Entrepreneurial Failure Is the Secret Sauce

Anita Brick: Hi, this is Anita Brick. And welcome to CareerCast at Chicago Booth. To help you advance in your career. Today, we're delighted to be speaking with Hap Klopp, who is the founder of the iconic brand, which I see everywhere, by the way, The North Face. He's a Stanford grad and a serial entrepreneur. Klopp consults around the globe and lectures on the topic of entrepreneurship at places like Stanford, MIT, and Carnegie Mellon, among others.

He is the author of three books, one we're going to talk about today, almost, which I really enjoyed a lot. He's been profiled on National television and in publications like Businessweek, Forbes, and The Wall Street Journal and Inc. In addition to mentoring entrepreneurs, Klopp is presently the executive chairman of Obscura Digital, a San Francisco based digital communication company, and serves on many boards. I'm really thrilled to be able to have this conversation with you. What an amazing life. What amazing career you have and continue to have.

Hap Klopp: Well thank you.

Anita Brick: It almost is. And I know we're going to get to a lot of the concepts, but it's quite the thriller in a way.

Hap Klopp: That's what entrepreneurship in Silicon Valley is all about. It's about the ups and the downs, the excitement, the dreams, the greed, the hubris, the conflicts. All those things exist. And I wanted to write it because most books aren't written that way. They're sort of written post the event and generally all about the successes. And as the title implies, this was a company that didn't make it and should have. I tried to take people through that. It's a true 12 months, and the ups and downs followed the flow of that 12 months.

Anita Brick: It was unbelievable. I felt like there were two companies going on. The engineers were on one side and you and the marketing people were on the other, and it was a fight to the finish. But in the end, no one really won. I'm very curious, how is failure different in Silicon Valley than in the rest of the world?

Hap Klopp: The key thing is it's accepted there, it's expected there, and it's embraced. And as a result, people take very large gambles, very large chances, because they know that they can actually respond after that. If there's a failure, there's still going to be finance. They're still going to be back. I mean, all you have to do is think about people like Steve Jobs or Max Levchin or Marc Andreessen, Jack Dorsey.

All those people failed in the first go round for a variety of different reasons. And yet they were highly successful later on and people liked it. If you look at the financing in Silicon Valley, oftentimes it's venture capital. That's a very short term finance thing. Sometimes private equity is a longer term. Usually what they're looking for is within a 5 to 7 year period of time to get out of that investment.

And they expect two of those investments say there's ten. They expect two of them to be highly successful Facebook or Google or one of those great ones. And they expect two of them to go just outright bankrupt. And then the remaining six, they have to get rid of because they don't want to give their limited partner shares, they just want to give them cash.

So those are sold off, folded into something else. Basically, the entrepreneur's dream dies. So in eight out of those ten events, what you find is failure. Failure to some degree or other, this could be heart rending and other parts of the world. Certainly I've worked in New Zealand, I've worked in Ireland, I've worked in the UK. And those environments.

It's very difficult to fail because you can't get financed again, and it's a blemish on your record in Silicon Valley, where they're looking for this very high scalability of business. They need a lot of experienced people who make quick decisions. And the best way to make a quick decision is to have the experience and the experience. It's probably the best that you can have is actually one where you made a mistake because you don't make that one again, or the bright people don't.

So in Silicon Valley, that's accepted. It's sort of a way of doing business. People then feel like they can strive for the biggest goals ever. They know that the bigger the goal, the higher probability of failure. But it's okay because you can bounce back and do it again.

Anita Brick: I got that. It is very, very interesting. And you're going to see in some of the questions today clearly where failure is not okay, bubble up from there. So the first one is with an executive MBA student who said learning from failure sounds quite nice in theory, but in some environments a perceived failure is a ticket out the door. How would you advise someone to gain the benefits of failure without risking everything?

Hap Klopp: I would say the first place is to try to make sure you're in the right environment. You don't want to be in New Zealand, and you don't want to be in Egypt. And try something that's going to fail because that's unacceptable. But if you can set up the environment, Silicon Valley is great. You could find that in Boston, you could find it in Seattle, you can find it in a couple of entrepreneurial countries.

Set yourself up in the right place where people understand that there's a probability of failure. The second way to do that is using OPM. That's other people's mistakes and other people's money. If you can read a lot about what other people do, you don't have to replicate their mistakes. You make ones of your own for sure, but you don't have to make theirs.

