In a quiet workshop in Kyoto, Japan, artist Kunio Nakamura sits at a small wooden table surrounded by shards of broken pottery. With meticulous care, Kunio pieces together the fragments, using a mixture of lacquer and powdered gold to bind them.
“In every break, there is a story. And in every story, there is a lesson,” he says, focused on the intricate work in front of him. Kunio’s craft, Kintsugi, is the ancient art of repairing pottery that highlights rather than hides the breaks. Each piece, transformed by damage and repair, can often become even stronger and more valuable.
Just as Kintsugi transforms broken pottery, failure can so for entrepreneurs. That’s because failure, whether large or small, forces founders to confront weaknesses and rethink strategies, fostering greater self-awareness and learning along the way. By analyzing what went wrong, getting feedback, and eventually iterating, entrepreneurs can develop valuable skills that would otherwise be difficult to learn in any other way. But, of course, not all failures are built alike.
Take the example of Jane Chen, co-founder of Embrace Innovations. Jane aimed to create a low-cost infant warmer for developing countries. Despite initial enthusiasm, the product faced numerous challenges, including technical failures and market resistance. Rather than giving up, Jane and her team analyzed their mistakes, refined their designs, and eventually succeeded in creating a life-saving product that has helped over 300,000 babies. In Jane’s case, a series of small failures, approached with a mindset of learning and perseverance, eventually led to success in her business.
Then there’s Evan Williams, cofounder of podcasting platform, Odeo. Evan’s biggest mistake was failing to see the impending rise of iTunes, which was Odeo’s downfall. But he didn’t let this major failure define him. He analyzed what went wrong, re-aligned with investors, and went on to rebuild the organization under a new company, Obvious Corporation, which later developed Twitter. To no surprise, much of what Twitter did well can easily be traced back to the lessons Evan learned from Odeo, demonstrating how a big failure can lay the groundwork for future venture success.
Whether large or small, failure can be a powerful teacher. According to a Harvard Business School study, entrepreneurs who have previously failed have a 20% higher success rate than first-time founders (Gompers et al., 2010). But this statistic doesn’t mean that failing alone is the key to greater success. Rather its failing forward – i.e. learning from the experience and applying those lessons to future endeavors – that really makes the difference, particularly for startups that rely on external investors to grow,
Think of Elon Musk’s SpaceX as a great example. The first three launches of the Falcon 1 rocket ended in explosions, nearly bankrupting the company. However, with each incident, Musk and his team meticulously analyzed the issues, made improvements, and found ways to keep their investors on board. The fourth launch was a success, leading to a $1.6 billion contract with NASA.
Then there is Travis Kalanick’s story of failing with file-sharing service, Scour. Due to massive legal challenges, Scour filed for bankruptcy in 2000. But what Kalanick learned from the experience about legal risks was immensely valuable when building his next company, Uber.
The experiences of these two well-funded startups poses the question: how do investors perceive founder failures, big and small? Do they see a previous failure as increasing or decreasing the risk profile of an investment? In short, it depends.
Some investors value a previous failure, understanding that it provides founders with a more nuanced understanding of the complexities of building a startup. On the flip side – particularly in cultures with greater stigmas around failure – some investors prefer founders with squeaky clean track records. In practice, however, most professional investors take a nuanced approach, asking questions like: Did the founder reflect on what went wrong? Did they identify the root causes of the failure? Have they learned and adapted as a result?
Now the rational aspect of the founder-investor relationship is already complex. But when we throw an emotional variable like failure into the mix, the relationship gets even more complicated. These are the kinds of things I think about often. So I asked a few dozen VCs what they think. And since the responses I got were wide in range, I assumed that their positions on the subject boiled down to cultural perceptions of failure. But that was just a hypothesis with limited data to pull from. Then I did some research. And to no surprise, a US National Venture Capital Association study showed that almost exactly 50% of VCs prefer a failed founder over a first timer. The opacity of these results inspired me to look at this dynamic from a more first principles approach and explore how failed founders and investors actually THINK about the topic.
The Emotions of Founder Failure
“I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.” – Michael Jordan
Entrepreneurs, much like athletes, encounter numerous failures on their path to success. The emotional responses to these setbacks can sometimes overpower rational and analytical thought, making it challenging to move forward constructively. But by understanding the nature of these emotions, entrepreneurs can learn to manage them more effectively.
