There are three things to know about failure: 1. It happens. 2. It can be destructive in ways you've never imagined. 3. Believe it or not, there's a right way to do it

"Do you believe in miracles?"

Jeff Schwartz is proudly demonstrating his company's most popular product: a framed photograph of the U.S. hockey team defeating the Soviets in the 1980 Olympics. Push the button at the bottom of the frame and Al Michael's memorable words come crackling out of a tiny speaker. For a few fleeting seconds, the Miracle on Ice comes to life.

It's not quite enough to give you the chills, but almost. The company's modest offices, near the breakers in the leafy beach town of San Clemente, Calif., are festooned with these talking frames--tributes, mostly, to sportsmen persevering and triumphing in the face of impossible odds. There's an echoing Lou Gehrig ("I consider myself the luckiest the face of the"), Bobby Thomson, and Jackie Robinson. Schwartz circles around his desk to demonstrate another of his favorites. But this time, when he presses the button, no sound comes out. "The batteries must have died on these things," he says brusquely, "they've been sitting here so long."

It's a jarring reminder of why we're here--not to play with the merchandise (which is undeniably appealing) but because Jeff Schwartz's business, Remarkable Moments, has failed. Schwartz, 43, is standing amidst the accumulated detritus of five years of unsuccessful endeavor: empty frames, piles of inventory, and snarls of partially disassembled sound-editing equipment. Out back, his wife, Sandy, is about to start loading things into a Ryder truck to be hauled off. It is, in a macabre kind of way, a remarkable moment.

But what's really bugging Schwartz isn't that he's pulling the plug on his dream. It's that he didn't pull the plug long ago--before he had gone almost three years without a salary. Before he had burned through another $100,000 of his own money (the dividend of a previous successful company he had sold). Before Sandy quit the PTA and other community activities because of the business's demands. Before he had run out of money even to pay his two children for their efforts. Before he had raided their college funds. "And the biggest thing I've lost isn't the money. It's five years or so," broods Schwartz, his eyes downcast. "I could have played golf and watched TV for the last five years, and I'd have more money than I do now."

He means that literally. He's done the math.

This perplexing reality has thrown Schwartz into a philosophical crisis of sorts. Like everyone else, he'd been schooled in the Vince Lombardi-style slogans that cloak entrepreneurial lore. That winners never quit. That quitters never win. That, in the oft-quoted line from the movie Apollo 13, "failure is not an option." Yet now experience seems to have taught him a different lesson. "The blinders-on, full-speed-ahead mentality sounds great, and it really does motivate people," says Schwartz. "But the sad truth is that 'never give up' isn't always the right thing. For people like me, it means we burn through our savings....My failure wasn't in taking the risk to start the company; it was when I let it bleed my family dry." Pausing, he asks: "When does your ally--tenacity--become your worst enemy?"

Call it a genetic compulsion, a defensive reaction, or simple entrepreneurial optimism, but the reality is that most business owners refuse to contemplate the possibility of failure. The word is all but missing from their vocabulary. Even in the vast canon of management literature, the topic is glaringly absent. "There're no books on it--nothing on how to shut down a business, on how to deal with failure personally," notes James Kilmer, who went to the bookstore in search of guidance when he knew his food-processing company was going bad. "The best I could do was Chicken Soup for the Soul."

But do not be deluded: failure is an option, and in some instances it's the wisest option there is.

Not that the spirit of reckless persistence doesn't play a powerfully positive role in our economy. It does. It's what enables ordinary people with a dollar and a dream to overcome stupid-seeming odds--in ways that are routinely celebrated, even glamorized, by the likes of Inc. Yet too little acknowledged is the flip side to this coin: that the never-say-die spirit is also what wrecks lives, splinters families, and spoils people's chances for future entrepreneurial success. It makes failure--already painful--potentially ruinous, both financially and psychologically.