And if you can use other people's money as opposed to just your own, you're going to be around for another battle. And then I guess the other one, which doesn't appeal a lot to me. But in response to the question, you can establish lesser goals if you lower your expectations of what you're going after. If you want to incrementally grow a business as opposed to something which is world stopping, becoming one of the unicorns that exist out there, your probability of success is going to increase, or conversely, the probability of failure decreases. And so you don't have to risk everything. If that's the case, you know, I happen to be one of those people who believes in shooting for the moon and seeing what happens as a result of it. So having lesser goals doesn't personally appeal to me, but it is a technique for making sure you don't have, as the question said, a ticket out the door.

Anita Brick: Really good point. I think, though, that over the years you must have created more resilience and evening students, and I understand that to really be able to make the most of any experience, failure included, it's crucial to be resilient. How have you become more and more resilient in your career and life?

Hap Klopp: Well, I'm assuming I have. I don't know if I have or if I've always been this way. Surround yourself with other partners. They face the same problems. They face the same challenges. And when you realize you're not alone in that bucket, you're better off. There's organizations like Entrepreneurs Organization EO. There's also ypo. If you're in groups like that, you can talk about where you are and what you're doing, and you can feel better as a result of it.

And if you really want to do it, there is a conference in San Francisco called fail.com that's been put on every fall. I presume it'll be next fall again, but it's about failure in business and people talking about aspects of it. So again, you don't feel like you're the lone Ranger. And I guess the other thing to realize is that usually failure is sort of a summation of a lot of things going well, a few things going bad, and the bad ones swamped the other.

You can set up a series of milestones so you feel good about the things you did accomplish, and to look backward periodically at how much you've accomplished it doesn't hurt quite so much if you just look forward and you have the same number of problems and and some of them seem intractable, then it's pretty hard. But if you monitor your progress looking back, celebrate the things that you've done.

Look at some of the things, some of the many milestones that you have along the way. You feel better about yourself and frankly, feel like you can take on the world because you've only had a few things go wrong. There was a great quote from Thomas Edison which he said, you know, I've never failed. I've just found 10,000 ways something doesn't work. If you can adopt that, it's pretty good.

Anita Brick: I agree with you. I think it's important to have people around you who are supportive. But what if your family isn't? And there was an alum who said, my family has a very low tolerance for failure. I, on the other hand, am entrepreneurial and know that not everything I do will succeed. Would you have any advice on how to bring my family on board? I think that's a tricky one because I grew up in an entrepreneurial family, and my father had to do that repeatedly with my mother.

Hap Klopp: People are people and there's going to be differences of view. I would say the first thing you have to do is talk about failure and talk about what people are really concerned about. I mean, is that a concern, the economic aspect of the failure, or is there concern what it will do to a reputation is the concern that you won't be able to do something again?

I mean, all of those can be different. You need to get to the details of what they're concerned about before you can get them to resolve it. If it's about economics, then you try to show them how you've developed something that insulates you against total catastrophe. If it has to do with reputation, maybe you can show them by reading books or like my book, or by showing read about Steve Jobs and Andreasen and all those people and pointing out that it's tolerable. You can get through it. Your reputation isn't going to be totally besmirched as a result of it. I think those two things. But talking with your family is the best way to do it, because if you don't talk about it, you're going to have different perspectives and they will never be reconciled.

Anita Brick: Just like in the book where certain people in the company in arctica just didn't talk, and that lack of transparency made everyone uncomfortable, I would think the same thing would apply with our families.

Hap Klopp: Absolutely. They are part of the whole team, I will say. And if you ask my wife, she will confirm this, that every time I took some major leap in business. But it seemed to be the time when we were having the most turmoil in our life. I started a business, The North Face, when we were having a baby.

You know, I had to take no pay for about a year, and all of my peers from Stanford Business School were taking great jobs with large companies and a lot of security. You got to kind of talk about it and say, is this really what we want to do? And if so, why now? We didn't have the aspirations that many of the people have for a $1 billion company.

You know, we were talking about building something which was great, something which overthrew a lot of the tenants that we didn't like in the business world at that time. And she concurred with those who didn't believe in planned obsolescence, didn't believe in destroying the environment, believed in the integrity of a job, the importance of a job paying women the same as men.

