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.
Get the latest headlines from Small Business Trends. Follow us on Google News.
Anita Campbell
To other business owners, I say this: don’t overlook the benefit of experience. I would have missed out on some great employees if I had only hired those who had done the same thing before and were successful at it. Lots of people can be successful without having been successful in the past. I can point to real life examples, and I know others can also.
In my own performance, while I haven’t always learned from my failures 100% of the time, more often than not I have learned. I can point to a dozen initiatives off the top of my head that I have been successful at, but originally did a mediocre or poor job at when I was younger. Once I had broader experience and could look back and analyze how I had approached something earlier, I knew better what to do. That’s because I relived all my mistakes 1000 times over, and decided I would handle things differently in the future. And I am grateful for all the second chances I have been given.
Likewise, I am sure there are many things that I have failed at a second time, too (some things I’ll never be good at no matter how much I wish it differently).
But the biggest failure of all would be not to try just because of having once failed.
– Anita
Jonathan Vaudreuil
When I read articles on learning from the past, whether supportive or not, I think back to the UCLA study on students trying to reduce stress (found in “Made to Stick”). The students who looked back at what was causing their stress and were forced to analyze those situations made tremendous strides reducing or eliminating certain stressors in their lives in a mere two weeks.
While yes, the research shows a correlation between past success and future success, it does not show a causation. In other words, past success doesn’t mean future success. Read deeper into those studies and they begin to site a whole slew of reasons why previously successful entrepreneurs are successful again, such as their established network, or their deeper understanding of an industry. New entrepreneurs are more likely to receive funding because they do not have money yet, do not have established connections, and therefore are more likely to seek funding for growth. Past failures? Well, if you repeat the same mistakes of the past then yeah, you won’t be successful.
However, the UCLA study shows a clear causation: analyzing your past is a definite way of improving your future. That’s the part most unsuccessful entrepreneurs probably miss. They fail to look back and make adjustments as they move forward the next time.
Learning from past experiences is valuable. However, it’s what we do with that learning that will either influence our future success or failure. Sometimes people feel like the failure was a result of outside factors and will repeat their actions hoping for a different result. Sometimes people internalize the failure and don’t ever try again.
I firmly believe that everyone is capable of succeeding, but each person needs to determine what success means to them.
Mike
This article seems to have the hidden assumption that ‘entrepreneurs learn from failure’ means that all you have to do is fail and you will then be successful.
It doesn’t.
Entrepreneurs have an opportunity to learn with each failure. Those who eventually become successful take that opportunity and learn from it to – at least – fail in different ways next time.
Most people don’t learn from failure – they just blame something and repeat the same mistakes.
Actually Mike I think this article does not have that hidden assumption – it clearly states that’s what most people think it takes to become a successful entrepreneur – fail a lot.
Whereas Scott is challenging that assumption in a refreshing take I think saying that learning from those experiences and assessing your past performance is the way you will inevitably move forward and find success in business
Natalie
Roy A. Ackerman, PhD, EA
You had me going there until the end. This is evidence of the problem that many researchers cause. They fail to discern the difference between causality and correlation. Many things happen, some happen at the same time, but that does not mean one causes another. For example, if all entrepreneurs of the 50s were men, does that mean women can never be entrepreneurs? (Please, let’s not go back to the nostalgic, vacant 50’s.) There is a correlation between handguns and violence- but not a causality (which is how the gun lobby succeeds).
Moreover, there is no evidence in this paper that any examination of past performance was effected. The researchers simply compile data of serial startup entrepreneurs- and their subsequent ability to be funded by venture capitalists. There is no evidence that the entrepreneurs in the study ever STUDIED what they did before. Their definition of failure (not obtaining funding) has no true relationship with whether they studied the reasons for their prior failures. It even could have been related to their personalities (or their potential clash with venture capitalists they approached). Or, the niche they continue to serve is not among the darlings of the venture capital world.
I, for one, have always recommended (and will continue to do so) that one studies failures- carefully. Of your own, and others. Learn what you can and discern facts and nuances. There is no better preparation for success.
Zach Dexter
While it’s certainly possible to fail and not learn anything from that experience, it’s disingenuous to suggest that we shouldn’t even try to learn from failure.
Besides, what if you start a profitable business and decide not to IPO? Then you’ve failed? Absurd.
Perhaps by the time the author writes his next article he will have learned from the failure of this one, no?