And that's a shame, because failure is a vital, inseparable part of the entrepreneurial arc. Such luminaries as R.H. Macy, H.J. Heinz, and George Westinghouse all once stumbled. With U.S. business failures on the rise (last year an estimated 83,384 companies closed their doors owing creditors money), the ability to endure and overcome failure has arguably never been more important. For this article, Inc. interviewed scores of failed entrepreneurs--some who've bounced back, some who haven't--soliciting their collective wisdom regarding the f-word and its consequences. Their message: Company builders, like good cyclists, need to know how to crash well. They need to know how to fail.

Into the desert floor

One thing must be recognized at the outset: merely by getting a company up and running, an entrepreneur has already overcome a daunting array of obstacles--some of them incredible long shots. From those improbable successes, lessons are drawn. As a failed entrepreneur in Hawaii remarks: "We kept the company alive through an incredible series of minor miracles. One begins to believe that one can keep pulling them off, because that's what experience seems to be teaching."

It's therefore little wonder that when the prospect of failure looms near, there can be a tendency to throw too much into the breach--to persevere to the point of catastrophe. "There are people," notes another failed founder, "who fly the sucker right into the desert floor."

Steven Berglas, a clinical psychologist and an Inc. columnist, has seen plenty of those. He's treated more than a dozen entrepreneurs from the Young Presidents' Organization who, he says, "were utterly devastated" by a failure. "They were monomaniacal," says Berglas. "Typically, there was a horrific bout of depression, followed by either denial or acting-out behavior, like spending sprees or having an affair. They say, 'Hey, it's time to go to Monte Carlo!' One guy became a race-car driver. Another divorced his wife, grew a beard and ponytail, and left Boston for Seattle. It's a way to counter the depression, but it's also a dangerous form of denial." David Ferrari, a consultant who advises failing companies, estimates that 10% to 15% of the CEOs he counsels become heavy drinkers.

Even those who don't unravel can feel severely undone. Take Mike Campbell. In 1987 his Chicago-based software company, General Optimization, looked like a sure winner. Then 26, Campbell and a University of Chicago computer-science professor had developed software that allowed businesses to optimize numerous variables (say, helping a coal-blending company find the most efficient mix of ingredients). The program, called What'sBest!, was elegant, eminently useful, and a commercial flop. Most companies, Campbell soon discovered, had no idea they had optimization problems--and could have cared less about the lovely mathematics behind the product. Sales touched a million dollars, then sputtered.

The failure, as Hemingway once described the process, happened gradually, then all at once. The gradual part began two days before Campbell's wedding, when an IRS agent called him about shortfalls in his company's accounts. Campbell replied that he'd have to sort out the mess after he returned from his honeymoon. Feigning friendly interest, the agent asked him where the newlyweds were headed. Greece, Campbell responded cheerfully. The next day, Campbell discovered that the IRS had frozen his bank accounts. White-knuckled at his rehearsal dinner that night, Campbell pulled aside a friend and told him of his terrifying situation. The friend pulled out his checkbook and asked Campbell how much he needed. "I wept openly," says Campbell.

The check saved the honeymoon but not the company. After Campbell returned from the placid waters of the Aegean, the all-at-once part happened. "I was devastated," he says. "I was almost comatose for about a week." And the failure came close to wrecking his new marriage. "When you fail, it's like losing a child," says Campbell. "My wife was terrified. Absolutely terrified. You have a huge credit-card-debt load--$50,000 at 18% interest, racking up hundreds of dollars a month in finance charges. You have no job prospects. You're making noises like you're unhirable. You've got rent to pay. And she was thinking up to that point, 'It's about time to start a family."

So how bad did things get? "Let me put it to you this way," says Campbell. "I had to build my next computer out of parts that I was scrounging. I was a software person and I had no computer! I couldn't check my E-mail. I couldn't write a new business plan. What, write it out longhand? I did, in fact, but it took me a while to come to that." Couldn't he comprehend that his company had failed, not him? "The business was me," responds Campbell. "It's a little sick and twisted, I know, but that's the way it is. It's almost like having a part of you ripped out."

Had he seen the failure coming? "Running the business," Campbell says, "you're almost delusional. You have these blinders on--you have your head down and you're charging. When you hit the wall, it comes to you as a blow in the face." He adds: "You're so focused on the prize, you don't realize how big the crater can be. Do you want to lose your house, lose your wife? Do you want your kids to hate you?"

