Winning by Failing, the new Entrepreneurial Paradigm Shift

Why is it that startup companies that fail never make headline news? A likely reason is that few readers are interested, and yet, over one-half of new startups fail during their first year of operations. To make matters worse, their unfortunate founders are often subjected to heavy losses, fines, foreclosures, and humiliation, just for trying to fulfill their dreams. Why then, do societies worldwide come down so hard on these well-intended individuals, especially when they represent a potential source for job creation? Are entrepreneurs who fail, outcasts or overlooked assets? 

Successful startups or inventions do not just surface out of thin air. Thomas Edison, one of the greatest inventors of modern times, once claimed that he never invented the light bulb but rather confirmed 2,000 ways of how not to make a light bulb. Edison knew that his inventions hinged on repeated experiments, the vast majority of which would fail. Why then did he consider his failed attempts more valuable than his inventions? Was it because he viewed his successes and breakthroughs as an afterthought? In a new world order where inventors have had to become entrepreneurs and entrepreneurs, inventors, could Edison’s approach to ‘inventing/winning by failing’ offer us some new insights?

Imagine if…
Imagine if, instead of shunning entrepreneurs who failed, societies embraced their expertise (such as the many ways not to make something work) by efficiently reintegrating their experiences/experiments into an ongoing process of discovery and invention? Take this idea one step further. Imagine if, these entrepreneurs were motivated to work together by co-owning shares of an organization that was partially funded by the profits of the companies whose ideas/inventions did succeed.

While most entrepreneurs would support this type of arrangement, the traditional establishment of venture capitalists, private equity investors, politicians, and large established companies may not. But, as technology advancements continue to enable entrepreneurs to accomplish more with lower funding requirements, investors and their cohorts may, at some point, be wise to reconsider their old business models.

Evidence of Edison: A Five Country Review
To see, if indeed, entrepreneurship is trending toward an inventor’s model, I met with key leaders from 5 different countries including an academic institution, (Ecuador, Chile, Kenya, Mexico, and MIT) and compared their respective entrepreneurial initiatives. My choice of countries coincided with a slew of conferences and meetings that I attended between the months of August and September of 2012.

With each person I met, I inquired what policies, if any, they or their respective governments/institutions were actively pursuing to promote local entrepreneurship. If they were entrepreneurs, I asked about their experiences and expectations. Over time their collective comments developed into an interesting mosaic, which reflected their wide range of experiences promoting entrepreneurship. Less experienced countries sought lofty goals and often highlighted successful models elsewhere. Assuming this trend, one might conclude that the country/institution with the most experience could thus be considered the industry trendsetter.

Least Experienced – Ecuador, Chile, Kenya
A countries with the least experience promoting entrepreneurship such as Ecuador are usually held back by their own overburdening bureaucracy and an economy largely operated by a handful of family-owned businesses. Chile partially addressed these issues by legislating laws that designated a protected area (legally and physically) for its new startups. Their plan also included shared support systems (i.e. office space, Internet connection, etc.), and funding for an aggressive international mentorship program. Kenya’s government built out an Internet infrastructure that today connects over 40 million Kenyan users. They also approved the use of a mobile phone digital currency called M-Pesa that together has mobilized local entrepreneurs and investors.

Mid-Way – Mexico
At mid-way, Mexican thought-leaders are grappling with more sophisticated issues such as integrating venture capital funding. Key to their strategy is a coordinated effort among Mexican government officials, local venture funds, and public universities (i.e. Tecnológico de Monterrey) to identify the next ‘Steve Jobs-like’ entrepreneurs (or, in their words, ‘super entrepreneurs’’) who are capable of building the next ‘Apple-like’ industry on Mexican soil. To attract greater investor interest, the Mexican government recently approved a USD$120 million ‘fund of funds’ to encourage more venture fund managers to work with their most promising startups.

Most Experienced – MIT Media Labs
The highest level of experience also tagged as the industry’s potential trendsetter in my sample was MIT’s Media Lab (Massachusetts Institute of Technology). Under the direction of Joicho Ito, an accomplished investor and colorful visionary, MIT’s Media Lab operates about 350 concurrent student-related startups.  Ito explains that his primary focus is to develop a team’s collective agility rather than the prowess of one exceptional individual. Startup founders find each other, are free to innovate together as they see fit, and, when ready, present their ideas for funding by conducting a proof-of-concept such as a small pilot or survey. Funding is limited to no more than $100,000 per team. Teams that succeed may pitch for more funding (with a formal business plan), while those that fail are encouraged to join another team.

Teams are expected to conduct many small pilots and leverage their data analytics to identify timely opportunities. Ito’s unwritten rule of denying a second round of financing has forced team members to become more agile with their decisions.  As expected, however, failures do happen and are not only common at the Media Lab, but most importantly, revered. According to Ito, students who learn to fail several times, actually win by learning the art of risk taking. Given several chances to take risks within a short period of time has proven to render more ‘breakthrough ideas’ as well as develop a more seasoned crop of team leaders/entrepreneurs.

