What can businesses learn when things go wrong?

Executive Summary

Failure has long carried costs and stigma, both personal and professional. In some business sectors, though, notably the technology industry, failure has become acceptable, even fashionable. It's inevitable that people who try new things will not always succeed. Fear of failure stifles creativity and innovation, advocates say. Bankruptcy has become a business decision, rather than a cause for personal shame, and it can allow firms to become stronger and more nimble. Nonetheless, critical oversights and bad financial moves still hurt entrepreneurs, shareholders, workers and communities. Among the questions under debate: Is failure good for the economy? Is failure necessary for long-term success? Are there cultural and regional differences in how people react to failure?

Resources

Bibliography

Books

Gilson, Stuart, “Creating Value Through Corporate Restructuring: Case Studies in Bankruptcies, Buyouts, and Breakups,” John Wiley & Sons, 2010. A Harvard University professor of business administration examines the process of corporate restructuring using case studies of prominent companies, including Delphi, General Motors and Kmart, as well as the Eurotunnel debt restructuring.

Kindleberger, Charles, and Robert Z. Aliber, “Manias, Panics, and Crashes: A History of Financial Crises,” Palgrave Macmillan, 2011. Two academics detail how poor money management historically has given rise to financial crises.

Sandage, Scott, “Born Losers: A History of Failure in America,” Harvard University Press, 2005. A cultural historian at Carnegie Mellon University explains how the meaning of failure changed from a business term to an identity marker for failed businessmen in 19th-century America.

Schoemaker, Paul J.H., “Brilliant Mistakes: Finding Success on the Far Side of Failure,” Wharton Digital Press, 2011. A researcher and business consultant illustrates how many products, from ATMs to smoke-free cigarettes to penicillin, were initially judged as mistakes yet turned out to be money makers.

Skeel, David Jr., “Debt's Dominion: A History of Bankruptcy Law in America,” Princeton University Press, 2001. A professor of corporate law at the University of Pennsylvania shows the political and economic roles in the United States' unique approaches to bankruptcy, from its inception in 1800 to the 1994 bankruptcy reform.

Tugend, Alina, “Better by Mistake,” Riverhead Books, 2011. Drawing on research and behavioral studies, a New York Times columnist shares lessons from aviation and medicine on how to respond to errors, and why it's important yet difficult to accept and learn from mistakes.

Articles

“The Failure Issue—Failure: How to Understand It, Learn from It, and Recover from It,” Harvard Business Review, April 2011, http://tinyurl.com/oj235a6. A collection of articles, many by well-known professors and experts, on aspects of failure in career and business.

Bradley, Ryan, “A Brief History of Failure,” The New York Times Magazine, Nov. 12, 2014, http://tinyurl.com/p59yuyu. A photo gallery of innovative products that never took off, including the pneumatic railroad and a simplified typewriter keyboard.

Bruder, Jessica, “The Psychological Price of Entrepreneurship,” Inc. magazine, September 2013, http://tinyurl.com/kht6mzo. A journalist explains how leading a company through dark times can bring on depression, anxiety, despair and even suicide, leaving founders to feel alone in their emotional and financial battles.

Elmer, Vickie, “A coming-out party for business failures,” Fortune, Oct. 21, 2013, http://tinyurl.com/pgct6pk. FailCon, which started as a storytelling conference for business start-up failures, has grown to 10 cities and now has imitators.

Gillett, Rachel, “What the Hype Behind Embracing Failure Is Really All About,” Fast Company, Sept. 8, 2014, http://tinyurl.com/pxzh5ho. How the movement to celebrate failure began and how those in business should not go overboard in sharing their mistakes.

Lewis, Geoff, “Failure porn: There's too much celebration of failure and too little fear,” The Washington Post, Dec. 4, 2014, http://tinyurl.com/h2o7jo8. A Silicon Valley venture capitalist suggests Americans have swung too far in embracing failure stories while underestimating the risks in new ventures.

Moules, Jonathan, “From failure can come success,” The Financial Times, Jan. 24, 2013, http://tinyurl.com/pasvq94. British start-ups say a fear of failure in that country still holds back entrepreneurs, especially compared with the United States.

