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AndersB

We need more startup failures!

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One of my sons keeps harassing me about writing a blog. He says that all professionals that are of any relevance today are active on social media. Bah! Humbug! As if a swell lad like me would not still be "with it"!

 

Anyway, he talked me into it. So before I embarrass myself on LinkedIn I thought I would embarrass myself here first. Below is my d®aft text for a first post. Please be mean and cruel and mercilessly point out everything pathetic in the piece.

 

We need more startup failures!

 

Economies need more startup business failures. This is such a vital economic component that it should be a prime societal goal. Let me coin the Failure Index (FIX) to be a key metric that all governments should maximise with fervent zeal.

 

Why do I propose this? Because failure is the inevitable flip side of the coin of risk-taking innovation. Generally, we love successes and constantly hear stories about startup businesses that have made it big. Very rarely do failed startup businesses get much publicity, and there seems to be little in the way of official statistics on the matter. We need the big FIX!

 

The Lean Startup method is an illustration of the iterative nature of early stage businesses. Entrepreneurs need to fail fast (hopefully on the cheap) to quickly learn how to succeed. Often eventual business success is achieved with something else than the initial product or service idea the founders started with.

 

So the importance of accepting failure to achieve success is nothing new, of course. Yet, there seems to be so little focus on the nature of failure, and it gets nowhere near the attention it deserves. To stimulate risk-taking entrepreneurship and innovation in an economy – then, clearly, we need to look at how we manage business failure.

 

There are four classical methods to managing risks that could be applied at a societal level:

  • Avoid the risk of startup business failure
  • Reduce the impact of the risk
  • Share the impact of the risk
  • Accept the risk and budget for the cost

 

An important question to start with is: risk for whom? Because there is risk for society and there is risk for the individual entrepreneur. Let’s have a look at what society can do to manage risk for the entrepreneur. Because it stands to reason that innovative economic activity will increase if the downside of taking risks for the individual is reduced.

 

The first and the fourth risk management methods are not very applicable. There is no way for the individual to avoid risks with startup business – other than not starting a business at all. And the individual must always accept some risk and budget for the cost of it, which quite often involves opportunity cost of alternative ways of earning a living.

 

So what can be done to reduce the impact of the risk of startup business failure? It is worth keeping in mind that often businesses are started were the founder has to work with no income and living off savings while trying to get the business off the ground. Governments could do a lot to make sure that a failed entrepreneur can bounce back quickly.

 

Having no taxable income makes some social benefits unavailable. Special consideration for self-employed people could include areas of entitlement levels for future unemployment benefits, low income supplementation, and earning of pension points.

 

Another policy area that impact entrepreneurs are bankruptcy laws. As it is now, an entrepreneur going bankrupt after using own and borrowed funds to start a business is treated the same as someone that fraudulently gets 28 credit cards and mismanage their affairs with over-consumption. A more lenient treatment of bankruptcy for genuine entrepreneurs would reduce the negative impact of some business failures.

 

Many countries have generous tax provisions for angel investments. This could be further expanded for entrepreneurs that invest in their own business, such that their investments get bonus tax deductions with allowances for carrying forward of this benefit.

 

The second risk treatment method is risk sharing. An obvious policy area for risk sharing is pre-seed and seed funding for startup companies. There are different schools of thought on this where some countries, such as Sweden, have several public funding vehicles for startup companies, and other countries rely on private capital only.

 

Critics of the public funding approach suggest that the public sector is not as effective as private market capital in assessing the merits of business model proposals. Yet, there is a big gap between the situation of very early stage businesses and them having enough evidence of market potential such that commercial capital is available on acceptable terms.

 

My suggestion for this dilemma is for governments to take a multifaceted approach to funding support. There is virtually no market for the earliest pre-seed stage funding other than own savings and money from friends/family/fools. Governments clearly have a role to play here in providing low levels of pre-seed funding based on competitive grant applications. The scope for such funding can be increased to help new businesses get off the ground.

 

For subsequent early stage funding, governments can provide co-contribution venture capital. Basically, if the private market believes enough in the idea, than the government should co-contribute with capital on the same terms. That way we can leverage private capital and its due diligence processes.

 

Such public venture capital can be overall highly beneficial for society. Many such funds barely break even in terms of investment returns, but the money deployed comes back to the state in forms of taxes and employment that multiply societal benefits of such investments.

 

Finally, with recent monetary policies of quantitative easing and record low interest rates having the goal of increasing investments by big businesses, it is time for governments to also look at fiscal reform to stimulate entrepreneurship and business formation. Lowering the negative impacts for entrepreneurs that risked and failed will also increase the number of successes for innovative businesses.

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What's your word count? May lose people because it's too long. :)

 

Lean Startup is a terrible book but some good ideas. But I'd rather look to Lean as it's got more runs on the board.