Conclusion
This brief five country evaluation simplifies the entrepreneurial process into three distinct levels and suggests that sequential levels place the most experienced country/institution as the potential trendsetter, in this case MIT’s Media Labs.

Assuming my analysis is true and MIT’s Media Lab succeeds at creating companies responsible for new industries in the coming years, then one might guess what advice Thomas Edison would have given to governments and institutions if he were alive today.  According to Edison, future entrepreneurial programs would do better if they focused more on efficiently recycling lessons from failed attempts than on sifting through hay stacks of candidates in search of a few needles of success.

Hopefully Edison’s likely advice will turn on a few more light bulbs in the minds of our global leaders!

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Appendix

I have included an Appendix for those of you interested in more details and interesting tidbits from my interviews with each country/institution for this article.

———————————————–
Ecuador, Chile, Kenya, Mexico, MIT
———————————————–

Guayaquil, Ecuador
Considered a hidden city by investors in-the-know, Guayaquil recently conducted a national roadshow, http://www.nationroadshow.com/guayaquil/en, that began in New York City. In my brief interview with their mayor, Jaime Nebot, he expressed his views on entrepreneurship for his city in two words. ‘Not now!” Ecuador, like other Latin American countries are controlled by a handful of influential family groups who operate the country’s key businesses. For young Ecuadorian entrepreneurs, the chance of succeeding is both intimidating and inhibiting, not to mention, the 8 month lead time needed just to register a company and fulfill all of the public sector requirements. Venture funding exists primarily for launching new businesses within already established ones. Most new businesses are proven concepts transferred from other countries rather than breakthrough technologies that could offer spectacular returns. For now, Mayor Nebot is focused on attracting established international firms to Guayaquil that have the wherewithall to weather his country’s stifling bureaucracy.

Santiago, Chile
At a recent conference on M&A activities in Latin America held at the offices of Baker & McKenzie – (www.bakermckenzie.com) in New York, a cadre of legal experts described Chile’s financial economy as brisk. Unlike Ecuador with its family-owned monopolies, Chile’s formerly family-owned firms have been institutionalized and therefore easier to merge and acquire. Despite these advances, entrepreneurialism in Chile has had its challenges. Young Chilean students who might have taken to entrepreneurialism sooner prefer careers in finance, medicine, or law.

About two years ago, the government of Chile approved funds for a revolutionary program called Startup Chile (www.startupchile.org). Hoping to change the mindset of its youth, Chile’s government is offering entrepreneurs from around the world a USD$40,000 grant to spend 6 months launching their startups in one of two buildings located in downtown Santiago. The program attracted seasoned global entrepreneurs who served as mentors to Chile’s young hopefuls.  Chilean entrepreneurs today account for over half of the startups in the program. One of the participants I interviewed at a local meeting in New York, described the environment at the incubator in Santiago as serious-yet-fun, inspiring, rewarding, and very international. Founders often work with one partner on premise and form virtual teams-on-demand using shared referred resources sometimes located in other countries.

Nairobi, Kenya
A banking phenomena called the M-Pesa has emerged in the unlikely city of Nairobi, Kenya. M-Pesa is a cell phone currency operated by Safaricom (www.safaricom.co.ke) that has transformed local economies in a manner that few could have imagined possible and that other countries have had difficulty emulating. Similar to PayPal’s online capabilities (www.paypal.com), M-Pesa funds appear as a balance on a cell phone account that can be drawn and transferred at the time of purchase from one cell phone to another. Its resounding success has created fertile ground for Kenyan entrepreneurs and has attracted investor groups including a local bank. As expected, Kenyan entrepreneurs have formed their own version of an incubator/consulting operation called iHub, (www.ihub.co.ke) where local techies and investors can congregate. Despite having many fundamental issues to resolve, Kenya’s success in lubricating its economy with a digitized currency is truly noteworthy. Credit is largely due to the Kenyan government who played a crucial role in building out the infrastructure needed to connect over 40 million cell/Internet users.

Mexico City, Mexico
At a recent conference held in New York by the Mexican-American Chamber of Commerce – Northeast Chapter, (www.usmcocne.org) on Mexican innovation, entrepreneurship, and venture capital financing, two panels of key influencers shared their views.

