Categorized | the strategy notebook

In the world of entrepreneurship, failure teaches you . . . failure.

A research group at Harvard Business School has released a new study about venture capital financed entrepreneurs and has provisionally concluded that, well, nothing suceeds like success. While it may be true in most avenues of life that failure teaches valuable lessons, the Harvard researchers have found that failure teaches absolutely nothing. To bastardize a bit of Nietzsche, “the only thing failure teaches us is that we don’t learn from failure.”

Statistically, 18% of venture capital financed start-ups run by first-time entrepreneurs succeed (with success defined as an actual or announced IPO). As far as second- and third-time entrepreneurs are concerned, 30% of previously successful entrepreneurs succeed again, while only 20% of failed entrepreneurs succeed on the second, third, or nth time out. No better, that is, than first-time entrepreneurs.

The researcher at the head of the study, Paul Gompers, does acknowledge that some entrepreneurs learn from failure, but that is the exception rather than the rule.

You can download the entire working paper here.

While the conclusions seem to buck perceived wisdom amongst all the entrepreneurs and VCs I know, I don’t find it unexpected.

I’ve spent pretty much the last decade working with entrepreneurs including my fair share of VC financed start-ups. There really is no such thing as an “entrepreneur” type (really), but there are some common features of the majority of entrepreneurs who have failed (which is the majority of entrepreneurs I’ve worked with).

The first and most important are individuals who attribute success to themselves and failure to other causes. They are, in the common parlance, windows for credit and mirrors for blame. I have always believed that the first rule for successful entrepreneurship is to successfully come to terms with what and how much of the venture is under your own control. You can never fix external circumstances, but you can fix your effective response to them. That ability to find and focus on your mistakes makes it more likely that the first venture will succeed and, if not, that the second one will.

Universally, every failed entrepreneur I’ve dealt with is ineffective at adaptation. They are rigid and, when they do adapt, over-compensate. Successful entrepreneurship means changing the game plan. Steve Jobs and Steve Wozniak marketed the Apple II as a small business machine, making high-level computing, such as accounting and databases, available to small fry. Of course, small businesses didn’t want to waste their time on big business computing. But because the Apple II came with a spreadsheet (VisiCalc), it was adopted en masse by managers at big companies. So the Steves adapted their business strategy to the new (unexpected) reality. When video games became the real selling proposition for home compuers, the Steves decided that their precious Macintosh was too high-falutin’ for mere game-playing. They didn’t adapt (in other ways, as well), and the story played out the other way.

Reality is a stubborn opponent with a mean serve. If you move to the serve, you might just eke out a return. If you stubbornly hold to your place, the reality will ace you every time.

Why the Gompers results are not surprising is that adaptability may not be a highly learnable quality. Reflection, critical thinking, and the ego security to change your mind and your strategies are acquired over a lifetime, not learned in the micro-span of a startup failure.

I have, of course, talked about this in a previous post on pessioptimism.

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