We believed, and had jobs for people, whether they're gay or transgender or whatever. And we didn't see a lot of that in the world. So I was railing against that. But my wife agreed with those things. I don't think she was as on board with the economic risk as we took. But on the net, when we looked at all of the things that we were trying to change, it was enough to sway her into putting up with my flights of fancy.

Anita Brick: Got it. So just like in anything, finding that common thread and mitigating the risk or the perceived risk as much as possible?

Hap Klopp: Absolutely yes. It's. I should be interviewing you.

Anita Brick: It's sort of funny. You're really fun to talk to. We could think, shifting gears just a little bit from what I read in almost arctica had two main areas of productivity: knowing what you know now, do you believe that it's better to have one area of focus or more than one area of parallel development?

Hap Klopp: That's a very good question. I don't think you should have a small company, two different directions. You're going. That doesn't mean that you shouldn't have a pipeline product pipeline, and you can have many different products going which approach something differently. And that's what we had. But instead of it being part of an orderly pipeline based on having priorities and based on a plan, what we ended up doing is having people who believed in arctica in the fuel cells, arguing that that had to be number one.

And the people who were developing a product based on lithium ion batteries, saying that had to be the product, and both of them were going headlong at one another. If you have different products or different focuses, have a plan incorporated, stack rank, the importance of and the time, prioritize and then focus on the first one. Keep the main thing the main thing.

Anita Brick: Especially at a very early stage. If your focus and direction and resources are pulled in multiple ways, everything could collapse on itself.

Hap Klopp: Absolutely. And, you know, that's one of the lessons learned that is in the book. Almost one of the key things was the inability to have a plan and the inability to reconcile our differences. Tour of the company apart, there were different factions, different people focusing on different things, and it ended up almost as if we were in war between those two sides.

And that, coupled with all the other problems that were traditional in a small company, running out of money, not having enough money there to be able to do something, the idea of not listening to the marketplace and not jumping on the products that were actually selling and believing somehow in the myth of the overnight success, which is what really took us asunder.

All those things took us apart. But the fact that we couldn't have a concerted approach, rather that we had one that was at its best argumentative and at its worst totally destructive, is what caused the company to fail, despite the fact that it had the best students in the U.S., people from Stanford and Carnegie Mellon, and people from the Naval Academy, and two people who had been an astronaut training and go on and on and on.

There were millions of dollars poured into the company, and it was all overspent. But all of that was really run in part because of this conflict, which wasn't reconciled, and the CEO refusing to have a meeting with anybody to talk about it, just let it play out with the basic belief in there, which you see, if you read the book, is that the idea that big silicon, this company was going to come in and pay tens of millions or hundreds of millions of dollars for patents that had not been developed yet.

So there was no reason to focus on a business plan. It was just trying to develop something where you could sell your patents quickly, and you'd be another one of those instant successes they write about in Silicon Valley, which in fact always seemed to turn out to be many years of hard work before that overnight success.

Anita Brick: Well, true, and I certainly disagree with me. If you do it, I think it's really dangerous to think that someone's going to save you.

Hap Klopp: Absolutely. And it's sort of a defeatist attitude to think that you want to put all of your fate, all of your future in the hands of somebody else because those people can be fickle. There are as many approaches they have to business, they have to protect their shareholders, or they have to protect their investors. And so you aren't necessary, only their first priority if you rely on them. You're saying that we trust them to have our best interests at heart, and they don't often do that for very good reasons. Very valid reasons.

Anita Brick: Yeah. It's true. There was an evening student who well, I'll read you. The question says, how do you deal with what other people say when you fail? How do you not be considered a loser?

Hap Klopp: First of all, you have to have ego and your ego drives you. And so when somebody says something about you, it's kind of like being in school. You know, if they say something bad about you, don't respond to it. Don't define yourself by other people's views of you. It just makes you insecure. I mean, what you have to have is your own goal.

You have to have your measurement against it and you have to decide what is good. The other day I was speaking to a group of students six through 12th grade at a school called Menlo School in their Stanford, and I had a great question from one of the kids there. After listening to all the great things I was talking about and how you succeed in all these wonderful things, he came up to me.

