How we value failure

When startups fail, we give them more money; when entrepreneurs fail, their lives are over

(This is the second article in a series about what I learned from my year in startups, after transitioning from a 15+ year career in the public sector.)

We don’t talk about failure much in America, in general. Only the very wealthy are allowed to speak about how they once hit a stumbling block on their way to their fourth billion.

One of the things I had a hard time with working in startups (as opposed to community and economic development) was reconciling the vastly different ways we value, respect, and manage failure.

Founders are almost expected to fail. It’s an oft-cited stat that 90% of startups will fail before they ever reach hockey stick growth.

Yet when they do, their VCs pick them back up, dust them off, and throw them back in the ring with a few million for their next idea – because VCs are investing in founders, not businesses; they’re investing in people, not ideas. (This sounds nice until you realize it’s only certain people; it has nothing to do with their actual idea; and it’s a classic sunk cost bias rather than a value based on reality.)

Entrepreneurs – building real businesses that have to earn a profit, account for losses, and manage their operations – have a completely opposite experience. Over 75% of small businesses stay alive past the first year, something that startups will likely never be able to claim. Yet their access to capital is so limited that most of them (a little over half) won’t survive past their fifth year.

Entrepreneurs fall harder and faster than startups, too. It’s hard for small businesses to compete in almost any area of society today, at scale, with venture-backed companies focused on profit at all costs.

Entrepreneurs have to borrow real money from real banks with real interest. They are considered high-risk, so they pay higher rates and they often have to match it with personal collateral, like their homes, their inventory, or their personal property.

They face more barriers than VC funded startups – especially if they’re non-white, non-male, or over the age of 30. Their access to capital is laughably small. They’re often working around structural barriers, too (like being unfortunate enough to live in the 70% of America that doesn’t have things like decent public transportation, full access to high-speed broadband, walkable mixed-use districts, or a workforce that doesn’t move away as soon as they can for better opportunities.)

But do we pick them up, dust them off, and send them in the ring again?

No. We don’t.

When entrepreneurs fail, the bank comes after them to take all of that back. They go bankrupt almost six times more often than founders. They are on the hook for sales taxes, employment taxes, and use taxes that often they’ll sell their homes to pay before going bankrupt – since you go to jail for unpaid taxes.

When entrepreneurs fail, their lives are over. Because they have such limited access to shitty capital, they put everything on the line, and when they don’t make it, their entire lives are affected: their credit, their banking relationships, their personal property, and often the funding they sourced from friends and family.

It wreaks havoc on you as a human, as a family member, and as a community member. It puts a moral stain on your failure; it ruins your chances at homeownership, starting a family, or ever reaching financial independence. And it damages your sense of yourself as a creature of potential and value. (Yes, I speak from experience here, both my own and from spending over 20 years helping other small businesses avoid failure.)

What’s worse is that it almost never ends. For startups, whose VC backing means they get to go back and try again, it’s over after a few short months of “soul-searching” while doing yoga and going to “spiritual retreats.” For entrepreneurs, the shame, sadness, and financial devastation go on for years.

And entrepreneurs and small businesses never get another chance. You have one business that closes while holding a loan with a traditional bank and you are shit out of luck forever, regardless of why the business failed.

It’s not just that we don’t talk about failure enough. (I mean, we don’t; everyone in the world everywhere fails at something every day, and yet it’s almost as taboo as money and sex.) It’s more that we have been conditioned to treat certain failures as more valuable than others.

Founders are expected to fail, to try again, to be supported as they figure it out. Small businesses and entrepreneurs are expected to succeed with zero support, little capital, and global competition. When they fail, we make them pariahs and punish them by making it impossible for them to ever try again.

When we treat a founder’s failure as a bump in the road on their way to millions and an entrepreneur’s failure as the end of their financial security for the next several decades, something is truly wrong about the way we value failure. Something is truly wrong with the way we value humans who want to build things.

There is a moral hypocrisy here that not only hurts entrepreneurs but increases the divides between Silicon Valley and the rest of the world.

This is a false moral division that weakens our economies, stunts human potential, and further increases the divide between those on the right economic side and the rest of us.

Photo by Tina Bosse / Unsplash