Keep your fiscal powder dry. Barry Eichengreen

The Benefits of Failure

Failed companies are often regarded with suspicion: “Look who didn’t make it!” But the problem isn’t failure itself: it’s the failure to learn from hard times.

A good friend of mine once founded a company and ran it headfirst into a wall. But when he talks about his experience today, there’s not a hint of frustration in his voice. He learned a lot, he says. Complete failure was a benefit. After declaring bankruptcy, he completed internships in several other companies, gathered experience, and talked to seasoned entrepreneurs. And he learned. Eventually, he founded another company, build up a multi-million dollar business and successfully sold it. He invested in companies – not only money, but also time and know-how – and received good returns on his investments.

Not everyone has a learning curve that is as steep as my friend’s. He shall remain unnamed here, suffice it to say that he is now regarded as one of the bright stars of the German start-up scene. The moral of the story: every failure is also a chance.

To make it clear: failure must never be the goal of entrepreneurialism. Nobody wants to fail. Nobody should plan towards failure – especially when the money at stake belongs to others, who have worked hard for it elsewhere. I have never met a company founder who held a different opinion.

But failure isn’t just a product of the decisions and actions of the founding entrepreneur. A company can be well-positioned but face a competitor with deeper pockets and faster development cycles. Or an innovation might sweep across the market, and the company finds itself – for whatever reasons – unable to respond as quickly as others. If those things happen, a successful business can quickly turn into a money-losing venture. The only remaining change might be to sell the company to a competitor who extracts valuable ideas and personnel from it, but usually doesn’t leave much of the founder’s original vision intact.

What should an entrepreneur do if his start-up stumbles and falls? A thorough analysis of past mistakes is the most powerful tool to avoid similar missteps in the future. Maybe the company grew too quickly? Maybe it pushed too aggressively into new markets? Maybe the product range was expanded so quickly that the core product became diluted and focus was lost? In those cases, monthly operating costs might rise as quickly as management focus declines.

Judging by movies that have been made about the start-up industry, the development of an idea appears to be the central part. Next, a few quick snapshots of the new office before the exit is celebrated in all its colors: the company is sold, expensive cars are purchased, lavish parties are thrown.

But the most important aspect of a start-up’s success remains invisible to the movie audience: the time spent behind desks. Moments when predictions don’t come true and adjustments become necessary. Moments when creativity and decisiveness converge. When entrepreneurs change course and reorient their company.

If the quest to rescue a struggling company isn’t successful, the implication must not be that the founder and his team are failures. Common sense is wrong in this instance.

Those who have founded a company but have failed to build it into a successful business are easily stigmatized: they don’t receive bank loans anymore and are shunned by their former social circles. But it takes the experience of failure to avoid mistakes during the second attempt. It would be smart to listen closely to those who have failed but now stand before us with new enthusiasm and new ideas.

Newconomy is the new weekly column for the start-up industry. It focuses on the intersection of classical and new economies and of politics and entrepreneurialism. Newconomy is sponsored by Factory, the new start-up hub in Berlin.


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