Likewise, few company owners reckon with the possibility of failure until it's irrevocably upon them. OK, so they might acknowledge its existence on some abstract level. But most are no more in touch with the reality of failure than, say, the average 16-year-old is in touch with the reality of death. Typical is the comment of Joe Burnieika, on whether he knew he could lose his house when he started his Boston public-relations firm: "Did I understand that intellectually? Yes. Did I ever think it would come to that? Never. Absolutely never."

Failing well, part one

Frequently, of course, it does come to that. Failure happens. So how does one fail intelligently? We took that question out into the field. Here's what we came back with.

  • Don't leave your family in the dark. Colleen Campbell describes her marriage to her entrepreneur husband, Mike, this way: "We're in a two-man race car going very quickly--and I'm blindfolded." That was fine, she adds, "until the rear axle came off."

As harrowing as failure can be for business owners, it tends to be still more so for their spouses. "The most traumatic impact is on your wife, because everything is out of her control," says James Kilmer, whose Remlik Foods closed in 1996. "She doesn't know what's happening."

Hence, say experts, communication is of the essence. "The first thing you should do is bring the family into the sphere," says David Ferrari, whose Argus Management Corp., based in South Natick, Mass., counsels companies that are on the cusp of going under. All too often, he says, CEOs feel they must protect their families from the scary truth--or deny it outright. "I had one client whose company was in desperate shape," says Ferrari. "He said one day, 'I've got to leave early today because my wife and I have to go to the country club. It's a formal.' I thought, 'What an idiot this guy is. His wife doesn't even know his company is about to go out of business." Worse still was the time a bank sent an appraiser to a client's house to begin foreclosure proceedings, and the unknowing wife answered the door. Her reaction, says Ferrari, could have been predicted: "She went berserk."

  • Seek outside support. When Mike Campbell's software business hit the skids, "friends didn't really understand," he says. "The general reaction was, 'Isn't that pitiful? I could have told him. He should have had a job like the rest of us."

But there is support out there. You just have to find it. Realizing that his food-processing company was swiftly approaching its demise, James Kilmer set up a lunch with several local entrepreneurs who had failed, "so I knew what to expect," he says. "One had had some problems dealing with banks and secured lenders. Another guy had bounced back. It gave me hope." Local Small Business Development Centers (SBDCs) can also provide a helpful word and a sympathetic ear.

  • Think in terms of opportunity cost. Amar BhidÉ, a Harvard Business School professor who studies entrepreneurship, has this advice: Fail hard, and fail fast. "The living-death kinds of businesses that drag on for 5 or 10 years are worse than failing outright," says BhidÉ. "People waste not so much money as time. The longer they hang in there, the more costly it becomes in terms of personal and opportunity cost."

The thing is, most entrepreneurs find it hard to conceive that other opportunities exist. "You're so focused on what's happening, you think there's nothing else out there," attests Mike Campbell. "You think you're facing death." After his business failed, though, his perspective shifted dramatically. His most valuable asset, he realized, wasn't the particular product he'd been trying to sell. It was his own capacity to start and run a business--an asset that was readily transferable to his next start-up. Says Campbell, "You have to look at you as the venture."

  • Establish a turnaround time, and stick to it. The 1996 Mt. Everest tragedy occurred, in part, because the climbers failed to heed the 2 p.m. turnaround they'd set for themselves--the point at which, no matter where they were, they were supposed to head down the mountain. Jeff Schwartz says he made the same mistake: "I'd say, 'I'm going to give it another year, and if I'm not profitable by then, I'm going to walk away from it.' But at the end of the year, even though I wouldn't be profitable, something new would pop up." Like the vague but tantalizing prospect of a huge new order.