“Fail Fast”. “Fail Often to Succeed”. “Dare to Fail”. “Embrace Failure”. As you state, we often have heard or read that from “success” and “innovation” leaders. To put it as kindly and respectfully as possible –and I respect a lot of the work of quite a number of those whose oeuvre includes, (but thankfully is not limited to) such advocacy: Baloney!
The belief that “failure” is not only “OK” but REQUIRED on the path to success has been rammed into the American psyche so hard for so long that many believe failure is their duty – on the way to “success” of course!
What then? Forget training wheels for youngsters learning to ride bikes? Scratch “Driver’s Education”? No ropes for tyro mountaineers? Get rid of those Bunny Slopes? Forget Basic Training? “Be All You Can Be” – by repetitive failures? Don’t waste time practicing, just do it? After all, a faster path to failure must lead to success? A little hyperbole, but not far from “Failure is Great” training heralded as the road to success.
The concept that “failure” is OK, helpful, REQUIRED to succeed has been so over-hyped, so mutated that it is now taught as a mantra for Americans: “Fail Fast”…“Fail Often to Succeed”…“Failure is Required for Success”…“Failure is a Sacrifice on the Road to Victory” is… BALONEY!
We’re told that Edison “failed” thousands of times before he succeeded with the incandescent lamp he had envisioned. We’re told pioneers in vaccines, airplanes, weapons, high-tech, genetics, novels, art – you name it – experienced so many failures on their path to “Eureka!” that we must also accept, nay, even STRIVE FOR FAILURE! No wonder we seem conditioned for it, and our leaders proclaim that we are not exceptional. That, you guessed it, is… BALONEY!!!
ABSOLUTELY, failures happen as part of the normal process of innovation, development, of many aspects of LIFE! Life still does end in death, you know. We are best advised — we need — to be prepared, able to see signs of impending failure, have plans to prevent it, acknowledge it, train to avoid it, limit or mitigate its effects, repent of mistakes, cope with failures when they occur, recover from defeats and loss – even when not really predictable (Black Swans as defined by Nassem Nicholas Taleb). We do that through purchase of insurance, redundancy in systems when we can afford it or cannot afford to be without it, team work, “safety nets”, and the like. Research & Development and field application in innovative, never-been-done-before arenas can anticipate some efforts may go radically off course, into the ditch.
Failure is not the path, but Experiment, Test, Study, Iterate.
Thomas A. Edison is held up as the hero of failure. A Genius! Well, he really said, “I have not failed. I’ve just found 10,000 ways that won’t work”. That’s what experiments, tests, and studies are – working through iterations on the way to a solution.
Sometimes you “get it right” the first time – at times an incredible find, often just expedient mediocrity, the “minimum required” to meet deadline, budget or “lowest common denominator” expectations. Usually, long, hard work and sweat is involved – with fear and trepidation, major risks, expenses, sacrifices involved along a torturous journey to the right answer.
The great Italian Renaissance artist Raphael drew scores of studies of human hand positions before he chose the best ones to use for each character in a painting. Hundreds of trees, scads of heads, gazillions of animal limbs and heads. Those weren’t failures, they were studies, tests, part of the refinement process. Michelangelo did the same, going so far as being able to see the treasure buried in a block of marble deemed too flawed by others to even use(the rock was a failure at being a rock!). As a result, because of a life of experimenting up to that point, he created the extraordinary sculpture of David.
Similarly, architects run through piles of sketch tracing paper to test and refine again and again…and again… until the best design solution appears – sometimes going back to a lower layer to refine again and again! Failure? NO! Design is an iterative process of people refining layers – like Michelangelo chipped off layers of stone, like Raphael studied dozens of hands, like authors run through many drafts of their texts, like Ansel Adams making scores of exposures and dozens of darkroom proofs – before they identify their BEST ANSWER to the problem at hand.
Being a success in life, work and community, even being a renaissance person, is not counting coup on your failures (“look at my scars, I must be on the road to success!), it is seeking knowledge, learning technique, receiving honest criticism, learning from what didn’t work, modeling success, experimenting, testing, studying, sacrificing, modeling, iterating – and reiterating – the whole hard way through to success! Will you fail? Perhaps, but don’t insist on it being part of your journey – be prepared to deal with it and make plans to successfully attack the problems you choose or are compelled to face.
Yes, “Not failure, but low aim, is the crime” (James Russell Lowell). True, “Never give up, never give up, never give up” (Winston Churchill). Absolutely, “We never lose, but sometimes the clock runs out on us”(Vince Lombardi). Definitely, “It’s not that you fall down, but that you get up again”(Dozens of folks!).
