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Try, Try Again, or Maybe Not

By Julia Pierce,2014-01-11 07:31
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Try, Try Again, or Maybe Not

March 22, 2009

    Prototype

    Try, Try Again, or Maybe Not

    By LESLIE BERLIN

    IF at first you don’t succeed, it doesn’t matter that you tried.

    That seems to be the message of a working paper prepared recently by a team at Harvard

    Business School. The study found that when it comes to venture-backed entrepreneurship,

    the only experience that counts is success.

    “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.”

    The study looked at several thousand venture-capital-backed companies from 1986 to

    2003.

    Professor Gompers and his co-authors Anna Kovner, Josh Lerner and David S.

    Scharfstein found that 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.

    In other words, trying and failing bought the entrepreneurs nothing it was as if they

    never tried. Or, as Professor Gompers puts it, “for the average entrepreneur who failed,

    no learning happened.”

    This finding flies in the face of conventional wisdom in Silicon Valley, where failure is

    regarded as an important opportunity for learning. No less an authority than Gordon

    Moore, a co-founder of Intel, says that in the Valley, “You’re more valuable because of

    the experiences you’ve been through under failures.”

The basic idea behind the embrace of failure is this: Entrepreneurs who have built and

    then tried to save a company have seen what does and doesn’t work. This experience is

    viewed as excellent preparation for tough situations that might arise in a new venture.

    “Given conventional wisdom, we were expecting to find much lower differences between

    failed and successful entrepreneurs,” Professor Gompers concedes. Not all failures are equal, explains William H. Davidow, a founding partner in the

    venture capital firm Mohr Davidow Ventures. A company might fail because its timing

    was bad or because the entrepreneur was a poor manager. Mr. Davidow, who says he

    would have expected “a higher follow-on success rate for the failed entrepreneurs,” says

    that an entrepreneur who has failed in a previous venture “would get in the door to talk to

    me” about a new idea. But, he adds, “I would want to know why that last deal failed, and

    what the person learned from it.”

    Mark Pincus, founder and chief executive of Zynga Inc., a San Francisco company that

    develops online games that can be played on social networks like Facebook and MySpace,

    says his previous company, Tribe.net, “is for sure a failure from the investors’

    standpoint.” Tribe.net was an early social networking company that Mr. Pincus says

    raised $9 million in venture capital before it was liquidated in 2006.

    Despite this outcome at his previous company, Mr. Pincus has raised $39 million in

    venture capital for Zynga, which he says is profitable and has eight million daily active

    users. In part, the support he received from venture capitalists reflects the fact that Mr.

    Pincus founded two successful companies before Tribe.net.

    But Mr. Pincus also thinks that in general, venture capitalists expect entrepreneurs to take

    risks, and both groups anticipate occasional failures.

    “As an entrepreneur, you have to get used to failure,” he says. “It is just part of the path

    to success.”

    Terence Craig, founder and chief executive of PatternBuilders, a company in South San

    Francisco, Calif., that builds software for the retail industry, says that “there is such a

    thing as valiant failure.” Mr. Craig says his first software company, Optimize Solutions, raised $4.5 million but closed in 2001 when the tech bubble burst.

    At PatternBuilders, which Mr. Craig started in 2005, he has put into practice several

    lessons learned at Optimize. He says he is savvier about assessing competitors and

    “focusing on customers’ needs.” Experiences at Optimize also taught him that people

    who have been successful in large companies are not necessarily going to work out at a

    start-up, he says. Instead, he looks for “an entrepreneurial mind-set.” Mr. Craig says that his company will announce “two Fortune-500 customers next quarter” and that he is optimistic about PatternBuilders’ future. He also believes that if

the company fails, “there is no downside from a career perspective.” Even in the down

    economy, he says, he and his 15 employees are receiving recruiting calls.

    ALTHOUGH the study found that in general, failures are not a particularly effective

    teacher of entrepreneurship, Professor Gompers said that “absolutely some entrepreneurs

    can learn” from them.

    “There are some talented entrepreneurs who fail on the first time, learn and then

    succeed,” he said. But, he added, “that is not the rule.” Where does Silicon Valley’s deep-rooted belief in the value of failure come from? Mr.

    Gompers suggests what he calls “attribution bias” — people generalizing from anecdotal success-after-failure stories.

    “There is a lot of industry folklore and myth out there,” he says. “We tried to bring data

    to bear on it.”

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