Ironically, Schwartz notes, part of the problem was that his product--the talking picture frames--elicited such passionate responses. There was the letter from Babe Ruth's granddaughter ("You make a wonderful product and it is a fine tribute to my grandfather, Babe Ruth! Everyone who sees mine is fascinated!") and the endorsements from Wayne Gretzky and Bruce Jenner. "It's real hard to pull the gun out and shoot the business when you keep running into these things," says Schwartz. He wishes he'd paid more attention to the feedback that really counted: his numbers.

  • Preserve the corporate veil. "There's a very fine line," notes Jeff Schwartz, "between having lots of guts and being really stupid." Here's one way to tell you're on the wrong side of that line: when you start borrowing funds from your payroll-tax and sales-tax accounts. Unlike most kinds of debts, shortfalls in tax payments can't be wiped away through declaring bankruptcy, meaning the IRS can come after the owner's personal assets--often with pit-bull ferocity--for employee FICA and withholding when the business fails. Yet a surprising number of companies resort to this most dangerous form of financing. "If you're going to rob Peter to pay Paul," warns Robert Lussier, a professor at Springfield College, in Springfield, Mass., who specializes in business failure, "never play it with the government." His advice: help remove the temptation by using an automatic payroll service like Paychex or ADP.

Another common temptation for owners of troubled businesses--and another opportunity for gratuitous personal exposure--is to make stopgap personal "loans" to the company. Trouble is, when an insider makes an unsecured loan to the business, that money is doubly at risk: should the company go bankrupt, the insider could be forced to surrender any money the company has repaid on the loan within the past year. Plus, if you're still owed money after the business folds, warns Denver business and bankruptcy lawyer Donald McCullough, take a number to get in line behind the other creditors. So take care not to commingle personal and business funds; keep the corporate veil intact.

  • Keep your eyes peeled for the next opportunity. Out of the ashes of one business can arise the next. Paul Wenner's Gardenburger, for instance, was the hottest-selling item at his failed restaurant, the Gardenhouse, in Gresham, Oreg. Now it's the cornerstone of his Gardenburger Inc., a $57-million company. Better yet, Tulsa entrepreneur Bill Bartmann got the idea for his nearly $1-billion debt-collection business, Commercial Financial Services, when creditors were harassing him following the collapse of his oil-drilling-equipment business, in 1985.
  • If humanly possible, make your investors whole. Of course, that fine idea isn't going to go very far if nobody will finance it. So remember that, while losing your own money hurts, it's losing other people's money that'll hurt you more down the road--especially if you have any plans for an entrepreneurial comeback. Though Mike Campbell exited his first venture with barely a penny to his name, he's thankful he managed to scrape up enough money to pay back his investors. "I thought it was the nice thing to do," says Campbell, "but it actually turned out to be a brilliant move on my part." Those investors turned around and helped him start his new company.

Failing well, part two

But none of those steps will be effective, or indeed even possible, if a more elemental step isn't taken first. It's a step that's a precondition to all the others--one that's more psychological than procedural. And it's a step that's relevant for owners of even the healthiest of businesses.

You can't truly think in terms of opportunity cost, or know when to call it quits, or look for the next business idea unless you first--

  • Understand that your business is not you. "Your world has ended when the product ended," says Rick DuhÉ, who tasted fleeting entrepreneurial success in the late 1980s with his faddish soft drink, Cajun Cola. "It was your friend, it was your wife, it was your lover. It was everything. It's like you divorced your family, your god."

DuhÉ's devotion might have been pushing the outer edge of extreme, but his experience underscores a key truth: if you are to fail successfully, the most important work to be done is not procedural but psychological.

"The key to dealing with failure is differentiating between global and restricted attributions of failure," offers psychologist Berglas. He explains: "It's called the locus of causal attribution. If you make a global attribution--'The business failed because I suck'--then the failure will be devastating. But if you make a restricted attribution--'It failed because the Japanese were dumping product and I lost my VP of information systems at a crucial juncture'--then it won't be so destructive. It has to do with storytelling, and it's how you differentiate self from situation." People who have passions outside the business realm (religion, community service, fly-fishing), Berglas adds, tend to have an easier time making restricted attributions and thus reconstituting themselves, because their self-esteem derives from multiple sources.

