Catherine Blumer, people who had paid full price for a season theater subscription attended more plays than people who got a discount, even though the plays were equally enjoyable. Money and years already spent pull people toward spending more of both. A company that shows small signs of progress each year gives that pull something to hold onto.
Why did funding for e-commerce dry up in 2000?
The Nasdaq composite index peaked on March 10, 2000, after a run-up driven by internet stocks. It then fell by roughly three quarters by October 2002. As public valuations of internet companies dropped, venture funds had far less reason to back new ones, and many dot-com startups that depended on the next round of financing shut down.
Why do leaders keep investing in failing projects?
Psychologist Barry Staw described this in a 1976 study he called escalation of commitment. Business students who had made an earlier investment decision that turned out badly put more money into the same division than students who had not made the original decision. Staw's explanation was that people become invested in justifying their first choice. The pattern has since been documented in government projects and large corporate programs.
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