The F Word:

Making the Most of

Business Failure

Prof Deniz Ucbasaran

Outline

• Why failure?

• Defining failure

• Assess the nature and consequences of failure in

entrepreneurship (the assets and liabilities of

failure)

• Evaluate the saying “failure is the fuel of success”

> Reflect on how individual entrepreneurs might

make the most of their failures

> Reflect on how businesses might be designed

to enable them to capitalize on failures

The F word...

• The uncertainty entrepreneurs face brings with it

opportunity but also failure.

• “Large” vs “small” failures:

> Terminal failure – closure of the business because of

total economic failure (insolvency) or it has fallen

short of the entrepreneur’s goals

> Episodic / day-to-day failures – e.g. failure to meet

performance targets set by investors; NPD failure;

loss of key staff; sudden rise in costs etc.

• Failure is endemic in entrepreneurship

Business Failure Rates

• On average, 50% of new single-establishment

businesses ‘fail’ (i.e. cease to exist) within the first

4 years. • Office of National Statistics (ONS) 2008

• Business failure is on the rise

In 2009:

236,000 business births

279,000 business deaths

Highest no. of deaths and

first time deaths > births

since records began in 2000

ONS, 2010

Failure: The Fuel of Success?

Abraham Lincoln experienced 12 major defeats before he was elected 16th President of USA.

Before the start of his career, Beethoven’s music teacher told him that “as a composer, you are hopeless”.

Walt Disney’s first cartoon production business went bankrupt.

John Grisham’s first novel was rejected by 16 agents and 12 publishing houses.

“One who fears failure limits his activities. Failure is only the opportunity to more intelligently begin again.” (Henry Ford, whose first two automobile companies failed).

Failure is an event, not necessarily a person.

Failure: The Fuel of Success?

“The British attitude is if you have failed once, you are a failure forever. The American attitude is that if you have failed once, you have learned a lesson that makes you more likely to succeed next time…The American point of view accepts, and almost congratulates failure as a path to eventual success. It has made American society much more entrepreneurial and, ultimately, more wealthy.”

Haji-Ioannnou Stellios (2005)

The Assets and Liabilities of Failure

The Assets of Failure

• Learning and new knowledge

> About self

> About entrepreneurship

• Motivation – to correct problems, challenge old

assumptions and innovate.

• Emotional resilience

• Strengthened relationships

Entrepreneurs’

Thoughts on Failure

“Bankruptcy was a dire blow…After all, it is like

euthanizing your own baby. Economic downfall

entails a complete breakdown that affects your

confidence in your own abilities and your trust in

people” French serial entrepreneur

“Business failure is a kind of social death, with every

little aspect of your life badly jeopardized…I felt

abandoned by everyone, it was a nightmare” Italian serial entrepreneur

“[The business is] a child.... [Losing the business] was devastating....

The things that were going on in my life—I'd lost my company, lost

my home, lost everything. I couldn't handle it . . . . There was a time

…when I sat in my office and cried, and then put a gun to my

head…. When I finally got over all that [pain and anger associated

with the loss of the business] was when I quit blaming other

people.... It was my fault because I didn't plan far enough ahead. It

was stupid as hell of me to sit there exposed like that. . . . Listen, this

lesson was extremely expensive. I paid dearly, my family paid

dearly.... Yeah, I learned a lot.... I'd be an incredible CEO for some

company. I'm the best.”

A serial entrepreneur,

Founded 8 businesses (2 went bankrupt)

The Liabilities of Failure

• Financial costs

• Social costs

> Reputation – stigma

> Relationships (e.g. business partners, financiers,

family etc.)

• Emotional & Motivational

> Business failure likened to the loss of a loved one,

leading to grief

> Self-doubt & knock to confidence

• Physical

Failure:

The Fuel of Success?

For failure to lead to success, two related things

must happen:

1. One must learn from the failure (but this is not

automatic)

2. One must bounce back and start again to apply

what they have learnt (i.e. manage emotions)

How one makes sense of and reacts to failure

becomes important

Learning is not just a function of

how and what we “think” but

also how we “feel”

(Shepherd, D.A., 2009)

Learning from failure

• Learning from failure is not automatic or

straightforward – biases, emotions etc.

> Attribution bias: attribute successes to ourselves

and failures to others / external effects

> Emotions: Propensity to focus on how bad everyone

felt on last day of business and handing over key to

liquidator – leaves less room to focus on actions /

inactions that lead to the failure in the first place.