In this section, we’ll delve into the various emotions that arise from entrepreneurial failure and strategies to manage them effectively. By understanding these emotions, entrepreneurs can shed light on the emotional turbulence of failure and strengthen their entrepreneurial resilience for future endeavors.
Shock/Disbelief
Entrepreneurs tend to begin with feelings of shock and disbelief when their ventures fail, experiencing a stunned and oftentimes numbed reaction. This initial response can make it difficult to process the reality of the situation and can even lead to a temporary state of denial.
To manage these motions, it’s important to create a safe space to process them. Allow yourself time to absorb the reality of the situation without rushing into action. Take a break. Take a holiday. Or just spend some time refueling your tank. Talk to trusted friends, family, or mentors for emotional support and help you begin to articulate your feelings. Consider engaging in activities that enhance the production of serotonin and endorphins, like physical exercise and spending time in nature. Writing down your thoughts and feelings in a journal can also aid in processing the event and kickstart planning your next steps.
Confusion/Frustration
After the shock subsides, entrepreneurs often experience confusion and frustration. They grapple with understanding what went wrong and why their efforts didn’t yield the results they hoped for. This uncertainty can lead to intense frustration, with feelings of being permanently blocked from achieving their goals despite their investment of time and resources.
To manage these feelings, start by breaking down the situation into smaller, more manageable parts. Conduct a thorough post-mortem to identify the specific factors that contributed to the failure. Use structured problem-solving frameworks like root cause analysis or the Five Whys technique to explore underlying issues. Engage in reflective practices like journaling or discussing the situation with a mentor to help clarify thoughts and identify actionable insights. Incorporate stress-reduction practices like meditation, yoga, or physical exercise to improve your overall emotional regulation capabilities. Continue setting small, achievable goals to provide a sense of progress and reduce feelings of being stuck.
Resentment
For some entrepreneurs, feelings of resentment can arise. This bitterness may be directed inward, towards themselves for perceived mistakes, or outward, towards others who they believe contributed to their failure. Resentment clouds judgment and can impede future collaborations, creating barriers to recovery, learning and growth.
To manage these feelings, it’s crucial to reframe your perspective and take proactive steps to address them. Start by identifying the sources of your resentment and acknowledging your feelings. Engage in self-reflection to understand why certain actions or outcomes triggered such a strong emotional response. Consider adopting forgiveness and empathy practices. Forgiving yourself and others can reduce the emotional burden of resentment. Empathy allows you to understand others’ perspectives and intentions, which can diffuse feelings of bitterness. Engaging in open and honest communication with those involved can also help clear misunderstandings and rebuild trust.
Guilt
Guilt arises when founders feel responsible for the adverse impacts of their failure on employees, investors, and customers. This can lead to self-blame or even be paralyzing, preventing them from moving forward or trying again.
To manage guilt, take proactive steps to support those affected by the failure. Start by helping your employees find new jobs, providing references, or even offering career coaching. This not only aids their transition but also helps alleviate some of your guilt by feeling like you did your best for your team. Engage with your investors transparently, keeping them informed about the situation and any potential future plans. Additionally, practice self-reflection and try to diagnose what was within and outside your locus of control to understand and compartmentalize the root causes of your failure and what you could have done differently.
Shame/Embarrassment
Many founders feel shame and embarrassment when their ventures fail, perceiving the experience as a personal inadequacy rather than a business outcome. These corrosive feelings hinder one’s ability to bounce back, by internalizing the failure as if it reflects their worth and capabilities as a founder. Embarrassment exacerbates this by adding a fear of judgment from peers, investors, or the broader public.
To manage these feelings, it’s crucial to reframe a failure as a learning experience, recognizing that setbacks are a natural part of the entrepreneurial journey. Spend time with more experienced entrepreneurs who can provide perspective and encouragement since they’ve likely felt the pain of failure as well. Visit (or participate in) a FailCon, a conference designed to help entrepreneurs prepare for and learn from failure. Sharing your story of failure publicly may be difficult at first, but the responses of support from your peers can help you recognize that you are far from alone in your experience.
