Most people believe that entrepreneurs learn from failure. Pick up USA Today, Entrepreneur, or any of a multitude of popular publications and you will find stories about how entrepreneurs learned from their mistakes to become successful the next time around. Using examples of Apple’s failure with the Newton, Frederick Smith’s low grade on the Fed Ex business plan, and Bill Gates’ unsuccessful first computer business, many authors argue that entrepreneurial failure is no obstacle to later success.
In fact, some observers, like entrepreneur and Harvard Business School lecturer Shikhar Ghosh, even say that business failure helps entrepreneurs become more successful the next time around.
Policy makers often echo this view. For instance, the Director General of the European Commission’s Enterprise Directorate Horst Reichenbach writes, “Usually, failed entrepreneurs learn from their mistakes and are more successful at the next attempt.”
There’s only one problem with the “failure helps” perspective. There’s no serious scholarly evidence that prior business failure enhances later entrepreneurial performance. Quite the contrary, the existing evidence indicates that entrepreneurs who failed before perform no better than novice entrepreneurs and significantly worse than previously successful entrepreneurs. For example, in a working paper released by Harvard Business School, Paul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein showed that venture capital-backed entrepreneurs whose earlier business had an initial public offering (IPO) had a 30 percent chance of having another venture that also went public, but those entrepreneurs whose earlier ventures didn’t go public had only a 20 percent chance of an IPO the next time around, statistically no better than the 18 percent chance of novice entrepreneurs.
Explaining why previously successful entrepreneurs do better the second time around is easy. They might simply be better at creating new companies than those who have never done it before or failed their first time around. Or previously successful entrepreneurs might not be more talented, but key stakeholders – suppliers, customers, employees and investors – might think they are and lend them their support. Even if stakeholders provide assistance on the mistaken notion that previously successful entrepreneurs weren’t just lucky, their beliefs become a self-fulfilling prophecy. Because the previously successful entrepreneurs garner the support of stakeholders, their prospects end up better than those of novice or previously unsuccessful business founders.
More difficult to explain is the truism that “entrepreneurs learn from failure.” Our collective belief in its veracity stems less from a reasoned look at data and more from what we want to believe. The idea that prior business failure helps fits perfectly with the motto “if at first you don’t succeed, try and try again.”
You might say it’s fine to think that entrepreneurs learn from failure even if there is no evidence that it’s true. But this inaccurate belief has a cost. Many unsuccessful entrepreneurs start additional businesses in the mistaken belief that their previous failures taught them how to do better the next time around. And many of these entrepreneurs end up losing money again.
Investors who focus on experience and not past performance often earn less those who back only previously successful entrepreneurs. And policy makers who choose not to focus limited resources on business founders with winning records, under the assumption that “experience” is what matters, often miss the opportunity to enhance economic growth and job creation.
While I am deliberately trying to be provocative in this post, I think it’s worth considering the validity of the assumption that entrepreneurs learn from failure. Do you think that we overestimate the degree to which this actually happens? Or do you think that small business owners learn too little from their errors to do better the next time around? Or do you believe that only a small minority of entrepreneurs manage to learn from failure? Or is it perhaps that academics studying the topic aren’t very good at identifying what entrepreneurs learn from their mistakes? I’m interested in hearing your thoughts.
EDITOR’S NOTE: the last paragraph was inadvertently left out when this article was originally published. As often happens here, Professor Shane is trying to get us to think and debate the issue.