How to manage emotions and

bounce back after failure

Three strategies from the grief recovery literature: > Loss orientation – working through and processing some

aspect of the loss experience (e.g. discussing the failure with

friends, family, others…) BUT too much of a loss orientation

may lead to rumination and an inability to break the bond with

that which has been lost

> Restoration orientation – based on both avoidance and

proactiveness (e.g. starting a new business) BUT too much

restoration orientation may limit reflection on the loss and lead

to an inability to draw out lessons

> Oscillation strategy - individual oscillates between loss

orientation and restoration orientation.

“Don’t worry so much about being

right –worry about being wrong

intelligently!”

Marrisa Mayer

(ex-Google, now Yahoo CEO)

“Intelligent failure”?

How to fail well: Some insights

from experienced entrepreneurs

• Accept that failure is a natural part of entrepreneurship

• Affordable loss – what am I willing to lose? Fail cheap

• Build partnerships of all kinds

• Focus on control not prediction; incremental steps

• Embrace contingencies / surprises

• Develop a support system

• Build a culture that shares, forgives and sometimes

celebrates (?) failure

An “Intelligent Failure” Culture?

• How can organizations respond to failure

constructively without giving rise to an anything-goes

attitude?

• A culture where one can admit and report failure

must co-exist with high standards of performance

• Identify blameworthy and praiseworthy failures

> When asked managers estimated 2-5% of failures were

truly blameworthy but 70-90% were treated as

blameworthy

How to build a “safe” environment:

Implications for Leadership

• Frame the work accurately – what is normal in your

context (e.g. Routine production or innovation)?

• Embrace messengers – “blameless reporting”

• Set boundaries and hold people accountable

> What is tolerable and what is blameworthy? What are

the consequences?

• Lead by example – acknowledge your limitations – what

you don’t know, your own mistakes

• Invite participation from all perspectives – teams

Some additional evidence...

• You can learn from others’ failure experiences (as long

as you have some experience of failure yourself)

(Madsen and Desai, 2010)

• Challenges the learning benefits of small failures

(Madsen and Desai, 2010; Shepherd et al., 2012).

• If the failure is too small and you don’t experience a

sense of loss you may not have enough motivation to

try and make sense of the failure

• Social-pain functions like physical-pain and responds to

analgesics! (DeWall, 2011)

• You can learn to become more resilient (Seligman, 2011)

Let’s not forget about success...

• Failure can fuel an “unfreezing” process in which old

ways of perceiving, thinking and acting are shaken and

new ways accommodated. In contrast, success may

lead to over-learning of behaviours that are believed to

foster success – lessons drawn from success may turn

into straightjackets that prevent adaptability (Sitkin,

1992).

• Failures get a post-mortem. Why not triumphs?

In sum

• Failure and the fear of failure is real and with reason

(assets AND liabilities of failure)

• How can we ensure that the assets outweigh the

liabilities, increasing the odds that failure fuels

success?

> Individual strategies

> Emotional coping strategies

> Insights from expert entrepreneurs

> Organizational strategies

> Design for “intelligent failures”

> Create the right culture

Questions and Comments?

deniz.ucbasaran@wbs.ac.uk

The research (a sample)

Cope, J. (2011). ‘Entrepreneurial learning from failure: an interpretative phenomenological analysis’.

Journal of Business Venturing. 26: 604-623

Harvard Business Review (2011). The Failure Issue, April.

Madsen, P and Desai, V. (2010). Failing to Learn? The effect of failure and success on organizational

learning in the orbital launch industry. Academy of Management Journal, 53: 451-476

Read, S., Sarasvathy, S., Dew, N., Wiltbank, R. & Ohlsson, A. (2011). Effectual Entrepreneurship.

Routledge, Oxon.

Seligman, M. (2011). Flourish: A Visionary New Understanding of Happiness and Well-being. Free Press.

Shepherd, D. A., Patzelt, H. and Wolfe, M. (2012). Moving forward from project failure: Negative

emotions, affective commitment and learning from experience. Academy of Management Journal.

Shepherd, D. A. (2009). From Lemons to Lemonade: Squeeze every last drop of success out of your

mistakes. Wharton School Publishing, New Jersey.

Ucbasaran, D., Shepherd, D., Lockett, A. & Lyon, J. (2013). Life after business failure: The process and

consequences of business failure for entrepreneurs. Journal of Management. In press.

Ucbasaran, D., Westhead, P., Wright, M. & Flores, M. (2010). The Nature of Entrepreneurial Experience,

Business Failure and Comparative Optimism. Journal of Business Venturing. 25(6): 541-555.

Ucbasaran, D, Wright, M & Westhead, P (2011). Why Serial Entrepreneurs Don’t Learn from Failure.

Harvard Business Review, 89(4): 16.