Why Silicon Valley Loves Failures
In the mid-'90s, Kamran Elahian, a Silicon Valley entrepreneur, famously engraved his Ferrari F355's license plate with Momenta, the name of a company he founded in 1989. Plenty of entrepreneurs ordered vanity plates for their company's namesake, but Elahian was different: Momenta had gone bankrupt in 1992.
"It's to remind me not to be too proud," Elahian told the San Francisco Chronicle back in 1998, when asked why he chose Momenta for his license plate. "Unlike other entrepreneurs who put the names of successful companies on license plates, I decided to put my biggest failure. That way, I have to be reminded of it every time I get in the car."
Elahian may have been a man before his time.
Failure, it seems, is the buzzword of the moment in Silicon Valley. "Fail fast" is a common refrain in co-working spaces, coffee shops, and hackathons. Recently, Dave McClure, the angel investor and founder of 500 Startups, said the alternate name for his incubator was actually "fail factory."
"We're here trying to 'manufacture fail' on a regular basis, and we think that's how you learn," he recently told Fast Company. "Getting used to that, bouncing back from that, being able to figure out what people hate and turn that into what people love...if you're not willing to take the risk of failing and not experience failure, you're never going to figure out what the right path is to success."
There's nothing new about failure in business. In fact, failure is probably the constant of modern commerce: Companies are launched, they exist for a period of time, and then, well, they pretty much all fail.
But never before has failure seemed so embraced, cradled, and even encouraged.
"If you look at the Valley--certainly now--it's like, Try it. If it works, great. And if it doesn't, no problem."
--Dave Feinleib, venture capitalist
"It does feel like it's a lot more accepted now," says Dave Feinleib, a venture capitalist and entrepreneur based in San Francisco. Last year, Feinleib published his first book, titled (apropos of the times) Why Startups Fail. "If you look at the Valley--certainly now--it's like, Try it. If it works, great. And if it doesn't, no problem."
So what happened to the refrain, "Failure is not an option," if it so clearly is?
The first, and most obvious, answer, is that failure has become inexpensive. Decades ago, starting a business typically entailed borrowing capital from a bank, friends, or family. Opening a physical storefront required lots of capital. Today, the Web has democratized the process for starting up--building a website and hosting its data, even for e-commerce, are relatively inexpensive.
But while the Web has made it easier and cheaper to start up and succeed, it has also made it easier and cheaper to fail.
"It's not that failure is something to look forward to; it's that the cost of creating Web-based businesses is fairly low," says Alex Furmansky, president and founder of Sparkology, a New York-based online dating site for young professionals. "If in the past, one had to spend a year creating a bulletproof strategy and market-adoption model, hire dozens of employees, and pay for an office lease--now one can just take a concept and launch an alpha version of a site."
Brian O'Malley, a general partner at Battery Ventures, a Silicon Valley venture capital firm, agrees.
"Simply put, the risk of failure is dramatically lower than it used to be," he says. "With cloud services and new frameworks, something that used to take $10 million to test out can now be launched for $200,000. This makes it far easier for investors to take risk on unproven ideas and unproven teams."
And, he says, because funding is more readily available at the early stage, founders have access to capital--and that capital has fewer strings attached.
Furmansky has a simple theory: "Another way to think of it is that starting companies these days is akin to doing research in the past."
At that rate, even a start-up fail can lead to success for the individuals behind it--if it builds at least one useful thing or displays promise. As O'Malley says: "Even if the business doesn't work out, founders can still profit from their equity or, at a minimum, end up with a coveted job at a Facebook or a Groupon due to the rise of the acqui hire."
From that point, a second shift emerges. It's one that's a bit more subtle but that's just as important.
In the past, investors wanted to back entrepreneurs who had a proven track record. Of course, they still do, but investors today are beginning to become keenly aware of the virtues and values of entrepreneurs who have made catastrophic errors in their professional pasts.
"The change is indicative of a culture shift," says Ned Staebler, vice president for economic development at Wayne State University. "This shift hasn't occurred out of some transcendental revelation. Rather, investors have seen numerous resilient entrepreneurs learn from their mistakes and have a big success after one or more failures. As rational actors, investors want to be a part of that success."
Erica Zidel, who started an online babysitting co-op with her husband in 2011, says the recent embracing of failure has a lot to do maturity and experience--or at least the perception of having them.
"In the start-up world, failure is almost synonymous with learning experience," she says. "Being a founder who has failed before signals to the community that, one, you've done this before, and, two, you've gathered information on what doesn't work and are better armed to create something that does."
Daniel Isenberg, the founding executive director of the Babson Entrepreneurship Ecosystem Project, says to truly understand failure, it's necessary to look beyond the individual blip of a single start-up failing to gain wide user traction and going belly-up. It's also necessary to look past a given entrepreneur's track record.
In Isenberg's eyes, it's a much broader picture. When geographies and their governments embrace start-up failures, they catalyze economic growth.
"If you look at really entrepreneurial countries or regions, you see very high failure rates," he says. "Lots of businesses opening and closing. That churn is failure."
In other words, not punishing failure leads to stronger long-term growth.
Should we thank Silicon Valley for the fact that some degree of failure makes sense for the investment strategies of venture capitalists? After all, funds are leveraged with the expectation of failure; failure is baked into VC firms' business models. Start-ups are encouraged to swing for the fences, because one or two big exits in a cycle will guarantee profitability for a firm.
The rest will languish--and, well, that's OK.