For Ron Wilen, owner of a now-defunct chain of clothing stores in Pittsburgh, extricating his identity from his business wasn't easy. "It took some psychological work to distance myself, to say, 'This is what I do--it's something I love, but it's not who I am." Wilen advises: "Go out and talk to people, other small-business people. You need to find a way to get outside yourself, to start the process of separating yourself from your business." Otherwise, he says, choosing to let your company die means choosing to annihilate your sense of self-worth. And that, needless to say, is no choice at all.

The fire next time

So does learning to "separate yourself from your business" mean that if you create another company, you'll love it any less than the first? Probably not. "I'm just as attached, if not more attached," says Mike Campbell of his new software company. "I'm completely immersed in it again. But it's a more sophisticated relationship."

Nor does it mean that you shouldn't gamble. Says Marshall Smith, who went on to start Learningsmith, Videosmith, and Cybersmith after his Paperback Booksmith flopped, "Every time I do something, I still put all of my liquid assets on the line."

But among those who have been through a failure, there's a subtle but palpable change. It's best summed up in a comment made by one entrepreneur, which we heard repeated in a thousand variations: "It's made me a lot more cautious. Not more risk averse--but more paranoid." Or as Jeff Schwartz puts it: "You still have to have this maniacal drive to do it. But at the same time, you need these little antennae sitting out there."

The message in all these testimonials is clear: Don't avoid risk, but mitigate it at every turn. Don't resign yourself to failure, but assume it. Live in fear, but don't be overcome by it. It's a delicate line to walk--and, in a way, walking it requires a more courageous soul than does the gung-ho, damn-the-torpedoes-and-full-speed-ahead school of business. It's the difference between those who blithely march off to war certain of their invincibility and those who return to war despite already having faced its unexpected horrors. But one thing is clear: if one has the stomach for the latter, the potential payoff is enormous.

"You're equipped with a much broader sense of all the ramifications of the little decisions you make early on," says one failed entrepreneur. "There's a much higher appreciation for the downside. You come to grips with the fact that you make mistakes and that they can be big mistakes--enough to lose your house....I don't think I'm nearly as arrogant as I was. I'm more scared, and that's really healthy." He adds: "Failure is just the most powerful stuff in the world."

For example, entrepreneur Soheil Saadat says planning at his old company was so bad that he hired someone the day before he laid people off. This time around, he started with an 800-square-foot office instead of a 17,000-square-foot one, avoided fancy furniture, and has kept more cash on hand to weather the ups and downs. He uses worst-case, not best-case, scenarios as the basis of his planning.

"Going into my first company, the concept of failure was removed. It was all the pie in the sky. There was no question that it was going to succeed," says Matt Davis. "Going into this company, it was very real that that possibility existed. That doesn't mean you don't take risks--even big risks. It just means you don't take risks before you have thoroughly considered all options."

If only there were some way to tap the instructive, disciplining power of failure without having to go through it. If only it were possible to absorb what physicians call a "homeopathic dosage" of it: enough to spur your immune system, but not so much that you contract the disease.

There may not be (aside, of course, from reading this article). But Mike Campbell, for one, is glad he had to go through it. "Best thing that ever happened to me," he says. Just 18 months after his company failed, Campbell secured financing to pursue another start-up--this one taking the elegant math behind his failed optimization software and using it to build a more user-friendly application for workforce management. As a standing reminder of the reality of failure, he still carries around the eight Visa cards he used to finance General Optimization--cards that carried the $50,000 in charges he was stuck with after the company failed. These days, though, he couldn't use them to make payroll even if he had to. His new company, Campbell Software, has hit 100 employees, growing fast enough to make the Inc. 500.

Henry Ford, who suffered two flops before hitting pay dirt with Ford Motor Co., defined failure as "the opportunity to begin again, more intelligently." Campbell concurs. "You pay so much for these lessons, it's obscene not to apply them," he says. "You pay with financial capital, emotional capital, physical capital. What a waste to toss that aside. That's a tragedy."

Jerry Useem is an associate editor at Inc.

