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Is failure the price of innovation?

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Whether an entrepreneur is more successful following an earlier failure will, in part, depend on how they view the failure, the impact of the financial loss, whether the underlying idea was good, and the period in their career that the failure occurs.

If the failure is fast and cheap it could provide valuable feedback without wiping out the entrepreneur, allowing them time to come back with a better idea. Someone’s first idea is rarely their best.  This could be one of the reasons why so many start-up businesses fail in the first few years.

A good entrepreneur will take time to reflect on failure, just as much as they reflect on their successes. It gives the opportunity to examine processes and execution, making them smarter and more efficient. Keep what is good, improve it and discard the dross, distractions and the non-essential.

Savvy entrepreneurs will also learn from the mistakes of others. Early adopters of new technologies will often do better than the inventor. There may also be opportunities to acquire parts of failed businesses where the ideas are good but need development and resource.

Successful businesses can become complacent and stifle innovation, with brilliant ideas being left on the brainstorm flip chart for lack of vision or fear of failure. Businesses that fail to innovate can become casualties themselves. This is often seen in failures of second and third generation family businesses, where the later generations did not show the same business acumen as their predecessors.

Society should perhaps view failure as the price of innovation. And provided that directors are not reckless with other stakeholders’ resources they should not be condemned for taking risks that fail. The concept of limited liability is founded in such principles.  

For reckless directors there are provisions in the UK legislation for disqualifying them from holding office for a period of time and/or lifting the limited liability status requiring directors to personally contribute funds to the failed company to recompense creditors for their loss. These provisions are, in my opinion, currently under utilised principally because of the cost associated with such actions. Reform here is perhaps needed.

The responsible director will finance innovation using risk capital, including his or her own funds, where investors fully understand that their capital may be wiped out, but value the prospect of significant returns if the innovation is successful – the risk and reward model.  

An individual’s appetite for risk will depend on things such as their attitude to risk, personal financial stability and the point in their career. Younger people tend to have a higher appetite for risk, when compared to those a little closer to retirement. The state also has a role in fostering innovation through grants and tax incentives. Arguably, more risk capital should be made available to entrepreneurs if the country wants to grow more rapidly.

While risks can be managed they can rarely be eliminated, and so long as lessons are learned, then all may not be lost.

As Richard Branson once put it, “recognising mistakes and recovery are essential skills for entrepreneurs”, before adding that “business opportunities are like buses there’s always another one coming”.

Sandra Mundy is a partner at accountants James Cowper, specialising in turning around failing businesses. 

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