Master the 8 Stages of Entrepreneurship
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Master the 8 Stages of Entrepreneurship
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Master the 8 Stages of Entrepreneurship
Nicholas Seet (’05) is a serial entrepreneur whose newest company, SIVI, helps aspiring entrepreneurs succeed where many fail. Previously he founded Auditude, which Adobe acquired in 2011 for $120 million. As a student, Seet won the UCLA Anderson Knapp Venture Competition and the $10,000 grand prize, which helped launch Auditude.
“I learned through the ups and downs of Auditude what it takes to really succeed in business. It’s not what it seems. You can’t do it by yourself, as much as you would like to. Because you might be an expert in one thing, but that one thing is, inevitably, only 10 percent of the business. And then — and I’ve made this mistake as well — you trivialize the other 90 percent. Press releases? Marketing? Who cares about the logo? But the reality is that the customer cares. And the customer is the ultimate end game. You need to please the customer. Otherwise, you have nothing. That’s ultimately what it’s all about.”
Like a child throwing a tantrum while pleading, “But when will I ever use fractions in the real world?!,” you’ll find there’s one class you just don’t — or didn’t — feel would help on your entrepreneurial path. But, as Nicholas Seet noted earlier, it’s that 90 percent that will be the most important.
Leo Petrossian (’14), who had four previous degrees, including a Ph.D. — all in engineering — has learned that building products doesn’t equal startup success. His company, Neural Analytics, won the 2013 Entrepreneur Association Conference Fast Pitch Competition, and the engine to its continued progress was the class he was most surprised to love: marketing. He says, “Remember, startups don’t build products, they create and deliver value.”
1. Value Proposition
Your value proposition is just what the name implies: It is the reason why people will buy your product over your competitors’. Everyone should be able to answer the question: What benefit do you provide better than anyone else?
Remember, startups don’t build products, they create and deliver value.
2. Features Implementation
Proper market research will tell you what features people are willing to pay for and which features they don’t care about. Those are the features you should spend time and money implementing.
3. Customer Segmentation
Not all customers are created equal! All customers care about a value proposition, but sometimes it’s different customers. Some people will buy your service because it’s the best; others will buy it because it’s the cheapest. Segmentation tells you how many of each you have so you can focus on delivering that benefit.
4. 3Cs. Customer. Company. Competition.
This is the battlefield for entrepreneurs and it’s reduced to one question: What value can we build and deliver to our customer better than our competition that our customer is willing to pay for?
“If we got a dollar from everyone in China, we’d totally be rich,” isn’t a sound pricing strategy. Neither is, “That’s how much our competitor charges.” You really need to understand how much your customer is willing to pay for your service or product. You never know — you’re probably leaving money on the table.
6. Willingness to Pay
Speaking of pricing, just because something is a big problem or an unmet need doesn’t mean that people will pay for a solution. Ask yourself, how much would you pay to use Google, Facebook or Twitter? If you have a great value proposition and can deliver value but your user is not willing to pay, then you may not have found your customer yet! Keep in mind that your users and customers can be two completely different groups.
7. Primary Research
Go outside. Yes, I mean outside in the real world and talk to customers. Don’t just sit in your mom’s basement, frantically writing code for a cool app before you’ve spoken to a few (dozen) customers and asked them what they want and what they would be willing to pay for. You’ll know you’ve done enough (for now) when you know your customers’ “must-have” versus “nice-to-have” lists of features.
8. Embrace the Niche
You heard me, embrace it. Do it. The niche market is the tiny customer segment that is currently neglected by the competition. These are the most dissatisfied people who are most willing to try out new products. Find the underserved niche and serve them.
9. Show Me the Data
If you’re going to set a course for a startup and raise capital to fund it, you better have data supporting your assumptions. Investors want to know that you aren’t just choosing a course off the top of your head. Collect lots of data that supports your decisions, then look for data to disprove and refute your conclusions. If you can’t find the data disproving your assumptions, then you might be onto something.
Adjunct Professor of Finance Bill Cockrum has taught at UCLA Anderson for 28 years. He currently teaches entrepreneurial finance, leadership and business ethics, and investment management. He has won numerous teaching awards, including the national top entrepreneurial professor award in a 1996 Businessweek survey. He has become a legend for the case-study entrepreneurial-finance class he has taught for more than 25 years.