Reports and Studies

Altman, Edward I., “Revisiting the Recidivism: Chapter 22 Phenomenon in the U.S. Bankruptcy System.” Brooklyn Journal of Corporate, Financial & Commercial Law, 2014, http://tinyurl.com/pkfzhw6. A New York University professor shows that 15 percent to 18.25 percent of firms that exit Chapter 11 reorganization return to it.

Atkinson, Tyler, David Luttrell and Harvey Rosenblum, “How Bad Was It? The Costs and Consequences of the 2007–09 Financial Crisis,” Federal Reserve Bank of Dallas, July 2013, http://tinyurl.com/zp55lde. Economists review the cost of the financial crisis, and determine that up to $14 trillion was lost or forgone in output, wealth and more.

Gompers, Paul A., et al., “Performance Persistence in Entrepreneurship,” Harvard Business School Working Paper, September 2008, http://tinyurl.com/zvqx84e. Entrepreneurs with a track record of success are more likely to continue succeeding than others. Those with market timing skills also have an edge, researchers found.

Lee, Seung-Hyun, et al., “How do bankruptcy laws affect entrepreneurship development around the world?” Journal of Business Venturing, September 2011, http://tinyurl.com/od62n6r. Based on analysis of statutes in 29 countries, lenient, business-friendly bankruptcy laws lead to more firms being established.

Sonnenfeld, Jeffrey A., and Andrew J. Ward, “Firing Back: How Great Leaders Rebound after Career Disasters,” Harvard Business Review, January 2007, http://tinyurl.com/p5jctgf. Two business school professors interviewed 300 executives and found that only one-third of ousted CEOs returned to an active executive job, having done so by recovering their “heroic status” and fighting back.

Tian, Xuan, and Yue Wang, Tracy, “Tolerance for Failure and Corporate Innovation,” The Review of Financial Studies, Dec. 5, 2011, http://tinyurl.com/zwgdmjd. Initial public offerings of stock backed by more failure-tolerant venture capitalists are significantly more innovative, and less-experienced VCs are more likely to face capital constraints or career concerns, which may reduce their tolerance of failure.

The Next Step

Bankruptcy

Gleason, Stephanie, and Ted Mann, “GE Says Quirky Has Hurt Its Reputation,” The Wall Street Journal, Dec. 3, 2015, http://tinyurl.com/qcqjdlg. General Electric's partnership with a bankrupt home-technology invention start-up that reportedly failed to provide adequate customer service harmed General Electric's reputation, according to bankruptcy court documents.

Martin, Peter, “Free to fail in Malcolm Turnbull's new $1.1 billion innovation plan,” The Sydney Morning Herald, Dec. 7, 2015, http://tinyurl.com/j4upsha. New Australian laws will permit directors of bankrupt firms that have restructured debts to continue operating the businesses and allow them to start others, part of a national effort to help Australian entrepreneurs.

Schram, Lauren Elkies, “To Declare, or Not to Declare Bankruptcy?” Commercial Observer, Nov. 11, 2015, http://tinyurl.com/hbbbkyu. Chapter 11 reorganizations can help real estate developers in weak markets to refinance projects, continue operating businesses while repaying creditors and push lenders to modify their original repayment terms, according to real estate lawyers.

Cultural Differences

Duarte, Daniel, “Journalist Andrés Oppenheimer Tells Latin America to ‘Create or Die,’” PanAm Post, July 15, 2015, http://tinyurl.com/zmnzls3. Latin America has discouraged innovation by stigmatizing business failure and ostracizing entrepreneurs who do not succeed on first attempts, according to a book by an Argentinean journalist.

Nguyen, Hoang, “The entrepreneur teaching Japan how to take more risks,” BBC, Sept. 14, 2015, http://tinyurl.com/pyo3vzb. A Japanese entrepreneur who sold his first software company to Microsoft at age 33 now invests in start-ups in Japan, where he says disapproving cultural attitudes toward failure have stifled entrepreneurship.

Sheftalovich, Zoya, “EU pushes for business without borders,” Politico Europe, Oct. 28, 2015, http://tinyurl.com/jd63ofl. The European Commission has proposed regulations that aim, among other objectives, to make it easier for entrepreneurs behind bankrupt businesses to start new firms, although a Lithuanian member of the European Union Parliament says the EU could do more to improve the entrepreneurial climate.

