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Silicon Valley likes to celebrate failure as a nursery school for success. That is a good thing given that failure is such a common feature of the start-up world. Some 90 per cent of start-ups fail — even in the good times. “Fail fast, fail often,” is a phrase that often passes founders’ lips.
The latest venture capital winter, which saw global funding fall 61 per cent between 2021 and 2023, has led to a fresh wave of corporate deaths. The data firm CBInsights has tracked 483 recent start-up failures and identifies several reasons for their demise: running out of cash (never a good idea), being outgunned by competitors, feuding founders and/or investors, and exhaustion and burnout. Valley mythology suggests such failures can be a “learning moment” that teaches resilient entrepreneurs to be smarter next time. “Success is a lousy teacher,” as the Microsoft co-founder Bill Gates once said. “It seduces smart people into thinking they can’t lose.”
There are, though, two flaws with this seductive theory. First, it tends to ignore the collateral damage and human cost of failure. No one celebrates the failure of a company like the fraudulent cryptocurrency exchange FTX, which saw its founder Sam Bankman-Fried go to jail, even though it was a “learning moment” of a different kind for investors. We rarely hear from those who do not have a second act. Failure can crush people’s health, wealth and relationships, wrecking lives. The last thing many failed founders want to do is to jump back on a white-knuckle, roller-coaster ride.
Second, we tend to exaggerate how often failure leads to subsequent success. An interesting paper this summer from the American Psychological Association argued that the benefits of failure were overrated. “People expect success to follow failure more often than it actually does,” said Lauren Eskreis-Winkler, the lead author and assistant professor at Northwestern University.
Failure can undermine motivation and confidence and does not always lead to people self-correcting. In most other fields, we assume that past behaviour is a pretty good predictor of future behaviour. Why, the paper’s authors ask, do we think differently when it comes to failure and success?
Still, to my mind, there is something inspirational about Silicon Valley’s willingness to bet on probable flops, even if everyone agrees that failure is best avoided. Economic progress depends on bold people taking risks and applying technology in new ways to do different, sometimes crazy, things. This week’s report from Italy’s former prime minister Mario Draghi on how to boost Europe’s competitiveness contained many worthy technocratic remedies that should be rapidly implemented. But he should have emphasised the cultural change and tolerance of failure needed to stimulate more risk-taking enterprise.
European policymakers could learn a lot from a far shorter essay by the tech investor Paul Graham, who recently distinguished between what he called founder mode, in the early days of any start-up, and manager mode, when investors insist that “grown-ups” are needed to scale a business. Based on the experience of several founders, Graham argued it was often a mistake for companies to switch too quickly from the first to the second. Companies need to retain the culture of urgent risk-taking and experimentation that characterises founder mode.
Manager mode clearly applies to bigger companies, where incremental innovation is the norm and disruptive innovation the exception. Arguably, it is also the default mindset of much of corporate Europe. The ideal, of course, is to combine the best of both modes: the scope and capabilities of a large company and the spirit and flexibility of a small one, as Amazon’s founder, Jeff Bezos, has written. To survive in our fast-changing digital age, even a company as enormous as Amazon needs to retain an experimental, customer-obsessed Day One mentality.
That is especially difficult when incentive structures change in bigger companies, when corporate bureaucracy and politics intrude and regular salaries and bonuses become more important than shares. That all too often leads to the prioritisation of risk minimisation over reward maximisation, perfectly captured by the economist John Maynard Keynes: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
The genius of Silicon Valley is that it despises conventional failure and tries to create a safe space for unconventional success. More companies, especially in Europe, need to re-embrace that founder mode.
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