- Ideas are not opportunities.
- Opportunities are market tested to meet an economic or social need for which customers exist.
- Be prepared to act quickly before your opportunity or niche is filled by someone else.
- Know that your quick action will result in about 1/3 incorrect decisions from which you will learn and of which you should not be afraid.
- Every problem has a moral dimension, which you should be aware of to become a great leader.
- Financing does not make your endeavor—it only provides time for managers to succeed or fail.
- Getting the money for your endeavor is third in importance—from whom the money comes and the attached terms and conditions are numbers one and two!
- Success is ephemeral and often based on luck. Be humble and treat others as you would like to be treated.
- Great leaders and entrepreneurs pick teammates better than themselves.
- To quote philosopher Don Miguel Ruiz: “Be impeccable with your word. Don’t take anything personally. Don’t make assumptions. Always do your best.”
- Remember, given your intellect and abilities, to always give back and make a difference in the world that can make a quantum leap in an organization’s goals and performance!
- The world is made of givers and takers—givers are the only happy people in the world!
Liz Davidson (’97) is founder and CEO of Financial Finesse, a provider of workplace financial wellness programs in the United States. She is widely recognized as one of the nation’s leading experts in the field of financial education. Davidson is currently writing a book, “Leverage,” scheduled to be released in fall of 2014, that provides fundamental concepts for small business leaders who want to make a significant national impact with a small team and limited resources.
- You go into business initially to do what you want. You stay in business by doing what other people need and changing what you want into what they need.
- When frustrated, send nasty emails. Send them to yourself — pretending like you are emailing the person you are frustrated with. Then sleep on it and send an email that effectively addresses the issue and makes people think you are super rational and professional.
- There’s genius in everyone. Your job is to find it, nurture it and leverage the hell out of it. When people are in flow, doing what they were born to do, they are unstoppable. A person who taps into their genius every day can accomplish 20 times more than those who simply do their jobs. That’s a conservative estimate. We’ve created products for less than five percent of cost of our competitors on this premise — and generated many times the revenue.
- You may not know it in the beginning but, when you first start a business, you are in sales whether you like it or not. They don’t teach sales in business school, nor do your customers give you a manual on how to sell to them. So, you have to make a lot of stupid mistakes quickly, get them out of the way, learn the hard lessons and then come back and do a better job. Eventually, you’ll become good at it.
- Some days are going to really, really suck. If you don’t think about quitting once in a while, then you are probably in denial about the major problems in your business.
- Like a painter who decides what he or she wants to paint before ever touching brush to canvas, your road to success will be much more direct if you define success before starting to pursue it. Once you have decided what the destination is, you not only have a goal by which to measure progress, you now have a means of evaluating each decision along the way.
- People tend to behave like mirrors in that if you show them positivity, they will return the favor. When you accept that positivity begets positivity, you may come to realize that you are largely in control of how the world treats you.
- The path to success is lined with trail markers in the form of negative feedback. While positive feedback feels good, it’s the negative feedback that presents the opportunities for improvement.
- Anything worth having is worth working for, and success is no exception. Everyone has dreams, but only those who put in the extra effort required to change the world actually make those dreams come true. The word “dreamer” has a negative connotation because most dreamers do not invest the time and energy required to become “doers.” As a good friend once told me, “If you want something you’ve never had, you’ve got to be prepared to do something you’ve never done.”
- Your time is the one thing you can never earn or buy back, so be extremely conscious and deliberate when allocating it. The value of knowing what not to worry about cannot be overstated.
Dean Alfred E. Osborne Jr.
Osborne wants you to remember that you can’t do it all alone. “Be inclusive, connect and develop social skills and a comfortable manner for engagement with others,” he says. “Be inquisitive. Be curious.” This relationship- and resource-building are necessary to execute any business concept, he adds. This applies even more so to those less gregarious by nature who might ultimately need help. “Work or partner with someone else or a team with a resource that has outgoing sales and customer service orientation and outgoing personality,” he says.
“It is not IQ, but EQ.” Of course, he points to the Price Center as a great place to start reaching out, with clubs such as the Entrepreneur Association and others also providing a boost. “Being part of a community such as an incubator or accelerator will help broaden your reach,” he says.