There I learned that 99.8% of the firms in Mexico produce just over half of the country’s annual GDP (52%).  Most revealing was that the remaining 0.2% of Mexican firms are in the hands of the ‘super-rich’ who collectively account for the other half of the country’s annual GDP. With half of the country’s GDP in so few hands, venture capitalists and similar funding sources have seized the opportunity to disrupt the status quo with a new crop of technology-based firms that could deliver ‘Apple-like’ growth and a similar eco-system of supporting companies.  Their ‘plan of attack’ as expressed at the conference, was principally focused on identifying ‘Steve Job-like’ candidates who would agree to work tirelessly, communicate effectively, innovate constantly, and function amenably with their venture capital support teams. They referred to these individuals as ‘super entrepreneurs’.

To fill the pipeline with potential candidates, one of Mexico’s largest academic institutions, Tecnológico de Monterrey, operates a Technology Center for Entrepreneurs (www.itesm.mx). The center currently manages a total of 1,500 startups per year. Startups that show exceptional promise graduate to the university’s accelerator program and may eventually compete for venture capital funding. This step also includes assistance from internationally recognized non-profit organizations such as Endeavor Global (www.endeavor.org), also present at the conference. Graduates from the exclusive Endeavor Global program work with leader/mentors along with their peers to gain additional market access and intel.

Mexico’s Venture Capital (VC) industry is small in comparison to the US but is making meaningful strides.  They have approved legislation granting VC’s with limited access to its hefty pensions. In addition, the government has recently approved a $120 million fund called the Entrepreneur’s Fund or ‘fund of funds’ to encourage more local money managers to address the needs of their up and coming squadron of ‘super entrepreneurs’. The government’s support is crucial and timely for Mexico, since its crop of qualified candidates are more global in scope than their predecessors and  could easily decide to move their businesses to another country for support and funding.

Cambridge, MA (MIT)
At MIT’s student incubator known as the Media Lab in Cambridge, MA (www.media.mit.edu), Joicho Ito, an accomplished investor and colorful visionary, oversees over 350 concurrent student-related startups.  On the surface, the incubator program appeared similar to the incubator/accelerator initiative at the Tecnológico de Monterrey in Mexico. However, a closer inspection showed that  their similarities ended at the front door.  At the Tecnológico de Monterrey, startup instruction is centered around the rigors of writing and rewriting a comprehensive business plan that might, one day, be used for funding consideration at a venture capital firm. In contrast, MIT’s Media Lab postpones the business plan writing exercises until funding has been approved.  Heretical in his approach, Ito explains that his primary focus is a team’s collective agility rather than the prowess of one exceptional individual or a business plan subjected to the rigidity of an outline and presentation. Startup founders find each other, are free to innovate together as they see fit, and, when ready, present their ideas for funding by conducting some form of proof-of-concept such as a small pilot or survey. Funding is limited to no more than $100,000 per team. Teams that succeed may pitch for more funding (with a formal business plan), while those that fail are encouraged to join another team.

Teams are expected to conduct many small pilots and leverage their data analytics to identify timely opportunities. Ito’s unwritten rule of denying a second round of financing has forced team members to become more agile with their decisions.  As expected, however, failures do happen and are not only common at the Media Lab, but most importantly, revered. According to Ito, students who learn to fail several times, actually win by learning the art of risk taking. Given several chances to take risks within a short period of time has proven to render more ‘breakthrough ideas’ as well as develop a more seasoned crop of team leaders/entrepreneurs.

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2 Responses to Winning by Failing, the new Entrepreneurial Paradigm Shift

  1. Nelson says:

    This is a well written article but unfortunately i have do disagree. I do not see it as very practical. Mr friend, being an entrepreneur is risky, there are few safety nets. You are proposing a very general argument but no solutions. What are your real life solutions?

    If there was a safety net for everyone or a subsidy, even an incubator for everything or every small business then man would have flown to Mars already. Unfortunately that is not the case. Sometimes entrepreneurs fail because they ACTUALLY fail, and do a bad job. How is that for reality?

  2. Tom Kadala says:

    Nelson, Thank you for your comment. It’s always good to hear from my readers and engage in a meaningful exchange.

    After reading your comment, I felt that the difference in our interpretation is that your definition of an ‘entrepreneur’ is wider than mine. In my article I’m referring to individuals who have the natural instincts of an entrepreneur, which may or may not include small business owners. Entrepreneurs as I know them have a vision and a strong desire to disrupt the norm. Not everyone has that calling or quality. …nor should they for the same reasons you described in your comment. A world full of just visionary entrepreneurs would be chaotic and unrealistic.

    Entrepreneurs still rely on good managers and workers to succeed. What they can’t do well is evolve without solid support from both government and private sector and much less in our current global business environment. My main point is that countries that have placed their future hopes on building a middle class off the backs of a handful of local entrepreneurs will only succeed by chance. …and eventually chance will not be good enough.

    Another good example is Greece. I just returned from there last month and wrote an op-ed on my visit. You’re welcome to read it at http://wp.me/p26dHY-6m – “Greece: Land of Economic Tragedy or Entrepreneurial Opportunity?”.

    Your thoughts?

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