The Power of Failure

Inventors tried hundreds of designs before the Wright Brothers made powered flight practical.

Inventors tried hundreds of designs to make flying machines practical.

Looking at the glittering corporate campuses of booming technology startups in places like Silicon Valley, Boston, or North Carolina’s Research Triangle, it is easy to see nothing but success. But one of the secrets of entrepreneurship is that all of these successes are built on a culture that embraces failure.

It is a surprising truth borne out again and again by business researchers: the places where entrepreneurs have the most success are the ones where it is least painful for entrepreneurs to fail. Only a system that allows individuals to take great risks will see the great rewards that come from truly path-breaking innovation. As Jonathan Ortmans puts it, “the ideal environment for innovation not only celebrates success, but also accepts—if not encourages—failure.”

All entrepreneurs benefit from good education systems, effective courts that enforce contracts, well-functioning financial markets, reliable infrastructure, and regulations that don’t block business formation or stifle new ideas. Often overlooked, however, are the laws and policies that come into play when a new idea doesn’t work out — bankruptcy rules, limited liability corporate structures, and favorable tax treatment for business losses, for example. These can be just as important to driving innovation.

This idea may seem counterintuitive in a developing country context, where entrepreneurs lack basic supports that their counterparts in the developed world take for granted – like an electricity grid that allows them to keep the lights on.

Then again, inventor and entrepreneur Thomas Edison did not have this luxury either: he had to conduct thousands of failed experiments before hitting on a successful design for the electric light bulb, and then had to build the infrastructure to power them. In the 21st century, the corporate descendant of the company that Edison founded in 1880 ensures that today’s entrepreneurs in and around New York City have reliable electricity to run their businesses. Edison famously said, “I have not failed. I have just found 10,000 ways that won’t work.”

Many historians credit the risk-tolerant atmosphere in America and Europe in the late 19th century with fostering the rapid technological innovation that powered the industrial revolution and the phenomenal economic growth of the 20th century.  Prior to bankruptcy reform, debt and a run of bad luck could ruin anyone from a small tradesman to a rich aristocrat. Even Abraham Lincoln went bankrupt in 1833, when he ran a small shop — as did two other 19th century U.S. Presidents and many early American notables. The elimination of debtors’ prisons, the  introduction of bankruptcy proceedings, and corporate structures that limited the personal liability of investors allowed entrepreneurs to take the risks which helped the United States and other industrialized countries to flourish.

Henry Ford, an innovator of modern mass production methods, failed at four separate companies before developing the famous Model T that brought automobiles to the masses, something that was only possible due to corporate structures that limited liabilities for Ford and his investors. Ford’s major competitor, William C. Durant, lost control of his General Motors company in 1910 due to taking on too much debt, and went on to found Chevrolet in 1911. Forty years later, these were some of the most successful corporations in the world, employing hundreds of thousands of people.

Or take a more recent example: after being forced out of Apple in 1985 during a boardroom power dispute, tech pioneer Steve Jobs started a new company called NeXT Computer. When his initial seed capital ran out, he sought hundreds of millions of dollars in venture capital funding. Though the company’s workstations were never a commercial success, many of the technologies, ideas, and concepts developed at NeXT would later help Jobs to build Apple into the most profitable company in history after his return in 1996. In fact, the World Wide Web itself was invented on a NeXT computer in 1991, launching a technological revolution that reshaped entire industries.

These stories hold important lessons for countries that desperately need entrepreneurs to drive innovation and economic growth. Bankruptcy regulations in particular have been identified as a priority area for reform in Egypt and a number of other countries in the Middle East and North Africa where the frustrations of entrepreneurs and the unemployed boiled over into the Arab Spring in 2011. In many of these countries, debtors who default on their obligations can still be thrown into prison, which makes entrepreneurs and investors far less likely to take risks on bold new ideas.

What would happen to an Egyptian Henry Ford or a Tunisian Steve Jobs today? Would they end up impoverished or in prison when their initial ideas failed to pan out? Would they ever find investors for such risky businesses in the first place? Or would they do as many smart, ambitious people whose career options are stifled – and emigrate? This was the path chosen in 1979 by two young Soviet scientists, the Brins, whose 6-year-old son Sergey went on to co-found Google in 1998.

To develop a truly entrepreneurial culture that can drive economic growth and create jobs, policymakers need to look at the entire ecosystem of institutions, including those support successful entrepreneurs and those that accommodate the ones who don’t succeed — but whose ideas might one day change the world.

Jon Custer is the Communications/Social Media Coordinator at CIPE.