Why VCs look Kindly on Failed Entrepreneurs
What happens to an entrepreneur after running his company into the ground? Are financial investors willing to forgive and forget when he develops his next great idea? Is their life after Webvan?
As a matter of fact, failure might be seen as a positive the second time around, says Harvard Business School professor Bill Sahlman, an expert on entrepreneurialism.
"A distinguishing characteristic of the U.S. economy, of U.S. culture, if you like, is failure is never permanent. You're not kicked out of the game," Sahlman says in this video interview on Big Think. "As a matter of fact, if you are part of a failed venture, as long as you didn't lie, cheat or steal, you're considered 'experienced.'"
VC firms may look kindly on failure because there is so much of it going around. Over the past 15 years, according to Sahlman's research, 60 percent of high-potential start-ups backed by professionally run venture firms failed.
Failure, if handled properly, can actually enhance a career, says another HBS professor, Shikhar Ghosh. That's not just because the executive is smarter coming out the other side, but also because of networking opportunities with venture capitalists and other entrepreneurs that were developed through the life-death cycle of the enterprise.
But here is the sad reality: most start-up execs don't learn enough lessons from a crash-and-burn. More research out of HBS demonstrates that failed entrepreneurs had about a 23 percent chance of success in their follow-up venture (about the same rate of success as first-timers), while already successful entrepreneurs had a 34 percent chance. So success is the better teacher than failure.
The lessons here? I see three:
- Most entrepreneurs fail. When you spit the bit, know that you are in the company of great men and women, noted failurists such as Steve Jobs (NeXT). Don't blame someone else for your troubles -- instead understand what went wrong and why.
- Failure isn't penalized. Dragging a start-up into the ground could be considered a positive by some of the money guys -- just don't make a habit of it.
- Success is the Best Teacher. When ultimately you do succeed, pay even more attention to why and how.
Related Reading
- Failure is Great for the Entrepreneur's Resume
- Why Success Breeds Failure -- and What To Do About It
- Do Entrepreneurs Learn From Failure? Not Really