He was quite outspoken, actually, for a sixth grader in this group of probably 800 students. But he came up to me and he said, how do you define success? What I told him, and that sort of answers this question to being successful is not listening to other people. Being successful is defining for yourself what you want to be, and then measuring yourself against that and making sure you accomplish those goals that success failure is closer to success than mediocrity is, in my view, because you're really trying.

You're really doing something. You have to be honest with yourself. Are you hitting the goals that you want? If not, you probably start feeling like a loser. But don't let other people define what those goals are for you, and don't let them divert you from your goals, because then you're like that actor on the stage. If the crowd isn't a good one and they aren't clapping a lot, you think you failed irrespective of how good your performance is.

Anita Brick: Very, very good point. I think that's a really difficult thing to do. Absolutely something to aspire to. Like you said, if you're driving in the first place and you're able to have those goals, there's some level of ego. And when people say bad things, it pokes holes in that. How did you or how do you not listen to all the noise going around you?

I mean, I can only imagine how horrible it was being in that culture at arctica. I don't remember which page it was that I remember in the book someone said to me, you have a lot of people who don't even like you here. How do you deal with something like that? I mean, the environment seemed a little hostile to me. Maybe I'm overstating it.

Hap Klopp: Someone was in year one.

Anita Brick: And you were trying really hard. You kept wanting to leave because you knew it wasn't the right place anymore, and they wouldn't let you leave. How do you deal with that?

Hap Klopp: First one is you have to be fairly solid in your own belief of what you're trying to accomplish. And in this case, at a certain point, it pivoted from wanting to build a great company to actually, in my view, trying to protect the people that I'd gotten involved in the company as a people, as investors and some of the people who were employees.

And I was trying to do my darndest to be able to weave a path for them out of this morass so that they would be taken care of, and the fact that others didn't like what I was doing, my purpose, my cause, was righteous enough. I could feel pretty good about that, and I knew what I was trying to do.

They've been deceived by the CEO of the company, and I needed to protect them because they were in there and they joined in large part because of my involvement. By having a cause, we sort of transcended the overall situation there. I didn't have to cave in to it. That being said, you know, I've put myself in high stress situations in my entire business career.

So I played a lot of sports. So in sport, you're used to the newspapers criticizing what you do as well as chairing them. So if you're doing great and the team's doing great, then you get a lot of praise. And if you're doing poorly, everybody blames you. So that kind of goes with that territory. And then when my father died and I was in undergraduate school at Stanford, I ended up having to run the company from a distance.

I'd go back and forth between Stanford and Spokane, Washington, where the company was located, and we were having tough times because we were competing against huge giant companies like Weyerhaeuser and Anderson when the wall and things, and we had to compete against them with lesser resources. And here I was, a kid in school. I kind of had that NC two way look, no clue at all.

But I was trying to run something. And you can imagine there are a lot of people criticizing the decisions we're making. And ultimately the decision I made was to sell our company because we just didn't have the resources in terms of dollars and timber and locations that the competition had. And so I decided to sell it, and that wasn't universally approved, but it was a decision I had to make.

I've lived through that at a young age, and I was able to take the arrows as well as the backslapping for the good things that happen over the course of things. And at North Face we had ups and downs. We had a rough cave in when we just finished financing and had to offer all the money back to the individuals, and we didn't know how we were going to survive because the computers were all fried.

We couldn't get any of the inventory out of the building because the fire department wouldn't let us do it, and we just said we were going to persist and we were going to survive, and we were smart, and we were able to do that. And we built a great company. We believed in ourselves. And I told everybody that we were going to make it, and we did. Having a lot of belief in yourself, which is probably developed over a long period of time, and also in some cases being one that understands that you don't have to know all the time how you're going to get there if you know that you will get there.

Anita Brick: Well, it is amazing. But your story parallels people who end up being great leaders. They have adversity, and it's through that adversity. They come into their own and they're able to go beyond what ever seemed possible. It's so inspiring, really, really inspiring.

Hap Klopp: It is what it is. You do learn from trying these things, and one of the things you can do is you can start out taking small risks when you're younger and experiencing some of these things where maybe not as much is on the line. And then as you grow, take on larger risks and you're confident because of what you've accomplished and what you're able to put up with, it transfers to a larger stage.