Regret
Regret is also a common emotion as founders reflect on the decisions they believe led to their failure. This emotion can be consuming, as entrepreneurs can repeatedly think about missed opportunities or actions they wish they had taken differently.
To manage regret, first acknowledge and accept your emotions without dwelling on them excessively. Use techniques such as journaling to express and process your feelings, which can help you gain perspective and clarity. Focus on what you’ve learned from the experience and how you can apply these lessons to future endeavors. Practice mindfulness to help you stay present and reduce the tendency to ruminate on past decisions. Continue executing on small, new goals to create a sense of progress and forward momentum. Try to engage in activities that promote neuroplasticity, such as learning new skills or engaging in novel experiences, to help your brain adapt and move beyond the regret.
Anxiety
Anxiety can be a powerful emotion that follows failure, as the fear of repeating past mistakes or figuring out what to do next looms large, affecting decision-making and risk-tolerance.
To combat anxiety, incorporate relaxation techniques into your daily routine. Practice deep breathing, progressive muscle relaxation, or meditation to calm your nervous system and reduce symptoms of anxiety. Maintain a healthy lifestyle with regular physical exercise, a balanced diet, and adequate sleep. This will help to regulate stress hormones, enhance your decision-making abilities, and prepare you to face future challenges with a clearer mind and greater confidence. Consider engaging in activities that naturally reduce cortisol levels, like yoga or spending time in nature. And for those who feel they need to engage in deeper work, cognitive-behavioral therapy (CBT) can be useful in helping to identify and challenge irrational thoughts that fuel anxiety, replacing them with more balanced perspectives.
Fear and Self-Doubt
Some entrepreneurs experience intense feelings of fear and self-doubt following a failure. Fear arises from the anticipation of potential future failures and self-doubt causes founders to question their decision-making abilities for future endeavors. These emotions can severely undermine confidence, making it challenging to take the necessary risks for future ventures.
To manage these powerful emotions, start by reframing them as natural responses to a challenging situation. Acknowledge that they are common among entrepreneurs and don’t reflect your actual abilities. Build a supportive network of mentors and peers to provide valuable feedback and encouragement, helping you gain perspective and rebuild confidence. And engage in learning and professional development activities to help your brain adapt and build resilience, reminding you that you are capable of learning new things.
Hopelessness/Depression
In some cases, entrepreneurs face profound feelings of hopelessness and depression after the failure of their ventures. This belief that improvement is impossible and that future efforts are futile can lead to clinical depression, marked by prolonged sadness, a lack of motivation, and a pervasive sense of despair.
Since I’m not a psychologist or a therapist, it wouldn’t be appropriate for me to make recommendations on how to manage such powerful emotions. Seek professional help as needed.
The Neuroscience of Failure Emotions
The cascade of emotions that failed founders often experience is rooted in our brain’s intricate neural mechanisms, particularly the prefrontal cortex (PFC) and the limbic system, which includes the amygdala. The PFC, responsible for higher-order cognitive functions such as planning, decision-making, and self-reflection, can become overwhelmed when processing intense emotions that can accompany failure. Meanwhile, the amygdala, which detects threats and processes emotions, triggers powerful emotional responses that can dominate rational thought.
Shock and disbelief are driven by the amygdala’s heightened state of alertness, overwhelming the PFC and resulting in a temporary shutdown or freezing reaction. As founders move past the initial shock, confusion and frustration set in, further stressing the PFC, causing struggles in processing the complex and unexpected nature of failure. The amygdala amplifies these feelings by maintaining a high level of emotional arousal, creating a cycle of stress and cognitive overload.
Resentment, whether directed inward or outward, occurs when the PFC’s role in regulating emotions is challenged as the amygdala generates persistent negative feelings. This makes it difficult to move past the bitterness. Guilt involves the anterior cingulate cortex (ACC) alongside the PFC. The ACC monitors errors and conflicts, while the PFC intensifies self-blame, leading to paralyzing feelings of responsibility for the failure’s impact on others.
Shame and embarrassment are processed through an interplay between the PFC and the limbic system. The PFC evaluates self-worth, and when failure is perceived as a personal inadequacy, it triggers intense self-blame, further compounded by the amygdala’s stress response. Regret involves the PFC and hippocampus, leading to persistent rumination as the brain repeatedly revisits past decisions.