Always, Edison, “I have not failed. I’ve just found 10,000 ways that won’t work.”
BUT…Never, “Plan to Fail”!!!
Martin Lindeskog
I agree with Roy Ackerman that you have to learn correlation between cause and effect. I have learned plenty of things from my failures. I wrote an article (“Five Lessons Learned from my Start-up — And why I’d Do it Again”) on this topic on Open Forum in 2009.
Have you read “Bounce!: Failure, Resiliency, and Confidence to Achieve Your Next Great Success” by Barry Moltz?
Failure and Success are not end points, they are both continua. Every day there are examples of success and failure that pass by without proper evaluation. Why did we win this new client and what have we learnt? Why did we lose this client and what have we learnt? Both examples of events that are important yet most businesses brush over these events as if they were part of some so called flow of luck, rather than examples of a specific outcome that can provide useful instruction. Few companies evaluate anything properly, so waiting until your organisation is bankrupt is hardly the best time to look back over performance and pick over a trillion events that might or might not have contributed to the downfall. It’s not an iterative process yet the inference is that “having another go” should lead to success this time. All you need do is correct one small aspect of your business each time it fails and eventually you’ll get it right. My recommendation is continuous evaluation.
Jon Goss
I like to think from a photographers perspective. I could take 100 photos of a subject and choose one that I think is great quality. This doesn’t mean that the other 99 photos are substandard. Its just a process to find what works best.
David L
First, as with most endeavors, the only way to learn is by doing and the only way to really improve is also by doing. Repetitions are the key to improvement.
Second, it is foolish to think that there are not common elements or fundamental aspects of starting a business that are applicable in every startup. Therefore, based on the above, the repetition theory would apply. With each rep, you get better, you master those elements that you have performed before, which inevitably gives you a greater chance for success.
If no improvement is made, the blame should be placed on the practitioner for lack of effort in executing the repetition at full speed.
Jeri Vespoli
“If at first you don’t succeed, don’t try again?”
I don’t think many would support, quotable quotes aside, that failure is the only way to achieve success. Was that the even the topic? I thought the topic was whether we should question the propagated belief that entrepreneurs learn from failure. Obviously, some do…some don’t.
Should we find more evidence supporting that most do in the hope that venture capitalists (and employers, as Anita suggests) will be more open to taking a chance?
Or, should we work to disprove it so that, as Scott suggested, we avoid the potentially associated costs of diminished returns on investment and missed opportunities to enhance economic growth and job creation*. Would disproving it affect any change in investment or economic development?
And what, if it is disproved, of the loss of benefits that Anita and others alluded to – the lost opportunity for potential success?
Shouldn’t we, instead, ask what we could do to make belief truer? Or, at least, what additional facts we can gather that might help us make it true?
To answer to Scott’s thought provoking questions, I don’t think it is worth considering the validity of the assumption that entrepreneurs learn from failure. I do think it’s possible that we overestimate the degree to which failure breeds success, but would rather we explore any measurable ways the belief affects our culture and economy. IMHO, we gain more than we lose from the belief.
Do I think that small business owners learn too little from their errors to do better the next time around? No, I don’t. But even if I did, I’d rather ask what else we could do to help more small business owners learn more from their failures more often.
Do I believe that only a small minority of entrepreneurs manages to learn from failure? Maybe the question should be: How can we help to make it more likely that a larger majority of entrepreneurs will learn from failure and go on to succeed.
Or is it perhaps that academics studying the topic aren’t very good at identifying what entrepreneurs learn from their mistakes? I think, perhaps, we don’t always consider the right questions, or the right data sets, for our studies.
*I really take exception to the notion that venture-backed IPO’s are the standard by which to measure entrepreneurial success. Not only does the Harvard working paper define entrepreneurs as the founders of venture-backed firms, it doesn’t gather any data on failures and successes of those founders in prior non-venture backed firms. ”Firms that have received early-stage financing exclusively from individual investors, federally chartered Small Business Investment Companies, and corporate development groups are not included in the database.” “To the extent that prior experience in non-venture-backed companies is important, we will be understating the effect of entrepreneurial experience.”
http://www.hbs.edu/research/pdf/09-028.pdf
Neal O'Sullivan
Professor Shane, what an outstanding post. Pursuant review of your article I am in agreement with your thesis. In addition, I am in agreement with Anita’s comments as well as David L’s remarks. Dr Ackerman’s distinction between correlation and causation was also very fruitful.