It's a way to do that without saying, I'm going to suddenly go from being a kid in school to now I'm going to take on the dismantling of nuclear weapons around the world. That might be too big a leap to be able to get it done, but if you did it in stages, maybe you could get to that point.

Anita Brick: So there were two questions there. Different enough I'm going to ask both of them. But there are two questions about when a failure is too much. So the first one was from an executive MBA student. And he said, is there a quote unquote critical measure of failure beyond which it's career ending?

Hap Klopp: Well, in a humorous way, what I'd say is, if you repeat the same mistakes, you've gone past that critical measure, the great people in Silicon Valley who maybe were kicked out of their companies didn't make those mistakes. Again, Steve Jobs wasn't able to work with people when he started Apple. Later on, despite a very irascible personality, he figured out how to surround himself with people who accepted his style of leadership and also how to work teams there and delegate certain things so others could handle them in his place.

And he ended up with people like Tim Cook, who are managing a lot of things where he didn't have to interface all the time. A second critical measure, and it goes back to what I was talking about in my experience, that I write about almost, it's how you treat your stakeholders during these difficult times of failure. Are you honest with them?

Did you fight for them, not just for yourself? If you suddenly turned tail and ran from the problems and left everybody holding the bag, then that's probably career ending. But if people see that you're fighting for them, that you're self-sacrificing and what you're doing and that you're not just looking for your own goals, then usually you'll get a lot of support. The reverse is true if they see that you're only taking care of yourself by taking measures that they don't like, you're going to have problems.

Anita Brick: Got it. People will do all kinds of things for us if they know that we are on their side. Not to state the totally true. So the other variation of this was from an alum. He said hi hat. Love the North Face brand and products. I have a struggling startup that seems like it should work. Sounds familiar, but doesn't seem to be getting off the ground. As a serial entrepreneur, how do you determine definitive failure? That's a deep question.

Hap Klopp: It is a deep question. I would say, first of all, how long have they been at it? Every startup has a struggle, no matter how it's written later on. And that's part of what almost everyone is talking about. I want people to know that even in Silicon Valley, with all of these great successes, there are a lot of struggles and there's a lot of angst and anxiety as you go through that.

And usually it costs twice as much and it takes three times as long as you plan. If you haven't been there yet, and maybe you're just going through the usual teething problems associated with it, I would ask the person if I were seeing them face to face. Is it still fun? I'm not talking about every day, but generally, I mean, is it the passionate thing that you wake up at three in the morning?

It just can't go back to sleep because you're trying to solve those things? If so, it's probably not. Failure here is probably just some of those hurdles that you have. One of the things we used to say at North Face about this is, you know, it's not the mountain that wears you down. It's a grain of sand in your shoe.

It's really true. You may think you're not making any progress because daily things are swamping you. But if you look at him and say, listen, these are big, these are small, the big ones still we're pursuing and we look like we're getting there. The small ones, we're just going to overcome that. Then you haven't gotten to definitive failure.

And when I say fun, maybe a word that you could use. Ensign weighed in. There might be the word passionate. Are you still passionate about it? Is it your dream? Is that what you're trying to do? Or alternately, are you thinking that there's a better use of your time? If you think there's a better use of your time, you're already one foot out the door.

That's the time you should just wrap it up. You aren't going to be able to put 100% into this venture any longer, because make no doubt about it, when you're talking about an entrepreneurial venture, it takes 120% of your time. It is 120% of your energy, 120% of your focus. And if you no longer can do that because you're not passionate or you don't think it's fun or because you're looking at some greener grass elsewhere, then you probably should figure out a graceful exit from where you are.

Anita Brick: Very good point. I think part of the challenge is if there is no external feedback and the measure is, maybe it goes back to measuring the right things. How do you develop either a true board or an advisory board that can help give you perspective, and maybe even some encouragement to know to keep going when you just can't see the progress?

Hap Klopp: Well, my experience has been that all boards of directors, if you will, have some conflict associated with them because they usually are representing a different set of constituents, could be an investors constituent, it could be it could be a variety of things. But as a result of that, you can't always trust that their judgment is just for the company.

It may be for their other objectives. For example, if you're a venture capitalist and you have to get out of that investment and you're five and your investment portfolio and you only have another year, you're probably going to talk about selling the company, whether or not that's in the best interest of the employees or the other shareholders, that might be early shareholders, common stock or whatever.

