Business Brilliant

by Lewis Schiff

  There may only be one big question remaining. Often, although you may think you’ve done all the right things to follow the money, the payoff isn’t there. Synergistic systems are like that. By definition they produce unpredictable results of all kinds. This means that sometimes they won’t give you what you’re looking for. Sometimes they give you something even worse. Sometimes they fail.

  What then?

  8

  Nothing Succeeds Like Failure

  ABOUT 7 IN 10 SELF-MADE MILLIONAIRES SAID THAT “SETBACKS AND FAILURES HAVE TAUGHT ME WHAT I’M GOOD AT.”

  FEWER THAN 2 OUT OF 10 IN THE MIDDLE CLASS AGREED.

  The Valentine’s Day Massacre

  An enormous snowstorm was making its way toward the East Coast on Valentine’s Day 2007 when David Neeleman, the founder and CEO of JetBlue Airlines, made a series of decisions that would eventually cost him his job.

  Dozens of JetBlue flights were scheduled to leave that day from JFK airport in New York. Other airlines operating out of JFK responded to predictions of heavy snow and freezing rain by canceling all their morning flights. Neeleman and his colleagues, on the other hand, chose to count on a forecast that temperatures might rise and turn the snow to rain by the time the storm hit New York. They kept JetBlue’s planes on schedule.

  In the early morning hours of Wednesday, February 14, nine fully loaded JetBlue flights taxied away from the terminals, headed for sunny destinations like Cancun and Aruba. But as the giant storm settled over New York, the precipitation turned to sleet instead of rain. Federal rules forbid takeoffs in freezing-rain conditions, so the planes had to sit and wait for the storm to let up. “We were just minutes away from taking off and the ice pellets started,” Neeleman would later tell CNBC. “We waited and expected it to clear up, and waited. And then things kind of spiraled out of control.”

  As the nine planes awaited takeoff, other JetBlue flights continued to arrive at JFK, filling all the gates at JetBlue’s terminal. Hours later, when JetBlue officials finally determined that the delayed flights had to be canceled and called back, there were no empty spaces at the terminal so the passengers could disembark. The entire JetBlue operation became gridlocked. Finally, at 3 p.m., shuttle buses were sent out to retrieve the passengers from the nine stranded aircraft.

  Some travelers were trapped inside JetBlue’s planes for as long as nine hours that day. Back at the terminal, they plied the media with tales of testy flight crews, overheated cabins, stinking toilets, and rationed food and water. One passenger had to tear up a T-shirt to make an improvised diaper for her baby. Another told the New York Post, “It was like—what’s the name of that prison in Vietnam where they held [Senator John] McCain? The Hanoi Hilton.” A Post headline trumpeted “Air Refugees in New JFKaos; Hordes Camp Overnight before JetBlue Says, ‘Tough Luck, No Flights.’”

  Neeleman had founded JetBlue in 1999 with the bold declaration that he would “bring humanity back to air travel” and for years the company had been ranked at the top in the industry for consumer satisfaction. Now JetBlue was being accused of creating conditions that one passenger complained were “right on the edge of human rights violations.” Neeleman humbled himself by posting a video apology on YouTube in which he appeared to choke up. “We love our customers and we’re horrified by this,” he told an interviewer. Neeleman tried to reassure travelers that JetBlue flights would all be back on schedule before the weekend, but he was promising more than his company could deliver.

  For the next six days, JetBlue had to cancel 1,200 flights all over the country. At first, the problem was that too many of JetBlue’s planes were grounded in New York. But then the airline’s operation faced new complications. The first round of cancellations had put many of JetBlue’s flight crews out of position. The airline had too many planes at some airports, like JFK, and not enough crews to fly them. In other places, crews were sitting in hotel rooms awaiting instructions for when they’d get a plane to fly.

  JetBlue had managed to make profits on its low fares through a philosophy of operating cheaply in ways that didn’t show. Customers enjoyed the experience of bargain-priced luxury with leather seats, ample legroom, satellite radio, and satellite television screens in each seatback. But the carrier had neglected to upgrade many of its vital internal systems as it grew from 1 million passengers in 2000 to 18 million in 2006. JetBlue was still something of a shoestring operation when, on Valentine’s Day 2007, the shoestring snapped.

  For instance, the airline had no system in place to call ticket holders and tell them their flights had been canceled, so thousands of travelers showed up at JFK on the day of the big storm with no place to go. JetBlue’s underpowered phone system was quickly overwhelmed by the volume of calls, and since the airline also had no computer software to track its 11,000 pilots and crew members, out-of-position employees calling in for instructions were subjected to the same hours-long busy signals as JetBlue ticket holders. Luggage handling wasn’t computerized either, and bags from all the canceled and arriving flights at JFK piled up to the ceilings while being sorted slowly by hand. The entire debacle cost JetBlue $44 million and became known inside the company as the “Valentine’s Day Massacre.”