I have to say as a big fan of SBT, this is one of the best posts I’ve read.
Tom Gill
So success or failure isn’t a good indicator of future success (20-30% vs 18%). You still need to learn from failure. You also need to learn from success. It’s the learning part that is important. So do, learn, and repeat as necessary to succeed. The success or failure part only makes it more (or less) pleasurable and (financially) possible.
Kevin Gallant
It seems like everybody’s projecting either their own self-image or the idea of others (re: Thomas Edison failed a bunch! Geniuses fail too!), but I think the point of this article isn’t that we shouldn’t be persistent or hard-working, but we should be REALISTIC in entrepreneurial attempts.
All this “economic stimulus” and “empowering the people” stuff make a LOT of messages in the media and especially in SMB writing on the internet VERY biased towards “YOU CAN DO IT! BE AN ENTREPRENEUR! IF YOU ARE THIS (insert list here) TYPE OF PERSON, YOU WILL BE A GOOD ENTREPRENEUR!”.
People read these lists, and BELIEVE IT OR NOT, people have NO IDEA what their actualy personality traits are. HUGE gap between the actual self and the desired self, and that definitely takes hold when they say, “I’M THAT PERSON! I’M GOING TO BE A GREAT ENTREPRENEUR! I look forward to trying and maybe succeeding, but if I fail, I know that hard work will pay off!”.
REALLY what they should be able to do is say, “my personality, beliefs, work ethic, and lifestyle DON’T fit this ideal state of entrepreneurship that I’ve read and heard about, so I think I can be better off in {X career/job/whatever} that I can be most effective and happy”.
Sure, the internet’s great for making change happen and providing people with tons of very useful and important information, but sometimes we might give somebody too much credit in pushing them to be an entrepreneur and they really aren’t cut out for it.
Neal O'Sullivan
Kevin Gallant raises several interesting points. I especially agree with his closing remarks that entrepreneurship isn’t for everyone. Moreover, most do not understand the self sacrifice that comes with the job. Speaking personally, I have created and operated three separate companies…employing 25 FTE’s . Doing so required working seven days a week for years at a time as well as two divorces. Anyone who measures the cost-of-capital in strict financial terms is naïve.
Kevin touched an issue that always confounds me (in the press- you know the group that is supposed to elucidate). So much so, that I wrote an article about this.
We seem to interchange the concepts of entrepreneur, small business, and startup. They are (at least in my mind) very different.
Most small businesses are mom-and-pops, also known as lifestyle businesses.
An entrepreneur (or entrepreneurial venture) is one that plans to grow an enterpise. More often than not, it is based upon a new process or product and the enterprise is built around the novel concept (or delivery model).
If the new product or process is technical and the goal is to raise capital (venture and/or public funds), it is typically termed a startup. (Now, we have the problem of defining when a startup is no more- when it is a vital enterprise. Think Facebook.
Unless and until we agree on common definitions, communication and discourse fail.
Anita Campbell
Interesting distinction, Roy, between entrepreneurs and small business — but I respectfully disagree.
Small businesses can be up to 100 employees — hardly a Mom and Pop. (Or if you follow the SBA’s definition, they could be up to 500 employees or even more in some industries.) But to suggest small businesses don’t want to grow is to not understand what motivates many small business owners.
To me, “entrepreneur” denotes the person and his/her personal characteristics — someone who can start something from scratch. A small business denotes a business that is of a certain size. Startups are simply early stage companies, and due to being early are probably small.
I am an entrepreneur because I started a business — I am someone who started something from a clean sheet of paper. Early on my business was a startup. Now it’s a small business because of its size. I’m still an entrepreneur — that won’t ever change, because I get a thrill from creating things.
What you’re describing with the use of the term “entrepreneur” is a so-called “high growth company” that goes after investment money. Well, been there, done that. Don’t ever want to do it again. I want to be in control — strike that, I NEED to be in control. And I want to make my own mistakes and create my own successes. I don’t want a Board looking over my shoulder, and just because things don’t seem to be moving as fast as they want or because I communicate in a feminine way instead of the way they want to be communicated to, wresting control from me. My destiny is my own to create and I am driven by forces that spring from within me — the desire to create and grow something bigger than myself; the satisfaction that comes from giving people “employment” (even if as freelancers or service providers); the desire to create something that gives me joy when it receives accolades. A paycheck will never replace those kinds of feelings and forces. And just because I choose to be in control of my company’s destiny without an interfering Board and investors calling the shots, doesn’t mean I don’t want my business to grow. And it doesn’t mean I’m not an entrepreneur.
