Here is an excerpt from an article written by Joshua Gans for the Harvard Business Review blog. To read the complete article, check out the wealth of free resources, and sign up for a subscription to HBR email alerts, please click here.
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We are told that some large fraction (possibly 80 percent) of small, entrepreneurial businesses fail. The hard part is working out why.
You may notice a restaurant has closed in your neighborhood. If it seemed popular, you wonder if the owner left for greener pastures or there was some hidden health issue no one had noticed. And even if it seemed unpopular, it may be hard to determine the exact reason for its failure. Was it poor management, poor food, poor location, poor positioning, or some combination of all these things? And why might you care about this? Well, if you liked to eat there or if you want a better substitute, it might be worth knowing. And if you own the land that restaurant was on, it makes a big difference as to whether the business’s problems were tenant-specific or location-specific or something else. And if you are thinking of setting up shop where the old business closed, it matters even more.
Knowing what causes failure would be valuable. When businesses are successful, they hang around for a while and there is no end of examination as to why they became what they became. But for failure, the period during which we can observe what is going on is brief. And we may not know that we’re actually in the period that ought to be examined until it’s too late and the restaurant (and its records) has disappeared.
The Internet has brought us more discussion of failure and a bit more willingness to talk about it. (So has a certain magazine.) Paul Graham, one of the founders of the startup incubator Y Combinator, wrote about Airbnb, a business whose entrepreneurial goal was to create a platform to match beds with people in New York city. The idea was that many homes had space and a mattress, while many travelers were looking for cheap lodging. Airbnb aimed to complete this missing market for matching those homes with travelers. The idea has grown and expanded to include more than just a mattress on a floor, and Airbnb is now a broader player in the travel space.
In his essay, Graham posts email correspondence with Fred Wilson, a venture capitalist, in which Graham pleaded with Wilson two years ago to invest in Airbnb. Wilson and his team looked but concluded that what Airbnb were doing was not interesting enough. He was wrong and Wilson recently admitted so, writing, “We made the classic mistake that all investors make. We focused too much on what they were doing at the time and not enough on what they could do, would do, and did do.”
These admissions are rare. The stories of failure — in this case, failure to invest — often stay hidden. But even if people who have failed were not reluctant to share these stories, and even though such information is valuable, no market exists to bring together buyers and sellers of knowledge of failure.
But some are trying to change that. A new site, admittingfailure.com, is attempting to bring those stories out of the closet. Created by Engineers without Borders (Canada), the site lets users submit stories of failures and browse those of others. Users can also rate the stories. The site, of course, started with a number of failures of their own.
This is all far short of a market and it’s not clear markets will ever exist for knowledge of failure. But to the extent it is successful in preventing history from repeating itself and the wasteful entrepreneurial resources that might otherwise be expended, it’s a good thing. I wish them every success. And if they fail, I hope they tell us about it.
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Joshua Gans is an economics professor at Melbourne Business School and a visiting researcher at Microsoft Research (New England). All views here are his own.