Strengthening Entrepreneurship by Understanding Failure

November 18, 2015

Failure is an inevitable, and even necessary, part of the entrepreneurial process. Yet there isn’t much space for it in development programming.

Yesterday, we hosted an E-Discussion with Microlinks and the BEAM Exchange to dig deeper into entrepreneurship failure. It was a very insightful discussion that brought together vast experiences and opinions and we are now able to draw meaningful conclusions on how we can better accept entrepreneurial failures and broaden our perception of success in developing programming. 

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We focused on 4 key questions:

  1. How can we change the entrepreneurship paradigm in development programming to better leverage the real world failure and setbacks which occur during various stages of entrepreneurship?
  2. How can development programs better align their success metrics with entrepreneurial metrics?
  3. What is the role of failure in the behavior of market actors? How can we create the right conditions for failure to be a driver of entrepreneurship?
  4. What are effective ways to target high-potential entrepreneurs in strategic sector and certain groups (e.g. women and youth)? How should prior experiences play into this process?

Key takeaways from each of the discussions are outlined below.

Question 1: How can we change the entrepreneurship paradigm in development programming to better leverage the real world failure and setbacks which occur during various stages of entrepreneurship?

  • Looking at the system. We need to ensure there are proper systems in place that accept businesses’ failure. In the United States, 3 out of 4 start-ups fail. But, businesses have the room to try again. They can access loans again, etc. In some countries, when you fail once, you are stigmatized. This is caused by a combination of accessibility of business support mechanisms and social and cultural perceptions of entrepreneurial failure. If these formal and informal institutional arrangements are not in place, a development program will not have a large scale or sustainable impact by “simply” supporting “failed” entrepreneurs.
  • Following the venture capital model. If we look at a venture capital portfolio, they rarely double down on a particular entrepreneur who has repeatedly failed. Instead, they diversify their investments across many entrepreneurs and many different business models with the recognition that if they hit big on one then this exceeds the losses of the others. If the same principles existed in development, with a focus on both performance and impact metrics, then perhaps we could limit the number of firms that have become dependent on subsidized (or free) capital, and instead engender a culture of competition that weeds out the unsuccessful enterprises and breeds sustained success among the promising ones. We have seen single ideas that have revolutionized whole industries; it is these ideas we should be looking out for and investing in significantly.
  • Understanding that failure can build resiliency. Investors can often perceive failure as a “rite of passage” to being a successful entrepreneur. Those that are able to bounce back and learn from their failures are more likely to succeed in their next venture.
  • Quality over quantity. With existing cultural barriers and lack of support for entrepreneurs in some countries, often development programs have to work very hard to recruit enough participants, sometimes having to lower their eligibility standards or otherwise relax the competition. Donors and governments need to aim for the right-sized, realistic scale. This way, we can avoid the problem of programs focusing on hitting the number of participants, rather than focusing on who they are recruiting to participate.
  • Broadening our idea of success. Even though a business may not last for more than 6 months (for example), there are certain skills, including soft skills, learned that will be carried on to future employment opportunities and there were likely successful business accomplishments over the life of the business. We must look more critically to focus on successes achieved.
  • Self-employment does not equal entrepreneurship. There is a difference between being a transformational entrepreneur and being a subsistence entrepreneur (i.e. those that start a business as a form of self-employment, normally without additional full-time employees). They are often different and the tolerance for failure may not be the same. For transformational entrepreneurs, having mentors and coaches along the way — during the ideation phase and early start-up in particular — can help entrepreneurs catch the small "failures" early so that they don't lead to bigger failures later. Additionally, studies also show that virtually no subsistence entrepreneurs’ transition onto the transformational entrepreneurship path. Yet most development policy focused on entrepreneurship implicitly or explicitly assumes that moving individuals into microenterprises and then growing them is the pathway for achieving scale and impact, to create, eventually, large-scale successful enterprises—i.e. that transition from subsistence to transformational entrepreneurship is not only possible but is the default growth pathway. In light of the evidence she discusses, we need two separate strategic approaches for evaluating the impact potential for subsistence-level microenterprises versus larger and more sophisticated enterprises with the potential to change business dynamics and independently create jobs, up-stream demand growth, and downstream supply growth.
  • Shift from business mindset to education mindset. There should be a shift in thinking about entrepreneur development programs from a business mindset to an education mindset. Success is not necessarily running a profitable business, although that is a desirable outcome, but developing people who have the skills and the knowledge to be resilient, to be able to bounce back from failure and have a successful business the next time.
  • Opportunity to learn from mistakes. The US Global Development Lab recently created the Global Innovation Exchange. The Exchange allows development professionals, investors, and others to see the competitive landscape of development-related innovations and see which are succeeding, which are failing, and what the market feedback is on innovations. The site also supports entrepreneurs to find funding, resources, experts, etc. One of the goals on the Exchange is to learn from failures. So, an entrepreneur with an idea can see what others have tried in the past, how it has failed or succeeded, and build from there. Let's have more collective learning from failures so we're not trying the same things over and over again.
  • Raising awareness on failure. The stigma and weight of failure is dependent on which context and/or geography a project is being implemented in. Failure isn't an easy thing to talk about, especially when there is little to no framework to process and learn from failure. If development project interventions/programming were to incorporate more awareness/capacity building for individuals and communities to think about and approach failure in a healthy and constructive way, this could really be pivotal for the work we do in development.
  • There is no “one-size-fits-all” solution. No enterprise is like any other, even when they operate in the same sector, so our approaches should be versatile enough to allow for customized support to each business. For example, a proven weakness for challenge funds has been their "one-size-fits-all" approach within and across sectors. The type of support depends on where a business is in the lifecycle among other factors. There is no magic bullet that can address the needs of all businesses.