- As a rule, one should raise angel funds in the same serious, professional and methodic way as raising venture capital funds. Angels can make decisions faster and with less drama, but entrepreneurs should not think that closing an angel is ‘easy.’
- It’s not strictly a friends and family thing anywhere. This is a serious business, and entrepreneurs should not confuse raising angel capital with ‘hitting up Uncle Joe for $25,000.’
- A clean and fast way is to raise money as a bridge loan with a discount to the closing of a formal round of financing. The ‘reward’ for coming in early is the discount. The reason to use a bridge loan is that the legal costs are much less than for a formal round.
How does one raise VC funds?
George Abe: “With a lot of patience. It takes months. If you need the cash now, you’re too late.”
Bob Foster: “With great difficulty. In 2013, VCs invested $29 billion into technology ventures, but only $975 million of that went into about 250 seed capital investment deals of early stage ventures with minimal sales. Most of it went into B, C, D and later rounds.”
What are some tips and techniques for pitching a VC firm?
GA: “Prove there are customers and a lot of them. Prove your business model works. Prove you and your team can execute. Have good packaging. Have good manners; they have to like you.”
BF: “They are the same for pitching to angels or VCs. It is easier with angels, because most of them have websites where entrepreneurs can enter their business-plan information into a pre-formatted form. Don’t ever send them a big email of your plan. You need clarity and brevity of the business model, proof that the venture has a valid market demand based on solid market research, and a clear statement of how the investment is going to move the company forward.”
How should one structure a VC deal?
GA: “You don’t. They do. Your job is to understand what they are saying.”
BF: “The VCs do all the structuring of a deal. Entrepreneurs are at a clear disadvantage as this is normally the first time they have done such a deal. VCs do it every day.”
How does one go about borrowing money from a bank?Ultimately, banks are making an investment in your business when they make a loan, so, smart entrepreneurs need to recognize that from the start. The bottom line is they need to be convinced that the economic model of the business is viable, that the business can succeed and achieve projections, and that the leadership is trustworthy. Bankers don’t get awards if you overachieve, but they do risk their jobs if the loan is not repaid, so I like to focus on how we manage risk and protect their job as a lender!
In this market climate is that even possible?Yes, of course! But, ease of borrowing truly comes in cycles, and we remain in a very tough banking environment at present. There is plenty of money to lend, but banks are fearful, risk-averse and still seemingly unwilling to take on new businesses and new relationships. It is easier for bankers to grow existing relationships, truth be told. This makes it all the more critical to: a) address mitigation of possible risks; b) offer ancillary business to the bank beyond lending (cash management, payroll, 401(k) management, etc.); and/or c) find other areas of value. For example, is your business in a hub zone, does it qualify for CRA credit or is it a minority business enterprise?
Do you need to pitch a bank like an investor?Yes, and as a key partner! Showing the bank how it can grow breadth of services as the business grows is valuable. Communication is also critical and I like to be as transparent and open with banks as possible, before and after closing. And the pitch should again focus on controlling risks, managing possible market disruptions and ultimately being a “no-hassle” client who completes repayment. Paying high rates is not as important to bankers/banks as not being a problem borrower.
What are some tips and techniques for pitching to a bank?I have found success by being myself, letting my enthusiasm for the business come through naturally—if the owner isn’t the biggest fan, something is wrong!—and getting serious at the moment the pitch focuses on risk mitigation. I really stress how much I understand, as the borrower, that the banker is putting her job on the line for the loan—and how that trust will be warranted. Most bankers can smell a phony pitch a mile away, so I think the perfect pitch combines excitement with professionalism and, yes, humility. It’s amazing how far bankers will go if they think you are honest and sincere and your projections make sense. Two of the biggest reasons for loan turndowns are lack of trust/sincerity and if the numbers don’t match the rest of the pitch, in which case you won’t pass the “reasonableness test.”
What about using relationships through Small Business Associations to make a bank connection?Sure, that is one of many good routes. Use whatever cards you are dealt. Personal relationships tend to work best, so if you know a banker directly, that is optimal. A reference from a good friend is next best, so you are not coming in cold. SBAs are good on one hand, but the downside is the amount of paperwork, administrative bureaucracy and the slow process. If a vendor or existing customer is willing to provide an introduction to their banker/bank, that is also a great entré and, again, leverages a relationship so it’s not a cold call.
