Is failure overrated?

As seen in Biznology (slightly modified to avoid overlapping with previous posts in this blog):

Is learning from failures overrated? When emphasizing the importance of learning from errors, are we actually creating a culture of losers? Read on to hear arguments on both sides of this discussion and make up your mind. Your company’s survival in the long term may depend on it.

I’m in San Francisco this week, speaking at and attending the Web 2.0 Expo at the Moscone West. In a number of sessions, the speakers emphasized that failure is an important part of the innovation game. Knowing that I also tend to subscribe to that theory, and commenting on the Charlie Brown comic strip I embedded in my previous blog entry, a colleague at IBM pointed me to an interesting piece written by Jason Fried, from 37signals, who challenges that whole concept: “Failure is overrated, a redux”. It’s a good post, and the comments are also worth reading. To have a complete picture of the discussion, I suggest you to also read the New York Times article Jason refers to, “Try, Try Again, or Maybe Not”.

As it’s often the case in heated discussions, I initially found that Jason was defending a completely different perspective toward failure and learning, but this comment of his on another related post made me think that the difference is mostly one of weight.

“Everything is a learning experience. It’s just that I’ve found learning from your successes to be more advantageous. (…) I’ve always found more value in learning from the things that work than the things that don’t.”

I definitely can live with that position. What I have more trouble with is the cited Harvard Business School working paper. Here are some excerpts from the NYT article:

“The data are absolutely clear,” says Paul A. Gompers, a professor of business administration at the school and one of the study’s authors. “Does failure breed new knowledge or experience that can be leveraged into performance the second time around?” he asks. In some cases, yes, but over all, he says, “We found there is no benefit in terms of performance.”

(…) first-time entrepreneurs who received venture capital funding had a 22 percent chance of success. Success was defined as going public or filing to go public; Professor Gompers says the results were similar when using other measures, like acquisition or merger.

Already-successful entrepreneurs were far more likely to succeed again: their success rate for later venture-backed companies was 34 percent. But entrepreneurs whose companies had been liquidated or gone bankrupt had almost the same follow-on success rate as the first-timers: 23 percent.

If the article is accurate – and that’s a big if, considering that this is still a working paper – it seems that the HBS research is not actually proving that “when it comes to venture-backed entrepreneurship, the only experience that counts is success”, as stated in the opening paragraph. It basically demonstrates that enterpreneurs who managed to go public or filed to go public are slightly more likely (going from 22% to 34%) to have a repeat, but isn’t that expected?

There are several factors that come into play when filing a venture to go public, and having done it once gives an entrepreneur some knowledge of what it takes to get there again. I actually find surprising that, even with that edge, the rate of failure is still very high. Another way to interpret the same data is: roughly two thirds of entrepreneurs who were successful the first time (and I’m using the same loose definition of success here) fail the second time. If anything, the data tells me that success is also overrated.

The “learning from failures” approach makes more sense when you take a granular approach to it. Every single initiative you undertake is composed of a vast number of small wins and losses. You definitely can learn from both outcomes, so regardless of which one will teach you the most, embrace successes AND failures. The fundamental message when advocating a culture that allows failure to occur from time to time is to avoid analysis paralysis, or even worse, denial by hiding what went wrong and exaggerating what went right.

The bottom line is that innovation entails good risk management and shares many features with the financial world. Low risk initiatives are likely to generate low returns, and don’t give you much of a competitive edge. Being bold may lead you to collect wins and losses along the way, but also can reward you more handsomely overall. Knowing that, it’s important that you balance your innovation initiatives the same way you handle a portfolio: diversify them and adjust the mix to your comfort level. During economic downturns like the one we are going through now, it’s easy to panic and stop innovating. Keep in mind that a solid and consistent long term approach to innovation may determine your ability to survive in good and bad times.

Advertisement