Forum for Innovation

Any parent who has cheered their child on during a sporting event knows the old ABC Sports tag line, “the thrill of victory and the agony of defeat.”  When that winning goal has been kicked and is into the back of the net and arms are thrust into the air with wild cheers all around because the game has been won to the direct opposite of watching your child miss the block of the ball that ended the game in sudden heartbreak.  Afterwards on that long walk back to the car after a lost game,  parents sometimes try to soften the defeat for their children by praising their best effort and telling them that, “You’ll get ‘em next time,” before heading to the ice cream parlor to soften the game’s blow even more.  It’s a nice sentiment, and it certainly makes childhood failures easier to stomach, but it is not always the way of the world. In any competition, there are winners and losers, and that’s not a bad thing.

The American Dream is based on the idea that with hard work and persistence, anyone can rise to the pinnacle of their chosen profession. The freedoms guaranteed in the U.S. Constitution make this possible, but there are two sides to the coin of liberty. As well as the freedom to succeed, Americans also have the freedom to fail. While “failure” has some inherent negative connotations, in the context of the American free enterprise system, failure can be an essential (even inevitable) step towards business success.

In the current public debate over how to grow the economy and create new jobs, the success of entrepreneurs and small businesses is correctly championed as the path towards a more prosperous American future. Even as the country advocates for entrepreneurial success, however, we should also remember the important function failure plays in the American free market. Consider these perspectives on failure and innovation in the United States.

The road to success is littered with failure: Some of America’s greatest inventors and innovators embraced failure as an important step in the process of developing a new product or service. The early-20th century CEO of IBM, Thomas Watson famously said, “If you want to increase your success rate, double your failure rate;” and before him, the great American inventor Thomas Edison said he never failed but simply proved approaches that would not work.

Innovations rarely emerge perfect and ready for market, requiring no adjustments or experimentation. Rather, the process that leads to world-changing innovations is a series of attempts (aka: failures) progressively improving a product or service until it captures the consumer demand. From this perspective, failure is not a bad thing; in fact, it is the natural byproduct of innovation. This is also true for entrepreneurs, who are not always victorious on their first attempt to navigate a new business through the competitive landscape.

Removing the freedom to fail erases the incentive to succeed: Artificially preventing businesses from failing removes a critical element of entrepreneurial equation. Without failure, America’s free enterprise system would be challenged to produce the products and services that have yielded America the highest GDP of any country. Without risk, competition, and the potential for failure, there is no incentive to invest in research and development, improve products or lower costs, which hurts commerce, trade, and economic growth.

America’s business and investor culture forgives entrepreneurial failure: In many countries around the world, business failure is taboo and can mean the end of one’s entrepreneurial career. Some countries in the European Union, for example, offer little forgiveness for entrepreneurs whose company fails. This is partly because the European venture capital market (which is small relative to the United States) focuses on profit over growth.

In America, however, startups are encouraged to focus on growing their business, correctly deducing that growth (rather than profit) draws more customers, drives competitiveness, and ultimately supports long-term business success. One reason U.S. businesses are able to focus on growth over profit is because unlike Europe, in the United States, there is not a widespread assumption that business failure means an entrepreneur will never succeed. Entrepreneurs are free to fail without the fear of ending their business aspirations. Indeed, the common assumption in the United States is that entrepreneurs who have failed stand a better chance at success in their next attempt, as they gained critical wisdom and experience in their previous startups.

America needs investors and entrepreneurs today like never before. In the international competition for jobs and new business, the United States’ ace in the hole is its free market system. However, the country’s strong entrepreneurial (and jobs) potential is hampered by the uncertainty plaguing all corners of the American private sector. Beyond the current “fiscal cliff” negotiations, the country faces a regulatory landscape that can stifle growing businesses. This adds challenges to the already risky endeavor of starting a new business. In an uncertain economy, lenders and investors are less confident that new products or ideas will be able to succeed despite the added economic challenges.

Encouraging American entrepreneurship means, in part, making entrepreneurs, innovators, and investors feel confident enough in the future that they are willing to take business risk today. They might succeed, or they might fail, but unless they try, America will continue to want for the jobs and innovations that fueled the country’s economy for centuries.