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What's your word count? May lose people because it's too long. :)

 

Lean Startup is a terrible book but some good ideas. But I'd rather look to Lean as it's got more runs on the board.

 

Thanks for the comments.

 

I tried to cut down the word count while editing, but I think the text ended up longer while I tried to express myself more clearly.

 

Anyway, here is the published text:

http://upstreamview.com/

 

 

Economies need more startup business failures. Because the more entrepreneurs start new innovative businesses, the more often there will be some businesses that fail. Therefore, the number of business failures could be a good indicator of how innovative an economy is or its level of risk aversion.

 

So, let me coin the Failure Index (FIX) as a key metric that all governments should maximise with great enthusiasm! Generally, we love success stories and constantly hear about startup businesses that have made it big. Very rarely do failed startup businesses get much publicity, and there seems to be little in the way of official statistics on the matter. We need a big FIX!

 

If governments are serious about encouraging entrepreneurship and investments into new businesses then they can help by reducing the downside of taking business risk. Naturally, people thinking about starting a business may be reluctant to do so because of the risk of business failure. The balance between risk and reward is just too far skewed towards the risk side. Since there is little that governments can do to increase the reward of success, it stands to reason that innovative economic activity will increase if the downside of taking risks for the individual is reduced. Let me suggest a few ways that can be achieved.

 

There are four classical methods for managing risks that the individual entrepreneur can use:

• Avoid the risk of failure

• Reduce the impact of the risk

• Share the impact of the risk

• Accept the risk and budget for its likely cost

 

In this analysis the first and the fourth risk management methods are not very applicable. There is no way for the individual to avoid risks with starting a business – other than not starting a business at all. And the individual must always accept some risk and budget for its likely cost, which often is the opportunity cost of alternative ways of earning a living.

 

So what can be done to reduce the impact of startup business failure for the entrepreneur? Governments could do a lot to make sure that a failed entrepreneur can bounce back quickly. While considering suggestions for this it is worth keeping in mind that many startup businesses will initially require the founder to work for no pay and live off savings while trying to get the business off the ground.

 

For example, some social security safety nets are unavailable if you have no taxable income. I suggest that self-employed people should be given special consideration in areas such as entitlement levels for future unemployment benefits, low income supplementation, and earning of pension points.

 

Another policy area that impact entrepreneurs is in bankruptcy laws. As it is now, an entrepreneur going bankrupt after using their own and borrowed funds to start a business is treated the same as someone that gets 28 credit cards and mismanages their affairs with uncontrolled spending. A more lenient treatment of bankruptcy for genuine entrepreneurs would reduce the negative impact of some business failures.

 

Many countries have generous tax provisions for angel investments. This could be further expanded for entrepreneurs that invest in their own business, such that their founding investments get bonus tax deductions with allowances for carrying forward of this benefit.

 

The second risk treatment method is risk sharing. An obvious policy area for risk sharing is pre-seed and seed funding for startup companies. There are different schools of thought on this, where some countries, such as Sweden, have public funding available for startup companies, in contrast to other countries that rely on private capital only. Governments need to take local capital market realities into account when formulating policy in this area. In some countries, such as the USA, there is great diversity and depth of angel and venture capital available. In other countries or regions there is much less commercial risk capital available.

 

Critics of the public funding approach suggest that the public sector is not as effective as private market capital in assessing the merits of business model proposals. Basically, smart money is best at flowing to good ideas. Yet, there is a big gap between the situation of very early stage businesses and them having enough evidence of market potential such that commercial capital is available on acceptable terms.

 

My suggestion for this dilemma is for governments to take a multifaceted approach to funding support. There is virtually no market for the earliest stage pre-seed funding other than the entrepreneur’s own savings and money from friends/family/fools. Governments clearly have a role to play here in providing low levels of pre-seed funding based on competitive grant applications. The scope for such funding can be increased to help new businesses get off the ground.

 

For subsequent early stage funding, governments can provide co-contribution venture capital. In effect, if the private market believes enough in the idea, than the government should co-contribute with capital on the same terms. That way we can leverage private capital and its due diligence.

 

Such public venture capital can be overall highly beneficial for society. Many such funds barely break even in terms of investment returns, but the money deployed comes back to the state in forms of taxes and employment that multiply societal benefits of such investments.

 

Finally, governments need to get more serious about the innovative economy agenda. Recent monetary policies of quantitative easing and record low interest rates have had the goal of increasing investments by big businesses. These goals have been difficult to achieve; and when big businesses do invest, they tend to do so to improve productivity – i.e. do more with less staff.

 

Thus, it is high time for governments to also look at fiscal reform to further stimulate entrepreneurship and innovative business formation. The above suggestions are just examples of what could be done to do this. An important first step for governments is to make startup business failure less costly. That will encourage more innovative businesses to be started, which will then become the foundation for national economic resourcefulness, resilience, and renewal.

Edited by AndersB

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