Are there novel lending structures to look at (e.g. The California Capital Access Program or CALCap)?Yes, but for most businesses seeking bank funding that do not already have a borrowing relationship, banks typically aren’t looking for “exotics” or “novel” approaches for a new client. They prefer nice, simple (easy-to-explain to their committees), solid structures, and will save the novel approaches for longtime clients. Banks, for the most part, want to be able to rely on cash flow for repayment. They want to see a cushion built into the balance sheet in case of projection slippage. And they want a security interest in something they can go after if payments fail. Even novel approaches have to address cash flow and security interests, so as long as those are addressed, it’s fair game. Lastly, though, banks generally do not like “new.” They like proven, expansion-of-existing-business, boring, solid, understandable loan structures. Sad, but true.
How should one structure a bank deal?In some ways, that’s a trick question, as new borrowers likely won’t get to have much control of the structure. You can push, pitch and sell, but ultimately the bank will morph your cleverly proposed structure into a traditional lending model. Like most things, the longer you are in business, with a proven model, cash flows and borrowing history, the more you can tailor structures to suit your needs. But the key is to always have one or more banks either in a lending group or at least standing by as No. 2. You can play harder ball with banks if you have another bank waiting in the wings. After defaults, losing clients to competitor banks is pretty high on the list of bad things for a banker, so it’s good to have other banks around if for no other reason than to keep the primary bank honest.
Anything you’d like to add that I haven’t asked?Yes, what is the best business bank? The answer is Union Bank of California. See what I just did? I created value for my bank if that actually gets printed. Every little thing counts in building and growing a banking relationship!
- Anders gives six key points when pitching to investors. He says to keep it simple, “as if you’re explaining your idea to a group of 3rd-graders.” Next, be efficient and keep your executive summary to one page or less. He also recommends being transparent, humble and smart. And, in the end, be confident. “You’re offering an opportunity, not ‘just selling,’” he adds.
- Starting with friends and family is a great approach, but remember never to take funds from an investor who can’t afford to lose their investment. If they decline, ask why and learn from your mistakes and their misgivings. “Also, align your investors’ success with your success,” he says. “For example, Wood Ranch investors get their capital investment returned as distributions before my partner and I participate in any profit distributions. We cannot win without the investors first winning.”
- An entrepreneur should be passionate, of course, and “know their stuff inside and out,” but he cautions to be honest and not to hide or minimize risk factors. “Hit them head on,” Anders says. “This shows maturity and understanding of your market.”
- Once you’ve sold the investor on your next big thing, he says think about flexibility in your deal and also think win-win. “With Wood Ranch, we only took investors on a restaurant-by-restaurant basis, never in the ‘mothership.’ This way, we are completely free to finance our growth any way we want to in the future,” he says.
- The result of this open, honest, mutually beneficial mindset is a smoother long-term entrepreneurial path. “We’ve been successful and treated our investors as partners,” Anders says. “Because of this, we’ve been able to go back to the same group of investors, time and again.It makes our life financing our growth so much easier.”
- The age-old challenge is: Do you hire for skills first or fit first or both? Ideally, it’s both, but entrepreneurs tend to get stars in their eyes when they see an impressive résumé and think that hiring this person will make their business. Wrong! Most people you hire won’t have deep entrepreneurial experience and, as such, won’t be used to getting a lot done with very little clarity and support. The mistake is that these great résumé candidates get hired but don’t perform to the founder’s expectations. We hired an executive at my last company who had an impressive résumé of leadership, but I don’t think he had rolled up his sleeves in five years.
- The best hiring tip I can give is to ‘build your bench’ all the time. Keep a list of people you meet who you think would be awesome for a role at your company at the right time. Initiating the search process is both painful, expensive and time-consuming, so anything that can short circuit the screening process is helpful.
- As an entrepreneur, I am in the business of surrounding myself with people smarter than I am. As I heard from a friend once, ‘If you think you’re the smartest person in the room, then you’re in the wrong room.’ We have been rigorous with our hiring both on technical, marketing and sales. We have a part-time recruiter who does a lot of the initial outreach and screening. Candidates are put through a process that weeds them out efficiently and unemotionally. We live and die by our people, and the lessons I have learned are giving us a leg up.