Anxiety, driven by the amygdala and hypothalamus, activates the body’s stress response, releasing cortisol and adrenaline, which impair cognitive functions and decision-making. Fear and self-doubt, also regulated by the amygdala and PFC, amplify the anticipation of future failures and excessive self-evaluation, creating yet another cycle of paralyzing doubt. And finally, hopelessness and depression reduce PFC activity, overactivate amygdala responses, which can potentially cause hippocampal shrinkage and neurotransmitter imbalances, leading to negative impacts that may require professional intervention.
But by having a basic understanding of these neural mechanisms behind these emotions, entrepreneurs can be better equipped to manage their emotional experiences and adopt strategies to manage them more effectively.
The Investor’s Assessment of Failure
“Success is walking from failure to failure with no loss of enthusiasm.” – Winston Churchill
So you’ve experienced a failure and worked through the emotions that resulted from it. But you’re resilient and determined, ready to take another swing at building your next great venture. You also realize that you’re building something big, a business that requires external capital to get where in needs to go. But are you even investible? Would an investor consider you as too high-risk since you’ve failed once before? The high-level answer to these questions is… maybe. However, if you can learn how investors perceive entrepreneurial failure (and prepare accordingly), you might just have another opportunity to secure funding in the future.
Let’s take a closer look at the causes of founder failure, how investors assess the experience, and what founders should consider when ending an entrepreneurial chapter before starting a new one. We’ll begin by exploring the various types of startup failure and how investors may perceive them.
Product Failures
Product failures are common among startups, often stemming from issues with product-market fit. Misalignment can arise from having too many untested hypotheses, insufficient customer validation, or a lack of a data-driven approach to product development. Other factors include premature scaling, failing to identify the target customer or user, and technical flaws. A product that doesn’t meet market needs, is unreliable, or lacks innovation can quickly falter.
From an investor’s perspective, evaluating a founder with a history of product failure involves examining their approach to these challenges. Investors look for evidence that the founders understand the fundamentals of being customer-centric. This includes using lean startup and customer development methods, quickly learning and iterating based on feedback, and demonstrating agility by operating in sprints. They may assess whether the product was well-built and functioned properly or if the founders implemented proper quality assurance and built a competent product team, ideally in-house.
Market Failures
Market failures are another significant reason startups falter, often due to misreading market demands. This misreading often stems from insufficient market research and discovery, leading to products or services that don’t meet the needs or preferences of the target market. Poor timing is another common issue; entering a market too early, too late, or during a period of saturation can severely impact a startup’s success. Additionally, an inability to adapt to changing market conditions can render a product obsolete or irrelevant.
When investors evaluate founders who have experienced market failures, they look for several key indicators to assess future investability. First, they’ll want to know whether the founder has learned from their mistakes and has gained a deeper understanding of market dynamics. Did they enhance their market research methods? Have they shown the ability to pivot and adapt to market feedback effectively?
Investors may also assess the founders’ agility in responding to market changes and their ability to forecast and anticipate trends. They might look for evidence of strategic planning and risk management, ensuring that future ventures are better positioned to navigate market fluctuations. Demonstrating a clear understanding of the target market, the competitive landscape, and the timing of market entry is also important. Moreover, investors value founders who can show how they’ve refined their approach to market validation, including customer interviews, surveys, and beta testing. This iterative approach to understanding and penetrating the market reassures investors that the founders are now better equipped to align their offerings with market demands.
Team Failures
Team failures are a critical factor in startup collapses, often resulting from dysfunctional team dynamics or a lack of necessary skills and experience. Poor collaboration, internal conflicts, and misaligned goals can hinder a team’s ability to execute effectively. Furthermore, a team that lacks the expertise needed to develop, market, and manage a product will struggle to meet its goals, leading to operational inefficiencies and strategic missteps.
Investors can assess failed founders in several ways related to team-building. They may examine whether the founders were blindsided or recognized and attempted to address the root causes of team failures. Did they build and maintain a cohesive team culture? Did they demonstrate an ability to resolve conflicts and align team goals with the company’s vision?
