What Happens After Failure on Main Street


What Happens After Failure on Main Street

Photograph by Daniel Acker/Bloomberg

Heidi Ganahl was planning her first business in 1994 when her husband of two years was killed in a plane crash. Grieving and “an emotional mess,” Ganahl took the $1 million insurance settlement from the accident and used it to start two businesses over the next six years. Both her startups—an infant bedding catalog and a money management advisory—failed. “I’m very entrepreneurial and visionary, but I got sidetracked,” says Ganahl, now 45, of Denver.

According to the U.S. Bureau of Labor Statistics, only half of all startups survive past their five-year anniversary. The other half shut their doors—either through a sale, an acquisition, or a failure. Although there are myriad how-to guides to business success, coping with failure is typically isolating, uncharted territory. “People don’t like to contemplate failure,” says Paul Carroll, author of Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years. “They know it’s out there, but they’d much rather picture themselves winning the gold medal than falling on their faces because they didn’t tie their shoelaces or train properly.

While nobody likes failure, it is tolerated more often in tech startup cultures, like Silicon Valley, where some “noble failures” are looked on almost as badges of honor, Carroll says. In those environments, “it’s OK to fail a couple times, or even three times or more because you [might] have that one big success.” On Main Street, where startups are not funded by venture capital but by friends and family, failures are more often stigmatized. And they are often more devastating, because they may represent an entrepreneur’s only shot at success, Carroll says.

Ganahl’s third try at entrepreneurship succeeded: She’s the chief executive officer of Camp Bow Wow, a $7.5 million dog day-care and training franchise she opened in 2000 with the $83,000 that remained of her settlement. Like Ganahl, many successful business owners point to multiple busts in their pasts. A 2008 Harvard Business School working paper (PDF) on persistence among venture-capital-backed entrepreneurs shows first-timers “have only an 18 percent chance of succeeding and entrepreneurs who previously failed have a 20 percent chance of succeeding.”

Of course, there’s no denying that failure hurts. Joe Nicassio says he went into a deep depression after his software training business went belly-up in the 1990s. “I was underwater $250,000, I had liquidated my investments, and I had this huge debt cloud over my head,” the 51-year-old Upland (Calif.) man recalls. He used the painful experience to inform his current venture as a startup marketing coach and “business mechanic.” He says, “I am an expert at what not to do.”

Other unsuccessful entrepreneurs go back to their previous careers—if they’re lucky enough to be able to get their jobs back. William Loeber took a buyout after 25 years in the photo paper business at Hewlett-Packard (HPQ) and used about $50,000 of his severance to start an online photo printing and framing company in 2006. The company did not live up to expectations. Today he’s back at HP and working on a new side venture.

“I knew about printing and the technology of printing, but I realized what I didn’t know was Internet marketing,” Loeber says. He also had no experience running a business and says he underestimated the difficulties inherent in entrepreneurship. Although he brought in a partner who claimed to have the expertise he didn’t, the relationship did not work out. “I didn’t check her out enough to realize what she thought of as experience and what I thought were two different things. Since we met up through social contacts, I did not do the rigorous interviewing I should have,” he says.

Ignoring conventional wisdom about communicating problems saved Nick Sarillo from having to close his two Chicago-area pizza restaurants. When “everything came tumbling down” during the financial meltdown, Sarillo saw sales plummet at his Elgin (Ill.) restaurant by nearly 50 percent over six months as new homebuilding screeched to a halt, commercial development in the area was put on hold, and street construction impaired customer access.

When Sarillo recognized that he had four weeks left before he would be unable to pay his employees or his mortgage, he went to his lenders. Not only did his banker refuse to renegotiate terms, he advised Sarillo to keep his problems to himself, lest his employees quit and his suppliers cut off his credit. Sarillo did the exact opposite, composing a letter he e-mailed to 16,000 customers, employees, and vendors explaining his situation, praising his staff, and taking the blame for getting in over his head financially. He invited everyone to come in and say goodbye.

What happened next was something Sarillo calls his It’s a Wonderful Life moment: Almost immediately, customers flooded in, local sports coaches booked banquets, and well-wishers established a “Save Nick’s” Facebook page and planned a huge “pizzapalooza” night. The next time his produce vendor made a delivery, Sarillo says, he refused to take payment, saying the tomatoes and lettuce were “on the house.” Sales increased 105 percent at Elgin in the first week and 110 percent at his original location in Crystal Lake, Ill.

A few weeks later, the bank vice president called, saying: “I’m getting customers and employees asking how we can help Nick’s,” Sarillo recalls. They agreed to a loan modification that gave Sarillo enough flexibility on his mortgage to continue paying it through 2011. This year, sales for both locations, which together employ about 192 people and seat 700 customers, are up 4 percent to 10 percent and Sarillo expects revenue of $6 million. “Doing the right thing, building a company the way we did, and being a part of the community that paid our bills was an insurance program for us when we went through a tough time,” he says.