And the same goes for other small business owners. Do all of them want to grow their businesses? No, not all. But please don’t shortchange the millions who do want to grow, but need to stay in control as they do so.
– Anita
kevin
Boom, Neal got that spot on.
It might seem cool to always need a smartphone on you in case of emails, and having to spend tons of time “at the office”, but all these things are WORK and can very easily get bigger than a person.
Neal O'Sullivan
Dr. Ackerman. You post a most interesting comment. Allow me to comment on your point-of-view. At time zero all “start-ups” are “entrepreneurs”, “Small businesses”, “Mom & Pop’s” – simultaneously. The key differentiation is their business plan. No one desires to have a ‘Mom & Pop” operation as their terminal business volume solution.
A “front-of-the-house” mentality alone, will never gather capital to advance a unique defensible competitive advantage. But, I’m sure you already know this.
Neal:
To the outsider, it may so appear to be uniform at the start. However, if you speak with the individuals involved, it is inherently obvious who intends to start a small business. Oh, yes, they may declaim otherwise, publicly. Yet, when you ask certain questions or listen to their descriptions, it becomes clear what the objectives are.
Regarding the difference between a startup and an entrepreneur, it may be more difficult to completely discern. But, after 90 to 120 days of operation, it is clearer, as long as one understands the basis behind the (flawed) study to which we are officially responding. Certain startups are not destined to become more than that- whether due to the psychology of the perpetrators, their market niche, or their (or their product’s/process’) capabilities.
Between the two extremes- startups and small business, one does not need a crystal ball to predict the outcome (other than the long-term existence of the underlying enterprise)- it’s evident at the outset. Between entrepreneurs and small business is a little harder to discern in advance, but not within the first quarter of operation. And, between entrepreneurial and startup ventures, the evidence seems crystal clear long before the completion of the first year (and probably the first six months).
OK, Anita:
I don’t believe our government has one iota of sense when it comes to what it defines as “small business”. After all, with the interlocking S and LLC entities, many of the big accounting firms and beltway bandits manage to get considered among small business.
I also would agree with your self-definition as an entrepreneur. I never defined small businesses as those that don’t want growth. However, they tend to be risk-averse- refusing to branch out, automate, change systems and the like. For example, I consider most law firms (since most lawyers work for entities of 5 or less) to be mom-and-pops. Most small physician offices, as well. It’s the nature of the “owner” that makes it clear whether it is an entrepreneurial endeavor or not.
So very well put, Anita. It seems, more often than not of late, that entrepreneur, small business and startup are being used interchangeably with “high growth company”.
I am an entrepreneur and a startup, not because I desire to grow to be the size of Google, but because I innovate products and services to fill needs and assume the risk and responsibility for their profitability and value. I am a business when that risk begins to pay off – for me, those I may employ, my vendors and service providers, and the markets I serve.
It occurred to me as I read comments here that it is certainly a challenge to measure the economic impact of entrepreneurial success or failure when we can’t seem to agree on definitions of not only entrepreneurship, but the multiple business categorizations that clearly measure their failures and successes very differently.
Some by employment size and sales volume, some by the ability to support themselves and their employees and families while contributing value to a market, and some by high ROI, big buyouts, or the rounds and amounts of venture capital raised.
Which brings me back to whether we can or should explore the impact of the “entrepreneurial failure breeds success” mindset, or should we be asking other questions – at least at first – to better define the the scope of entrepreneurship and gather better data.
I came across a post yesterday entitled “Entrepreneurship Is …” and liked this excerpt: “Entrepreneurship is a science to academics who study it. And by the way, scientists: hurry up! Get us better information on what works or doesn’t and why. Improve on existing methods and studies … (not) that there aren’t some exceptions, but the rule is they are mired in conflicting definitions, lack of random data points, and political biases. Business starts? Failures? Causes of failure? Get going on it, and do it better, please. It’s pretty important” http://ow.ly/46nC3
Stuart
The contention of this article is spot on! I have carved a business out of assisting companies going through change, succession or business recovery as their Interim CEO or as a Board Advisor.
My credibility to do this arose simply because I did fail as a business leader and it cost me incredibly.
Fortunatley, I learned many valuable lessons though this period and have been able to return to help others again and again and again!