Question 2: How can development programs better align their success metrics with entrepreneurial metrics?

  • Seeing entrepreneurs as economic drivers. Entrepreneurs are often seen as individual beneficiaries and we count and measure the success of programs based on these individuals (e.g., training they received, benefits accrued). If we shift that to actually counting them as economic drivers (how many employees have they hired, how many of those employees have participated in training relevant to their jobs, etc.) we can start to see the ripple effects of the programs.
  • Monitoring relationships over data. Many organizations have been shifting their approach to measurement away from data extraction to a focus on relationship building with their clients. In many cases, it seems like it takes much more up front work to develop bespoke research questions and metrics for each business. But ultimately, you get better quality data, happier stakeholders, and measurement that really can add value. It is important to note that a challenge in this approach is finding sufficient similarity in the types and categories of responses to research questions to be able to aggregate across the whole program into something that will identify the common factors.
  • Having the flexibility to adjust metrics. Development programs must have the capacity to readjust metrics as the reality of the situation changes and as understanding grows. This adjustment of metrics must be based on good business analysis, practice and financial realities.
  • Fostering ownership in data collection. Too often development programs require entrepreneurs to report on metrics which are meaningless to them. This takes valuable time away from doing business and adds no value to the entrepreneur. Data should inform decision-making, both for programs and for entrepreneurs. If the data we are using doesn’t do that, we need to decide if entrepreneurs need to spend their time collecting it or if there is a way we can build their capacity on how this data could be useful for them.
  • Profit versus employment. Profits are the main metric that entrepreneurs are interested in, but they are often hard to measure accurately for external parties because of accounting as well as confidentiality issues. Donors and governments tend to be more interested in employment, which is easier to measure. These two metrics are not necessarily correlated though—both vary a lot on the sector the program is working in, as well as entrepreneurial capacity, capital, etc. It is noted that employment data often overlooks broader impact, so engagement data can provide important metrics for understanding both enterprise level performance and development impact.
  • Prioritizing localized metrics. Entrepreneurs have a tendency to focus on what they can contribute to a market, rather than what the market needs. Overall, this is a problem with development programs — focusing on an innovative solution to measure its reach, rather than on the unique communal problem that needs addressing. We need more localized metrics, rather than standardized metrics; the latter causes us to miss our mark. 