  In the days following the storm, Neeleman responded by announcing a hastily drawn up program called JetBlue’s Customer Bill of Rights. All JetBlue passengers now delayed for more than 30 minutes would get credits starting at $25 and those delayed longer than two hours would get free tickets for future flights. As a public relations gesture, it worked beautifully, and JetBlue’s loyal customers were again filling its planes within the following week. But Wall Street was dubious about the potential cost of compensating passengers for future delays beyond the airline’s control. The Bill of Rights seemed like an ill-considered plan that reflected the same seat-of-the-pants style that got Neeleman into trouble in the first place. JetBlue’s stock price took a big hit that week and has never recovered. One day in May 2007, two of Neeleman’s most trusted board members walked into his office and told him the board had decided to transfer his duties to JetBlue’s chief operating officer.

  The firing marked the third time Neeleman had been booted from a job in the travel industry. The first business he launched, at age twenty-three, was a travel agency that was forced to shut down in 1983 when one of its main customers declared bankruptcy. In 1994, after he’d helped found a small airline that was sold to Southwest Airlines, Neeleman took a job as a Southwest vice president, only to be fired five months later. Neeleman had to wait five years for the no-compete clause in his Southwest contract to expire before starting up JetBlue in 1999, where he held the CEO position until his firing in 2007.

  So, after three crash landings in the air travel business, where is Neeleman today at age fifty-three? He’s the founder and CEO of yet another new airline, a Brazilian domestic carrier called Azul.

  In Brazil, Neeleman has pointed out, it doesn’t snow.

  The Fruits of Failure

  All the people profiled in this book have faced serious disappointments and setbacks in their careers, but the experience of failure is a key ingredient to developing Business Brilliance. David Neeleman is a self-made multimillionaire, but in the course of making those millions he also became an expert on how failure can provide the seeds for your next success. Neeleman points out that JetBlue, the nation’s eighth-largest domestic airline, wouldn’t even exist today if he hadn’t failed so badly as a Southwest vice president. Failure is not really about what happens to you, he once said. “It’s how you deal with it, and what you make of it.”

  Neeleman is hardly unique in the way he’s partly paved his road to wealth with some shattering failures. The Business Brilliant surveys show that most self-made millionaires have had at least three serious setbacks or business failures in their careers. About one-fifth had four or more and one respondent reported having six. The middle-class failure rate, by contrast, averages just under two, which means that for most middle-class people, failure is so
mething they have experienced either never or just once.

  It may sound strange, but if you want to learn something useful about failure, go talk to the most successful person you know.

  Every survey Russ Prince has done over the past 15 years tells the same story. The people who are the most brilliant at business are also those who fail most often along the way. As Warren Buffett might say, they succeed by surviving because Business Brilliance is a game of perseverance. It is not a game of averages, like high school or college, where failing 6 out of 7 tests always earns you an F. It’s not like competitive sports, where a 1 for 7 average at anything will get you benched or cut from the team. In business you can fall short 6 times out of 7 and still enjoy great financial success. Marketing guru Seth Godin, himself the father of multiple business failures, puts it this way: “If I fail more often than you, I win. The ones who lose are the ones who don’t fail at all and get stuck, or the ones who fail so big that they don’t get to play again.”

  In my previous book, The Influence of Affluence, Russ Prince and I told the story of a self-made millionaire named Steve Dering who today is among the world’s top experts in high-end vacation real estate. In the early 1990s, Dering left a career in marketing to pioneer the concept of “fractional” condominium ownership at a ski resort in Park City, Utah. By selling one-sixth shares of $750,000 condominium units for $130,000 each, he hoped to attract new, less-affluent populations of buyers and also net more money for condo developers. Fractional ownership of private jets had long been a profitable practice in aviation, so Dering was part imitator and part innovator in trying to apply the same concept to resort real estate.

  Dering put together a development team, secured financing, and had sold $10 million worth of reservations for his first project when his Japanese funder bowed out due to a financial crisis in Asia. Even though the project went bust and Dering had to return all the deposits to disappointed buyers, his sales record encouraged him that he was onto something. So he tried again and partnered with another development team that already had a ski resort condominium under construction.

  As Dering racked up sales for the new project, his partners realized they had him in a vulnerable spot. They kept renegotiating Dering’s cut of the proceeds, and Dering kept giving in because he was desperate to prove the profitability of selling vacation real estate by the fraction. He sold all the units for a total of $22 million, which was $9 million more than the developers would have gotten if they had sold to individual owners. But Dering was left with little of the profit he had produced because his partners, as the party of least interest, had squeezed him until his equity was either gone or eaten up by expenses.

  “They weren’t purposely testing the courage of my convictions,” Dering told us, “but that’s how it turned out.” The project left Dering nearly broke. His only way out was to find new partners and try again, and then again. By the end of the decade, his company DCP International was involved in dozens of fractional-ownership projects, some worth $100 million, all over North America and Europe.

  Dering might not have pushed through all the frustration and disappointment he faced during his first years in real estate if he hadn’t held fast to his convictions that setbacks are inevitable and that it pays to persevere. We’ve found that self-made millionaires hold absolutely consistent beliefs in this respect. About 9 out of 10 say that perseverance is very important to financial success and about 8 out of 10 agree that “failure is important to becoming wealthy.” The middle class, however, is strangely divided on these two points. Their survey responses show that while 7 in 10 agree about the importance of perseverance, fewer than 2 in 10 believe in the importance of failure. The trouble with that line of thinking is that perseverance can’t exist without failure. Who perseveres in the face of success?

