tolerating failure
Chris Uggen points to an interesting paper coauthored by one of his colleagues in Minnesota’s Carlson School that shows a link between an organization’s tolerance for failure and innovation. Tracy Yue Wang and Xuan Tian find that venture capital firms that tolerate more failure are more likely to produce highly innovative IPOs. They operationalize failure tolerance as the waiting time before terminating an underperforming project. The longer a VC waits to terminate a failed project, the more tolerant it must be of failure. Here’s the paper.
At one level this seems like a standard high risk/high reward model of innovation. But I think the argument is a bit more nuanced. Usually we think of risk tolerance as seeking projects that have high performance variance. But even big risk takers are encouraged to cut and run when it’s clear that it isn’t working. Failure tolerance might be something else entirely. Tian and Wang argue that failure tolerance involves a sort of cultural transformation in the way one’s organization views and accepts failure.
After addressing the endogeneity issue, we go further to investigate the persistence of the failure tolerance effect on startups’ innovation. We find that the effect of VC failure tolerance on startup firms’ innovation persists long after VC firms exit their investments. More interestingly, the effect is even more persistent if an entrepreneurial firm starts to interact with VC investors in the beginning stages of development when the firm’s culture is immature. These results suggest that the failure tolerance effect reflects not just a direct and temporary VC firm influence while the VC investors are present in the startup firm, but also a more persistent cultural effect. That is, the VC investors’ attitudes towards failure have likely been internalized by the startup firm and become part of the firm’s culture.
Interesting idea.