Question 3: What is the role of failure in the behavior of market actors? How can we create the right conditions for failure to be a driver of entrepreneurship?

  • The role of culture in entrepreneurship failures. Various countries and cultures have social and cultural adversities to entrepreneurship that can be a barrier to entry. Whether it is beating a perception that entrepreneurship is not a viable career choice or that taking on risk in an already unstable economy is rash, building youth capacity in the education system addressing specific cultural perceptions around entrepreneurship would be beneficial.
  • Leading by example. We need to first create a “safe to fail” culture within our development industry before we foster that environment with local partners. We should be able to talk openly about what we have learned and how that shaped our next decisions.
  • Using media to increase public awareness on entrepreneurship. Local media announcements can be used to help to create positive views of entrepreneurs.
  • Learning from the Tech sector. The tech sector is leading the way in terms of cultural shifts to accommodate risk-taking behavior. We still need to see some more exits in the region to really boost entrepreneurs, but the shift is happening. The flip side of this is the tendency for donor funding and beneficiaries themselves to see "startups" and "entrepreneurship" as the next big thing, when in fact, actually having solid professional experience and maybe some working capital before launching a venture can be just as useful as having the freedom associated with youth to take the risks and "make mistakes" that can be learning opportunities. 

Question 4: What are effective ways to target high-potential entrepreneurs in strategic sector and certain groups (e.g. women and youth)? How should prior experiences play into this process?

  • Public awareness and support. At the grassroots level, holding presentations and making direct contacts with your target population has proven to encourage underserved populations to take the first step in starting their own businesses. Ensuring that businesses have access to support, through incubators, etc., encourages new businesses to emerge.
  • Competitions. The U.S. African Development Foundation is directly funding young African social and business entrepreneurs, providing them with "free capital" in the form of $25,000 grants as winners of a business plan competition. This is a part of the U.S. Government's YALI MWF program (Young African Leadership Initiative / Mandela Washington Fellows). The fellows are chosen from thousands of applicants who are leaders first, and may not be entrepreneurs. Qualifications such as a vision, solid track record, and potentially profitable plan are what the program focuses on. To tackle social challenges through business ventures, the passion and drive of the individual, along with a self-sustaining, nimble, innovative enterprise, are key.
  • Leveraging diaspora entrepreneurs. Diaspora entrepreneurs are gearing investments toward their countries of origins and beyond. Many successful diaspora entrepreneurs take the skills and knowledge they have gained back to their countries of origin to start new businesses and improve local markets. In particular, diaspora entrepreneurs have greatly contributed to reconstruction and economic development in fragile and post-conflict countries.
  • The natural entrepreneur. "High-potential" entrepreneurs often naturally emerge. It's important to create and empower platforms that provide the space for entrepreneurs to take risks through training, shared work space and flexible incubators in locations that are accessible to more traditional communities. These conditions will make clear who — when given opportunity and resources — thinks outside the box, has an open mind, is thinking beyond the local market, and thinks strategically about solving a problem with a market-driven solution.
  • Starting with youth. Promoting entrepreneurship and key sectors to youth is important. As the future workforce with creative minds, we need to shape their understanding of what job opportunities will exist in the future, foster an innovative and entrepreneurial culture, and work to address cultural barriers to entrepreneurship. 

It is clear we were able to draw great insights on how we foster acceptance of failure in entrepreneurship programming, but now what do we do? We need to continue this conversation beyond Global Entrepreneurship Week and continue to create awareness on this subject and build the international development communities’ capacity around the importance of failure in the entrepreneurial ecosystem. We also need to share when we are able to achieve wins, big or small, in development programming that allow us to broaden our idea of success and further analyze failure beyond the lifespan of a business. Let us know your thoughts in the comments below!