The government wants entrepreneurial Australians to fail. The innovation package it released this week is a set of policy measures designed to pep up the Australian economy through encouraging entrepreneurial failure in the hope that such failure will eventually lead to success.
The package includes additional funding for research, tax breaks for early stage investment and more lenient bankruptcy laws. The hope is this will all foster an “innovation ecosystem” which will help to pivot Australia from a resources-dependent economy to one which generates fast growing startups in sectors like IT and bio-tech.
At the heart of the innovation package is a fashionable idea – entrepreneurship relies on failure.
Business people and policy wonks around the world are fond of the idea that failure is actually a good thing. They claim that by failing, entrepreneurs are able to learn from the “school of hard knocks” and improve next time. If you want to encourage entrepreneurial success, we are told, you also have to allow for entrepreneurial failure.
The shining example of this idea of “failing forward” is supposed to be the US – a place where you can crash out of business one day and then move onto something new fairly quickly. In some entrepreneurship circles, the mantra has become “fail early, fail often”.
According to some, venture capitalists in Silicon Valley actually look for entrepreneurs who have failed multiple times. Having a number of ventures which have gone belly up on your CV is seen as a badge of honour, not a mark of shame. Failure has become something to shout about, not something to hide away.
Clearly the Turnbull government has drunk the kool-aid. A central part of the government’s policies to build an innovation ecosystem is to make it easier for companies to fail. The reformed bankruptcy laws means that someone who has bombed out in a big way can start up a new business within 1 year (rather than 3 years).
On the surface this seems to be fine. Banning would-be entrepreneurs from starting a new business for three years seems to be a big disincentive for trying out new things. The hope is that by allowing people to fail and then try again, they can learn in the process.
The big problem with this otherwise fine sounding plan is that often entrepreneurial failure is not as great as it is being painted. For years people studying entrepreneurship have known that starting a new business is an insane idea. Although there is lots of talk about how great entrepreneurship is, the reality is much grimmer.
The great majority of entrepreneurs (between 75 and 90%) fail. This rate is slightly lower for people who are older, who have significant experience in the industry they are starting a business in and who have outside sources of financial support (such as a rich spouse or parents).
We also tend to think that entrepreneurship is a great thing for the economy as a whole. The idea is that entrepreneurs are people who create whole new sectors and drive economy growth.
This is certainly the case sometimes. But in the great majority of cases, entrepreneurs are actually what Paul Nightingale has called MUPPETs – marginal, undersized, poorly performing enterprises. They often are just trying to keep their head above water. As a result they rarely have the resources or skills which are required to actually create much of the core innovations in the economy.
Where does innovation really come from?
A cold look at much innovation in the last fifty years shows the great majority was actually supported by the state and created by large corporations who have the patience and capacity to see through long term processes needed to develop new drugs, create new software and build new technologies.
The real problem for Turnbull’s plan is that entrepreneurs generally don’t learn from failure. There is now mounting evidence that when an entrepreneur fails, they don’t go back, revise what they did and try something new.
Instead, they often completely ignore their past lessons and often do exactly the same things. The main reason for this is that when things go wrong entrepreneurs do not ask themselves what they might have done wrong. Instead, they try to blame others.
A common get-out clause is “I was ahead of my time” or “my vision was too big”. This tendency to externalise blame has its uses – it helps to keep an entrepreneurs sense (or delusion) that they are special alive. But, it can also be profoundly damaging. It often means headstrong entrepreneurs keep on failing and learn absolutely nothing from it. And as they continue to fail, they burn through their own – and others’ – money and time with very little to show for it.
There are some big dangers lurking in the background of the innovation agenda. It may place undue emphasis on entrepreneurs, which will set up the conditions for many individuals to fail. What’s more it is could have the effect of focusing attention on smaller firms while ignoring the fact that innovation is actually often driven by larger firms and state supported institutions.
But perhaps the greatest danger is that it could encourage entrepreneurial failure without doing anything to force entrepreneurs to actually learn from their mistakes. To avoid these risks, the government needs to consider some important tweaks.
First, they should try to be more selective in targeting of individuals to become entrepreneurs. For instance, it makes more sense to target middle aged people with significant experience in an industry rather than young people with no experience.
Second, they need to match measures aimed to encourage innovation in smaller businesses with similar measures designed to support innovation in larger firms.
It is likely that supporting larger firms with the ability to scale will have greater payoff. Finally, they need to provide mechanisms which allow failed entrepreneurs to learn from their mistakes rather than just sending them back on the streets to do the same stupid things all over again.