10 Lessons I’ve Learned About Selling
- 1. Shut Up and Listen
That’s a tough one — especially if you have an MBA and think you know it all. But believe me, you don’t. As an entrepreneur, you often run the risk of being biased and blinded by what you believe people should think, like or feel. Don’t. Understanding your customers is the key to success, because it enables you to truly solve their problems rather than offer something that’s just nice-to-have.
- 2. Build Relationships
Most entrepreneurs ask for favors and then wonder why they get so little support. I learned that you should think about what people really need and then help them out before asking for stuff.
- 3. Plan Ahead
When I talk to young entrepreneurs, I find it interesting how they are often so focused on building a great product that they totally ignore the selling part. That’s actually a mistake we made when we started our company as well. We did some high-level planning and then thought that our product would just sell itself. That didn’t happen.
- 4. Just Do It
While you should plan ahead, always be pragmatic and don’t think too much in your execution. I, for instance, often tell my team that I don’t like the word “concept” when they talk about approaching customers or cooperation partners. I urge them to just pick up the phone and talk to their counterparts. However, it certainly does require some preparation to enable you to be quick on your feet and seize opportunities.
- 5. Bluff and Then Make It Happen
As a startup, you often need to seem bigger than you are. If you want to grow your venture, you need to think big and act like you are bigger than you are. I’m not saying you should lie to people, but it certainly makes sense to leave out the fact that you operate out of your grandma’s living room. Once you have the other person on board, however, you need to do all you can to make what you promised happen!
- 6. Build a Great Team
You can’t do this alone. However capable you are, you just can’t. So, get great people on board, train them, motivate them and grow with them.
- 7. Go the Extra Mile
Your customers always come first, so make them happy. Especially at an early stage of your business, you should strive to turn the people who buy your stuff into brand ambassadors. Nothing’s more valuable and cheaper than word-of-mouth. How do you achieve that? You could, for instance, write personal notes or letters. Surprise people!
- 8. Get Out of Your Comfort Zone
When I started at UCLA, I would hear this all the time: Get out of your comfort zone. As I realized what it meant and started to actually act on it, I saw great results within no time. It not only helped my personal development, it also enabled me to enhance professionally.
- 9. Embrace Problems
Any challenge is an opportunity to learn and improve. How you act in times of crisis is what truly matters. So whether it’s an unhappy customer or cooperation partner, do all you can to tackle the issue as fast and as comprehensively as possible.
- 10. Remain Confident
Lots of very intelligent aspiring entrepreneurs I talk to turn out to be paralyzed by fear of failure or rejection. Think of all the great people that failed hundreds of times before finally coming up with that incredible product or service that changed the world. When someone tells you to “F*** off,” ignore them. When someone gives you a reason why they don’t like what you do, take their criticism seriously. But never fear being turned down or failing, because that’s part of being an entrepreneur.
Professor Emeritus Eric Flamholtz is the author and co-author of several books, including “Growing Pains: Transitioning from an Entrepreneurship to a Professionally Managed Firm,” “The Inner Game of Management” and “Changing the Game: Managing Organizational Transformations of the First, Second, and Third Kinds.” He was one of the founders of the field of human resource accounting, and his book, “Human Resource Accounting,” is generally recognized as a landmark work in this area.
Flamholtz says there are seven stages in an organization’s life cycle. Stages one through four correlate to those early, sleepless days when a venture’s very existence might seem to be walking a razor’s edge. Stages five through seven describe what happens once that original, visionary leadership morphs into a professionally managed firm. “Each stage has certain key tasks to be accomplished, as well as an overarching task or strategic mission,” he says.
Flamholtz (and co-author Yvonne Randle) have identified what they say are the three key aspects of an entrepreneur’s transition to managing an organization: 1) They must have a “role concept” of what it means to be a manager; 2) they need to assess their own skill set; and 3) they must understand “the inner game of management,” as Flamholtz and Randle call it. “They are the three psychological dimensions a manager must have as he or she transitions into a new role,” he says. They must know their source of self-esteem (“esteem need”), need for control (“power needs”) and need to be liked (“affiliation needs”).
And, of course, the transition involves possibly the hardest thing for a visionary founder — letting go. Flamholtz says there is no simple formula for accomplishing that change. “It depends upon the individual and his or her need structure,” he says. “We usually deal with it via coaching of individual leaders and managers.” But while it might not be a simple shift, it is ubiquitous. “We deal with it all the time,” he says.
