It’s viewed as a step on the road to success – however a business failure can take a major toll on entrepreneurs. So how can they best learn from it and move on?
From Henry Ford and Walt Disney to Jeff Bezos and Donald Trump, so many high-profile entrepreneurs have had failed businesses in their early careers that the experience is often seen as a rite of passage. Failure, we are told, is the ultimate learning experience and a stepping stone to success.
Now new research firmly challenges this rosy view. Dr Anna Jenkins, a UQ Business School academic who led the research, says that entrepreneurs don’t automatically learn from a business failure, as the huge financial and emotional cost to the individuals concerned can make it difficult to do so.
The research interviewed over 120 people whose businesses had recently gone bankrupt and found that most experienced negative emotions such as sadness and anger and personally lost money. “A business failure is a highly stressful life event,” says Anna.
“If you have a business, you have a role in the community. You are an employer, a customer and a supplier. Suddenly you have lost that – people don’t always know what to say to you. Entrepreneurs may feel stigmatized, lose their social identity and self-esteem. They feel that they have personally failed.
“People told us they felt alone. In one case a woman whose business had failed due to a series of unfortunate events confessed she drives 50k to another town to shop rather than walk past her old premises.
“While other stressful events, such as a divorce or losing a job, may also be a learning experience, the first response is rarely that they should be viewed as an opportunity learn.”
Of course not all failures are quite so traumatic and attitudes vary from one location to another. Failure of a small business which the entrepreneur has built up over their career is quite different from the failure of a startup where the idea is being tested and trialed on the market.
In Sweden, where Anna’s research was conducted, bankruptcy is still a major stigma while in Silicon Valley, failure is often celebrated. Indeed, the ‘lean start-up’ school of thought encourages entrepreneurs to trial their ideas as early as possible, and to ‘fail fast and fail cheap’. This approach helps prevent entrepreneurs overinvesting in ideas and fosters the continuous testing of ideas.
“Where people design an experiment to test an idea, failure may be a small setback,” Anna adds. “Founders of technology start-ups may understand the risks are high. They are building their expertise as an entrepreneur and, if their first startup idea doesn’t work, they will have the energy to start up again and apply their knowledge to their next venture. That is very different to an established small business which the owner is being forced to shut down.”
The impact also depends on the individual themselves - how much of their self-worth and personal identity is staked on the performance of the business. Anna says those who are able to separate how they view themselves as an entrepreneur from the business which failed are able to recover more quickly.
But do entrepreneurs learn from failure? The researchers found that those who acknowledge their role in the collapse of the business learn from their mistakes but also find the experience initially decreases their motivation to try again.
By contrast, those who focus on the role of others find it easier to maintain their confidence and motivation. Therefore they are more likely to set up another business but are potentially less likely to learn from the failure.
This explains something that has long puzzled researchers - that entrepreneurial experience is not strongly linked to improved performance. It is because those who have potentially learnt the most are least likely to start again.
Dr Anna Jenkins says people can learn from failure but she believes it’s a challenging process. Other research has suggested that people may need to take time out to recover first. She has this advice for entrepreneurs: “Separate your personal identity as an entrepreneur from that of your firm as it will make it easier to recover if the business fails, however it is difficult to do as most entrepreneurs are passionate about their business.
“Do reflect on your own role in the failure of the business even if it’s really difficult to do so. If you simply blame others or the market you are unlikely to learn much. However don’t shoulder all the blame – try to maintain a balance and recognise that luck plays a big role in the process. So much of success and failure depends on timing and getting a lucky break.”