When it's OK to fail
Entrepreneurs have a reputation for bouncing back from business setbacks. And investors can learn a great deal from their outlook.
It’s well-recognised that US hotspots of innovation – from Silicon Valley in California to Silicon Alley in New York – are littered with failed companies. One long-term study by Harvard Business School lecturer Shikhar Ghosh indicates that three quarters of the country’s venture-backed companies don’t end up returning investors’ capital. That low hit ratio is by no means a bad thing: in such cultures, failure (both business and individual) is rarely regarded as negative but rather a misstep, a learning experience on the route to success. Indeed, “Fail fast” has become something of a corporate mantra in tech circles.
While such attitudes are hardly universal around the world, there is evidence that many wealthier individuals think more like Silicon Valley start-up executives and VCs, exhibiting a broad acceptance of the upside of failed ventures and investments gone awry.
A survey of 2,100 high net worth individuals conducted by Ledbury Research in 2012 found that three quarters believe failure needs to be viewed in a positive light within any economy in order to encourage innovation and growth; and just over half regard their own past missteps in entrepreneurial endeavours as contributing to their chances of business success in the future.
What is even more striking is how such attitudes to adversity vary around the globe. The research report, If at First You Don’t Succeed…, which was commissioned by Barclays Wealth and Investment Management, suggests that in dynamic, fast-growing economies wealthier individuals have a considerably higher tolerance of failure than their counterparts in other regions. So while around 40 per cent of respondents from Europe and the US believe past failure increases the chance that a subsequent venture will succeed, that rises to around three quarters among respondents from Asia and the Middle East.
Such attitudes are largely inspired by local business conditions. Entrepreneurs in countries such as India and China operate in highly constrained environments, encountering high levels of bureaucracy, restricted access to resources, and ultra-competitive business settings, says the report, making them adept at overcoming obstacles. “This requires resilience, a reluctance to give up and a perception that failure is not an absolute outcome but one step on the journey to success,” says one of the report’s key contributors, Navi Radjou, an innovation and leadership strategist and business author.
Lessons for investors
The ability to keep bouncing back is typically underpinned by high levels of persistence and optimism, the Ledbury research found – characteristics that are, in fact, innate in most successful entrepreneurs, no matter their origin.
In this respect, financial investors can learn a lot from entrepreneurs on dealing with adversity. “Entrepreneurs use their persistence and optimism to create a healthy relationship with failure,” says the report. “Rather than being discouraged from starting a new venture, many entrepreneurs will bounce back from the experience; they regard failure as a chance to refine their approach, draw valuable business lessons and perform better next time.”
With six out of ten wealthy individuals saying they have experienced significant setbacks with their investments at some point, the capacity to handle adversity as well as success can lead to better financial decision-making – especially important in periods of economic uncertainty and market volatility. “Investors who see losses in their portfolios as ‘failures’ are more likely to respond badly, sell low and lock in the loss,” the report says. Instead, they should accept that losses across a well-balanced portfolio are likely to be temporary and, indeed, view periods of low valuation as a time of opportunity, the authors conclude.
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