Innovation and failure

Is learning from failures overrated? When emphasizing the importance of learning from errors, are we actually creating a culture of losers? Read on to hear arguments on both sides of this discussion and make up your mind. Your company’s survival in the long term may depend on it.

I had a good laugh last week when I stumbled upon the following Peanuts comics strip in my feed reader:

That reminded me of a couple of presentations I attended in the past. The first one was back in 2006 by the then CIO of Disney, Tony Scott–now with Microsoft. In a very inspiring keynote to IBMers in Orlando, he said: “Create a culture where you’re allowed to fail from time to time. An error-adverse culture cannot expect much innovation to occur”. Note that those were not necessarily his exact words, but my poor recollection of what I think he said.
The second one was by Mike Moran in the following year, speaking about Marketing 2.0. I vividly recall him concluding his presentation with a slide with the following remarks:

• Do it wrong quickly and then fix it
• Let the market tell you what works and what doesn’t, and then quickly do it better
• Listen, learn and adjust

Those two talks made an impression on me, and I’m a firm believer in the role that failure plays in the innovation process. Knowing that, a colleague at IBM pointed me to an interesting blog post by Jason Fried, from 37signals, who challenges that whole concept: “Failure is overrated, a redux”. It’s a good post, and the comments are also worth reading. To have a complete picture of the discussion, I suggest you to also read the New York Times article Jason refers to, “Try, Try Again, or Maybe Not”.
As it’s often the case in heated discussions, I initially found that Jason was defending a completely different perspective toward failure and learning, but this comment of his on another related post made me think that the difference is mostly one of weight.

“Everything is a learning experience. It’s just that I’ve found learning from your successes to be more advantageous. (…) I’ve always found more value in learning from the things that work than the things that don’t.”

I definitely can live with that position. What I have more trouble with is the cited Harvard Business School working paper. Here are some excerpts from the NYT article:

“The data are absolutely clear,” says Paul A. Gompers, a professor of business administration at the school and one of the study’s authors. “Does failure breed new knowledge or experience that can be leveraged into performance the second time around?” he asks. In some cases, yes, but over all, he says, “We found there is no benefit in terms of performance.”
(…) first-time entrepreneurs who received venture capital funding had a 22 percent chance of success. Success was defined as going public or filing to go public; Professor Gompers says the results were similar when using other measures, like acquisition or merger.
Already-successful entrepreneurs were far more likely to succeed again: their success rate for later venture-backed companies was 34 percent. But entrepreneurs whose companies had been liquidated or gone bankrupt had almost the same follow-on success rate as the first-timers: 23 percent.

If the article is accurate–and that’s a big if, considering that this is still a working paper–it seems that the HBS research is not actually proving that “when it comes to venture-backed entrepreneurship, the only experience that counts is success”, as stated in the opening paragraph. It basically demonstrates that entrepreneurs who managed to go public or filed to go public are slightly more likely (going from 22% to 34%) to have a repeat, but isn’t that expected?
There are several factors that come into play filing a venture to go public, and having done it once gives an entrepreneur some knowledge of what it takes to get there again. I actually find surprising that, even with that edge, the rate of failure is still very high. Another way to interpret the same data is: roughly two thirds of entrepreneurs who were successful the first time (and I’m using the same loose definition of success here) fail the second time. If anything, the data tells me that success is also overrated.
The “learning from failures” approach makes more sense when you take a more granular approach to it. Every single initiative you undertake is composed of a vast number of small wins and losses. You definitely can learn from both outcomes, and I don’t think you learn more from one than the other, so embrace both. The fundamental message when advocating a culture that allows failure to occur from time to time is to avoid analysis paralysis, or even worse, denial–by hiding what went wrong and exaggerating what went right.
The bottom line is that innovation entails good risk management and shares many features with the financial world. Low-risk initiatives are likely to generate low returns, and don’t give you much of a competitive edge. Being bold may lead you to collect wins and losses along the way, but also can reward you more handsomely overall. Knowing that, it’s important that you balance your innovation initiatives the same way you handle a portfolio: diversify them and adjust the mix to your comfort level. During economic downturns like the one we are going through now, it’s easy to panic and stop innovating. Keep in mind that a solid and consistent long term approach to innovation may determine your ability to survive in good and bad times.