Using your board as a whole generally doesn't work to be able to give you honest feedback, because they may have other objectives. What I found is there's usually a subset of a board that you can have, or you can go out and get advisors who are there primarily to do the right thing. And in doing that, they support you.

You're their CEO until you're not their CEO, you're the one that they're going to deal with. And they can tell you things that you might not hear at the end of North Face. One of the reasons that I finally sold it was I ended up doing constant refinancing of the company, which wasn't what I really loved. What I loved was a product we had.

I loved building the brand. I loved the team we were putting together. But every six months I was spending another six months trying to do financing. When you do that, you bring in a lot of people with different goals. You bring out a lot of people that are cats that you have to hear. It became a full time job just managing the board, managing the investors, chasing down new investment.

We did a round of financing in that company, and one of the members of the board who was part of sort of my inner circle that I listened to, came up to me and he said, he said, you know, you always told me that it wasn't fun anymore. You were going to leave. This does not look like it's fun for you what you're doing.

I mean, you've been able to round up a whole bunch more cash, and you got out some investors who wanted to get out, and you're bringing new ones in. But you always told me that you like skiing. You always like hiking, you always like driving your team, and that isn't what you're doing. And, you know, I must say that as he said that to me, I didn't necessarily embrace it.

You know, what I did is go back and sit around having a few beers and had to think about it myself on my own terms. But it was good input. And I said, yeah, you know, it's time to go skiing. And that's what I did, and that's what I enjoyed. So, you know, I think you can get a subset of those people in there.

If it's people that only have a financial interest in what you're building, they may not necessarily be the holistic person that you need to help you look at something, and then you've got to be honest with them, which means that you've got to tell them the good and the bad. You can't just tell them the good news so that they all love you. You've got to tell these friends who are your supporters the true picture so that they can assess it and give you feedback, which is worthwhile.

Anita Brick: Got it. Do you have time for one more question?

Hap Klopp: Absolutely.

Anita Brick: Okay, good. And he's given us a lot of really great advice. And we like to kind of summarize a little bit what are the top three things someone who's contemplating setting a goal where failure is a real possibility. What can that person begin doing today?

Hap Klopp: I think the first thing is set up clear milestones, not just one success point or not set up milestones and milestones that have sort of a go no go points where you review them and say, if we don't get here, you know, we obviously are out of it. If we get there, we've got to decide, are we going forward?

Are we going to sell the company or are we going to get out? What are we going to do? If you just have this big goal that we want to be successful, it'll be almost like that cinnamon rolling in front of you. You just never catch it. There is another thing you could do, and most people would argue against this, but I believe it was way back in the days of Napoleon or William the Conqueror.

It was when he went to capture England, and he sailed all of his people across the water to England and got to Dover. And when they got there, he burned all the ships, basically said, you have no way of going back now, you're going to go forward. And he eliminated all the safety nets. And I think you can do that because if you're constantly wondering, am I going to fail?

Am I not going to fail? It's amazingly refreshing if you know that you have no choice but to succeed. Another three of the three things that you mentioned, probably the third thing to do is talk to those people who will be impacted by the decisions that you have, and by the potential failures that might be there, whether that's your family who's going to be impacted, whether or not that's your key employees who may be worried about their career path or where they go next, talk with them. Be honest with them about where we are, what the risks are so that they know when you're looking at them and two, so they can self evaluate as opposed to just writing what they think you're thinking.

Anita Brick: Well, that's great. I think it is scary to contemplate that there might be a failure, but there's always a setback. From the time we start walking, we fall down the first time.

Hap Klopp: And but you keep bouncing back and finally you learn how to walk.

Anita Brick: Very, very true. Thank you so much. I mean, thank you for making the time. I know that you're super busy. I know you're very modest and very humble, but what you have done throughout your career is not only an inspiration, but it's sort of a roadmap for others. So thank you for doing that and sharing the other side of that and almost really appreciate it. And thank you for sharing all your wisdom with us today.

Hap Klopp: Well, thank you for your kind words and I hope it was meaningful.

Anita Brick: Oh, absolutely. Thanks again. Thanks for doing this. Really, really appreciate it.

Hap Klopp: Thank you Anita, this is my pleasure.

Anita Brick: And thank you all for listening. This is Anita Brick with CareerCast at Chicago Booth. Keep advancing.