Are You Celebrating Failure a Little Too Much?
"Lessons learned from failure" is a common theme in life, let alone the business world. But is it a myth? Are the entrepreneurs who've failed once just as likely to fail again?
Some data says yes. In a recent New Yorker article, James Surowiecki presents compelling evidence that "past failure really just predicts future failure." Specifically, he cites a 2009 study of venture-backed firms. This study, he writes, "found that entrepreneurs who had failed in the past were not much more likely to succeed in new ventures than first-time entrepreneurs were."
In fact, about 80 percent of the founders who'd failed before, failed again.
A 2014 paper by the Centre for European Economic Research, also cited by Surowiecki, paints an even bleaker picture. The paper is called "If you don't succeed, should you try again? The role of entrepreneurial experience in venture survival." It studied 8,400 ventures and found that "previously failed entrepreneurs are less likely to survive and, in common with entrepreneurs with mixed prior experiences, are more likely to experience bankruptcy."
Why are so many entrepreneurs who've failed once, failing again? Is the notion of learning from failure merely a myth?
The Veneration of Failure
One theory is that contemporary entrepreneurial culture doesn't attach a stigma to failure. If anything, founders who've failed are celebrated. Surowiecki writes:
There's a widespread tendency to treat failure as a badge of honor: "Fail fast, fail often" is a familiar mantra in Silicon Valley. There's now a regular FailCon, where people come to hear other entrepreneurs tell about the hard times they endured and about how starting a business and failing actually makes you more likely to succeed in the future. It's a comforting message, but the evidence suggests that past failure really just predicts future failure.
So here's the question: Does our current entrepreneurial culture venerate failure too much? To the point where some founders laconically accept the statistical improbability of success, instead of battling tooth-and-nail to overcome the staggering odds?
That is, of course, impossible to answer in general terms. Surely, there are some founders whose grit levels are higher than others'. But who is to say that a grit level is a leading indicator of entrepreneurial success? While you can find several studies in praise of grit, you can also make the case that not giving up isn't the best entrepreneurial attribute. Sometimes a stubborn tunnel vision and self-belief can prompt a founder to fight beyond reason, even when the market provides ample evidence that she should quit on the idea.
Learning From Failure
Despite what the above studies suggest--calling into question the concept of learning from failures--there remain several reasons to believe that most entrepreneurs do, in fact, become better founders the second time around.
For one thing, all of the above studies focus on venture-backed companies. While those companies might make for convenient data sets, they by no means represent the entirety of entrepreneurial life. Far from it. As Dileep Rao points out on Forbes:
The reality is that most ventures do not qualify for venture capital and never will. According to the Small Business Administration, about 600,000 new businesses are started in the U.S. each year, and the number of startups funded by VCs was about 300. This means that the probability of an average new business getting VC is about 0.0005 (300/600,000), and it also means that 99.95 percent of entrepreneurs will not get VC at startup.
In other words, most founders (failed and otherwise) will not be part of these VC data sets. What, then, do we know about how the majority of founders learn from failure?
Mainly that they become better leaders, thanks to dozens of lessons learned. These lessons, as John Brandon writes, include things like learning to delegate; figuring out how to grow at the right pace, so you don't make promises that outstrip your capacity; getting realistic about whether early-stage equity financing is really the best approach; and knowing when to pull the plug on a doomed idea.
But wait, there's more: About 13 years ago, I wrote an Inc. story in which Steven N. Kaplan, a professor of entrepreneurship and finance (both then and now) at the University of Chicago's Booth School of Business, insisted that experience is always an advantage for entrepreneurs. I spoke to seven serial founders for the story, all of whom agreed with Kaplan and swore that they were much better entrepreneurs the second time around.
Most of their lessons learned came in human resources categories: Waiting too long to hire executives, hiring executives who overspent or underperformed, and waiting too long to fire executives. Just as telling were their personal parables. "If they had it to do all over again, most of the group would have spent more time away from their first companies, hanging with the family, schmoozing up other CEOs, and pondering the long-term picture," I wrote.
All told, then, the takeaway is one that should be familiar to Inc.'s readers, both newcomers and long-time followers of our entrepreneurial chronicles. Sometimes the VC-backed companies and their founders get the headlines. But their story is not always representative of the larger reality.