The Untouchables
Corporate human-resource directors despise nothing so much as a failed entrepreneur

If you're looking to rebound from a failed venture, don't expect the corporate world to extend a helping hand.

At least that's the message of the failed entrepreneurs we talked to. "I couldn't get a job anywhere," says Paul Wenner, whose Gresham, Oreg., restaurant went belly up. "As soon as people hear the word failure they think, 'Well, you're a flake."

"I was unhirable," echoes software entrepreneur Mike Campbell, whose Chicago-based General Optimization bit the dust in 1990. And he says employers were right to be wary of him. "Having hired a lot of people," says Campbell, "one of the last kinds of people I would hire is an entrepreneur. What they're really trying to do is get on your insurance, use your computer equipment and phones, and build up their bank account so they can give it another go. I've hired maybe 500 people. Two of them were entrepreneurs. Both of them went off at inopportune times to start their next venture."

Matt Davis, who unsuccessfully launched an entertainment guide for the Bay Area in the late 1980s, also admits he was crummy job material. "Savvy potential employers know that good entrepreneurs who fail are going to try again," he notes. "You try to reassure them that this is not the case, but they're basically right."

But what about people who genuinely intend to throw in the entrepreneurial towel--for good? After Rick DuhÉ's soft-drink company failed a decade ago, he insisted he was ready to do so, and meant it. Trouble was, nobody believed him. "I had to prove myself to the corporate world again, to reestablish alliances and expectations, to convince people I wouldn't become an entrepreneur again," says DuhÉ, who's remained a faithful employee of medical-services firm CorVel Corp. for three years now.

But DuhÉ, it seems, is a rarity. More often than not, the resolve to forsake company building for the life of a salaried employee proves ephemeral. "When you fail, a certain mild depression sets in, so you think, 'Well, I'll take a job from someone else," explains Matt Davis. "But when you get back in the corporate environment, so many companies are mediocre. You're like, 'What is this company thinking? Why don't we do it this way?' All of a sudden you're back in that sharkish, opportunistic mode.

"It didn't take too long," he says, "for that old feeling to come back."

Failure Hall of Fame
For the two biggest failures of all time, life couldn't be better

For the title of World's Biggest Failure, it's a close call between Kamran Elahian and Jerry Kaplan. Each tried to create computers that recognize handwriting. Each failed. Each in its turn left the biggest crater in Silicon Valley history--Elahian's Momenta Corp. burning through $40 million before folding in 1992 and Kaplan's Go Corp. quickly breaking that record by spending $75 million.

Yet their epochal screwups have hardly sent them into hiding. Kaplan wrote a best-selling book, Startup: A Silicon Valley Adventure, about his; Elahian's red Ferrari bears the vanity license plate "MOMENTA." And the venture-capital firm whose money Kaplan lost, Kleiner Perkins Caufield & Byers, happily gave him more to try again with an on-line auction service called Onsale. Meanwhile, Elahian found the funds to establish a multimedia chip maker called NeoMagic. Both companies went public last year, earning their founders millions.

Only in Silicon Valley. There, the rules of failure are different; far from amounting to a demerit, a past bankruptcy is almost a credential. Perhaps it's because high technology is so innately risky. Or perhaps it's simply because, in the valley, it's the venture capitalist--not the entrepreneur--who tends to shoulder the risks and eat the losses. Elahian speaks of his "philosophy of not putting my own money on the line." The small-time restaurant owner, by contrast, can seldom afford such a philosophy. He loses everything when he fails. It's a bit of a paradox: the greater the commercial risk, the less the personal risk.

Not that Kaplan and Elahian are completely unchastened by their failures. Both, for instance, were careful to bite off less on their next time out. "Onsale is the yin to Go's yang," says Kaplan. "It's low technical risk, low capital risk, quick time to market"--everything, that is, that pen-based computing wasn't. And Elahian, for his part, has made an art of the mea culpa. "I made bad decisions," he recalls telling investors. "If you want to shoot someone, I'm the guy." For big-time failures looking to make a comeback, therein may lie the most valuable piece of advice of all: say you're sorry.