The best advice might be the old cliché “forewarned is forearmed.” An astute entrepreneur will face the reality a successful organization will bring — a good problem to have — and put transitional structures in place long before they’re needed, both organizationally and emotionally.
Entrepreneur T.K. Pillan (’96) is co-founder of The Veggie Grill, the chain that “redefines classic American sandwiches and burgers” as vegetarian items. Previously, he co-founded Guidance Solutions, a technology services firm that Deloitte & Touche ranked as one of the 15 fastest-growing technology companies in Los Angeles in 1999, 2000 and 2001.
- My approach has been to focus on finding a compelling solution to an unmet need that you are passionate about. If the solution is compelling enough and the need large enough, then an opportunity to exit should present itself if you are able to execute.
- From my experience, I think you also need to have passion for what you are doing, as building a company from scratch usually involves a lot of blood, sweat and tears, with no guarantee of success.
- There is nothing wrong with thinking about exit scenarios, as investors obviously want to know what the potential endgame could be, and identifying exit scenarios can help you make decisions on where and how you invest your resources as you grow.
James B. Freedman (’78) is chairman and managing director of Intrepid Investment Bankers LLC. He has more than 30 years of investment banking and corporate finance experience, and has acted as an advisor in numerous corporate finance and merger and acquisition transactions, including the City of Los Angeles’ acquisition of the Los Angeles Kings hockey team. He is on the board of advisors of the Price Center for Entrepreneurial Studies.
How do you create an exit strategy?
My best advice for entrepreneurs is to focus on building a great and unique company — or developing one that has a special or unique technology that will be extremely valuable to another company. A successful exit strategy will be the end result if you can create a great business.
I think sometimes would-be entrepreneurs spend too much time concentrating on exit strategies — oftentimes before they even start their companies. Understanding potential exit opportunities is important, but getting too focused on the final outcome is not where you should be spending your efforts.
Typical business advice seems to waiver between “go in with an exit strategy” and “do the thing you love.” Do you fall on one side or the other? Are they mutually exclusive?
Always start the business with an eye to what you want to create — a product or service — that fulfills a need. And then work really hard to develop that business or idea. Good things will result if you simply do that. If you don’t have the passion to do it, no amount of exit planning will make you rich or successful.
Once funds are raised, it seems that an exit strategy is necessary in a business plan. Is this true? If so, how do you frame it?
In developing a business plan, prospective investors will be interested in learning about your ideas of an eventual exit and monetization of their investment. So having some thoughts on the subject will be important as well as a general time frame for the exit.
Anything you’d like to add that I haven’t asked?
Almost every entrepreneur who has had a successful exit will tell you that passion, hard work, perseverance and creating a unique company, along with a certain amount of luck, is the real formula for ultimate business success and exit.
- Make sure there is real pain in the market and it’s not just something you think would be cool to do. That is a hobby, not the start of a successful business.
- Don’t be discouraged by the massive successes of the businesses you read about on the front page. Businesses like Facebook are one in a million and are as much luck as anything.
- Don’t worry about sharing your ideas. In fact, you need to share them in order to get employees, customers, investors, etc.” “An entrepreneur’s job is never done, but there are only so many hours in the day. Learn to focus on what is important and what can be neglected.
- Learn to fail and not take it personally. Failure is the ugly underbelly of innovation, and if you are afraid to fail you will never succeed as an entrepreneur.
- You can always make one more call, write one more email or have one more conversation to help your business. But, you also need to know when it is time to leave the office and go get some exercise, have some fun and not focus on work.
- I’m mentoring a number of first-time entrepreneurs right now and what’s the first thing I tell them to expect? Difficulty raising money? No. Questions about the business model? No. The first thing I tell them about the reality of being an entrepreneur is to prepare for a roller coaster ride emotionally. Entrepreneurship has a sine curve emotional trajectory.
- As for whether entrepreneurs can objectively assess their ideas, the answer is no — and that’s the point. If entrepreneurs were to listen to everyone tell them why they can’t or won’t succeed or shouldn’t try, then no transformative businesses would ever emerge. Sometimes, they just have to do it.
- There is no failure in entrepreneurship. There are lessons. If the entrepreneur is smart enough to learn from the experience and apply the learning to the next endeavor, then there is no failure. Failure is not trying. X