Economic Effects

Guilford, Gwynn, “China's latest refusal to fix its state-owned companies is bad news for the global economy,” Quartz, Sept. 16, 2015, http://tinyurl.com/poyjhxj. The Chinese government props up bankrupt state-owned enterprises by continuing to lend to them, leading to overproduction and market inefficiencies.

Howitt, Peter, “Failures and job losses are integral to economic growth,” The Globe and Mail, Sept. 2, 2015, http://tinyurl.com/jxn2nhh. Company failures and job cuts lead former employees to innovate and start competitive firms that create new jobs, thereby contributing to economic growth, says a Canadian economist.

Shane, Scott, “Is Declining Business Failure Holding Back Entrepreneurship?” Entrepreneur, March 11, 2015, http://tinyurl.com/h8r7sc2. Government aid to failing businesses may inadvertently hold back the creation of start-ups, according to a professor of entrepreneurial studies at Case Western Reserve University.

Technology Sector

Griswold, Alison, “Startups With Shorter Names Are More Likely to Succeed, Study Finds,” Slate, Feb. 9, 2015, http://tinyurl.com/konkyuw. New businesses named after their founders are 70 percent less likely to succeed than other firms, and those with names of three words or less are 50 percent more likely to succeed, according to a study by Massachusetts Institute of Technology researchers.

Maney, Kevin, “In Silicon Valley, Failing Is Succeeding,” Newsweek, Aug. 31, 2015, http://tinyurl.com/jmbgmbx. Silicon Valley's technology industry has embraced failure as acceptable for many companies, an uncommon trait that has made the region's success difficult to replicate.

Voorhis, Dan, “Can Wichita get its entrepreneurial mojo back?” The Wichita Eagle, Dec. 12, 2015, http://tinyurl.com/jpm4pdp. A group of entrepreneurs in Wichita, Kan., is working to attract investors to fund the city's technology businesses, but the director of an entrepreneurship nonprofit says many cities are unprepared for the high failure rate of such businesses.

Organizations

American Bankruptcy Institute
66 Canal Central Plaza, Suite 600, Alexandria, VA 22314
703-739-0800
www.abi.org
Membership-based institute that connects bankruptcy professionals and provides educational and research resources.

Business Plan Archive
3318 Van Munching Hall, College Park, MD 20742
301-405-0559
www.businessplanarchive.org
Online archive at the University of Maryland's Robert H. Smith School of Business that contains business plans and other documents of failed dot-coms and technology companies from the 1990s, with access limited to research and educational purposes.

FailCon
www.thefailcon.com
Conferences for start-up founders and others to discuss and study their past business failures to prepare for later success.

Failure: Lab
Grand Rapids, MI 49504
616-292-7277
http://failure-lab.com/
Group that organizes storytelling events around personal or professional failures.

International Failure Institute
Durham, NC 27708
http://internationalfailureinstitute.org/
Group of scholars, students, activists and artists seeking to understand the productive role of failure in learning and creativity by sharing stories, conducting classes and more.

Historical Bankruptcy Cases Project
4400 Massachusetts Ave., N.W., Washington, DC 20016
202-885-1000
http://www.american.edu/cas/economics/bankrupt/
A research effort at American University that is working with the National Archives to digitize bankruptcy cases from 1898 to 1978 for scholars; also offers research projects such as the extent to which women and African-Americans were involved in early bankruptcies.

National Association of Consumer Bankruptcy Attorneys
2200 Pennsylvania Ave., N.W., 4th floor, Washington, DC 20037
800-499-9040
www.nacba.org
Membership organization of consumer bankruptcy lawyers providing education, advocacy and some consumer resources.

The Success-Failure Project
5 Linden St., Cambridge, MA 02138
617-495-7680
www.successfailureproject.bsc.harvard.edu
An effort of Harvard University's Bureau of Study Counsel to provide resources aimed at students to discuss success and failure in context and to explore their own definitions of them.

Turnaround Management Association
150 North Wacker Drive, Suite 1900, Chicago, IL 60606
312-578-6900
www.turnaround.org
Membership organization of corporate turnaround-industry professionals that provides educational resources and hosts events.

U.S. Bankruptcy Court
E. Barrett Prettyman U.S. Courthouse, 333 Constitution Ave., N.W., Washington, D.C. 20001
www.uscourts.gov
One of the 94 federal judicial districts handling approximately 1 million business, individual and other bankruptcy cases filed each year.

DOI: 10.1177/2374556815626908