  The middle-class respondents said they lack faith in the value of failure and it shows up clearly in their actions. The survey results reveal that members of the middle class almost always respond to failure by quitting. More than half say they commonly react to a serious setback or failure “by giving up and focusing on other projects.” Another 3 out of 10 say that they “try again, but in a different field,” which, as we’ll see later, is really the same thing as quitting. Self-made millionaires, on the other hand, react to failure just like Neeleman and Dering: They pick themselves up and take another run at whatever knocked them down. More than 8 out of 10 self-made millionaires said that their most common response to a serious setback or failure is to try once again in the exact same field. Just 1 out of 10 in the middle class says they share this same persistent “try, try again” response to failure.

  We told Dering about these results and he was astonished by the middle-class response. If you don’t go back and try the same thing after two or three failures, he explained, “then you don’t get any of the benefits of learning from what went wrong.” Dering certainly didn’t count on his first real estate effort to go bust, but he always knew it was a possibility. By the time he’d gone through the painful experience of returning $10 million worth of deposits, though, he consoled himself with the hundreds of things he’d learned to do right through trial and error. He’d discovered the best ways to dig up prospects, he’d refined his sales pitch, and he’d figured out which amenities were most important to his buyers. By the end of his second project, Dering had also learned some new and painful lessons about partnership. But he’d reached his goal of bringing a fractional-ownership project to completion. He survived, if only barely, and then succeeded on his third and fourth tries.

  Dering’s story helps illustrate why self-made millionaires are so certain that failure is important and sometimes inevitable. You need to try things that are risk-prone and difficult because that’s where the money is. Dering’s series of stumbles was actually a testament to the untapped potential of fractional ownership. If it were risk free and easy to overcome buyer skepticism about the concept, other real estate agents would have jumped on fractional ownership years earlier. If securing financing for such an unusual project were a simple task, Dering wouldn’t have needed to rely on his shaky funding from Japan. Selling one-sixth shares of condominium units is hard work because you need to dig up six times as many prospects, close six sales on each unit, and suffer through six times as many rejections and agonizing near-misses. The risks, the unknowns, and the difficulties were daunting enough to keep all other real estate people away, which is exactly why fractional ownership marked an opening and an opportunity for Dering.

  Whatever line of work you’re in, if you seek to follow the path of Business Brilliance you will suffer some setbacks and failures. That’s because that path will present you with challenges that scare off most others in your field. Going where others fear to tread is what sets you apart. It confirms your unique value and ultimately can make you rich. Think of the frustrations that Guy Laliberté faced and the sacrifices he made while starting up his circus. Remember how Warren Buffett had to overcome his shyness and endure criticism and rejection in order to raise money for his first several partnerships. When Bill Gates met IBM’s strict delivery date for MS-DOS after months of work, the software was so buggy that it had to be completely rewritten. How many maddening bug fixes did Gates and his team have to undertake before they handed over what they knew was a shoddy piece of work?

  These periods of struggle, frustration, and failure amount to what Seth Godin calls “the Dip.” He defines it as “the long slog between starting and mastery . . . the long stretch between beginner’s luck and real accomplishment.” It is the winnowing process that prevents all but the most tenacious from getting to the top of any field, which is where all the money is. “Successful people don’t just ride out the Dip,” Godin writes in The Dip. “They lean into it. They push harder, changing the rules as they go.”

  If you fail to appreciate this relationship between failure and success, you’re likely to keep switching projects every time the going gets tough. A lot of hardworking and tal
ented people make this mistake because it’s only natural to feel like quitting when it starts to hurt. Again, in Godin’s words, “Countless entrepreneurs have perfected the starting part but give up before paying their dues.” Success, he says, belongs to the rare people who focus, who overcome the pain of failure and push through. “The Dip causes scarcity,” he writes. “And scarcity creates value.”

  Chapter 4 touched on the way the media play up stories about companies with innovative “big ideas,” even though the vast majority of highly successful businesses are imitators that execute on ordinary ideas. In a similar way, although the media love a good comeback story, most business stories focus on glowing successes that avoid the gritty details of setbacks and failures that have shadowed the growth of every successful enterprise. If the middle class doesn’t believe that failure is important to success, part of the reason might be that the media rarely care to tell that story.

  Successful companies aren’t very keen to remind the public of their past failures, either. For instance, Pixar Animation currently reigns as the most successful movie studio in the entire history of motion pictures. Since the 1995 premiere of Toy Story, it has never had a box office flop. Every one of its dozen movies has earned a massive profit, and Toy Story 3 grossed $1 billion worldwide. On the Pixar company website, the history of its dramatic rise is tracked on an interactive timeline. The release date and awards listings for every one of the company’s movies are cataloged year by year, including a handful of very short computer-animated films made in the 1980s, some of which were only two minutes long.