Perhaps more importantly, did the founders recruit and retain talent well? Investors like founders that can identify the skills and expertise needed for their venture and attract the talent required to provide them. This may include assessing a founder’s network, their hiring strategies, or their ability to foster a supportive and productive work environment.
Of course, investors will want to evaluate a founder’s leadership and management skills. Effective leaders can inspire and motivate their teams, delegate tasks appropriately, and provide the necessary resources and support for their team members to succeed. Founders who can show how they learned to improve their leadership abilities and implement better team management practices are more likely to gain investor confidence.
Financial Failures
Financial failures are a major cause of startup collapse, often resulting from mismanagement of funds, poor financial planning, or lack of funding. Inefficient use of resources can quickly deplete a startup’s capital, while inadequate budgeting and financial oversight can lead to severe cash flow problems. Additionally, failing to secure sufficient funding at critical stages can halt a startup’s progress and ultimately lead to its demise.
When evaluating founders who have experienced financial failures, investors often focus on several key indicators to determine their future investibility. They assess whether the founders learned from their past mistakes and implemented better financial management practices. This includes examining how founders tracked and allocated their resources, managed their burn rate, and planned for future financial needs. Investors may also want to scrutinize spending habits, noting if founders were spendthrift, investing in unnecessary luxuries like fancy offices or expensive travel accommodations, versus being frugal and mindful of their expenditures. Additionally, they may evaluate whether founders paid wages appropriate for the company’s stage and whether they adapted their spending when funds were low, showing foresight and flexibility in managing financial crises.
Investors want founders who exhibit financial literacy and strategic financial planning. If foudners demonstrated a thorough understanding of their financial metrics, such as unit economics, cash flow forecasts, and break-even analysis, they are more likely to be viewed favorably. Of course, investors prefer founders who developed clear plans focused on sustainable growth and are capable of making informed financial decisions.
Operational Failures
Operational failures are a significant factor in startup collapses, often stemming from inefficiencies in processes or operations and an inability to scale effectively. Poorly designed workflows, lack of standard operating procedures, and inadequate resource management can severely hinder a startup’s growth and performance. Additionally, startups that cannot manage rapid growth or scale their operations to meet increasing demands often face insurmountable challenges.
When evaluating founders who have experienced operational failures, investors look for several key indicators to assess their future investability. They examine whether the founders have identified and addressed the root causes of their operational inefficiencies. This includes evaluating how well the founders understood and managed their processes, whether they implemented standard operating procedures, and if they effectively utilized their resources.
Investors also scrutinize the founders’ ability to scale their operations. They look for evidence that the founders had a clear plan for scaling and whether they could adapt their operations to meet growing demands. This includes assessing whether the founders had the foresight to anticipate scaling challenges and the agility to respond to them promptly.
Another critical aspect is the founders’ approach to operational management. Investors evaluate whether the founders were proactive in identifying and resolving operational bottlenecks and inefficiencies. They also assess the founders’ ability to build and manage a competent operations team, ensuring that the right people were in place to drive operational excellence.
Assessing Responsibility
Investors will try to distinguish between failures that were within the founder’s control and those caused by external factors, as this distinction is crucial for evaluating a founder’s future potential. Founder-controlled issues typically include mismanagement, poor decision-making, and a lack of leadership. These are aspects where the founder had direct influence and could have taken steps to mitigate risks or resolve issues. For example, if a founder made strategic errors in product development or failed to manage their team effectively, these would be considered founder-controlled failures. On the other hand, external factors such as market downturns, regulatory changes, and unforeseen events like natural disasters or economic crises are beyond the founder’s control and can derail even the most well-managed ventures.
When assessing responsibility, investors pay close attention to how founders address their role in the failure. They value founders who honestly assess their mistakes, take responsibility, and show a willingness to learn and grow from the experience. This level of accountability is a strong indicator of a founder’s integrity and resilience. Investors also like founders who can openly discuss what went wrong, why it happened, and what they would do differently in the future. This kind of transparency not only builds trust and credibility but also demonstrates that the founder is committed to continuous improvement and learning from their experiences.
Honesty and transparency are essential qualities that investors seek. Founders who can candidly communicate about their failures are more likely to gain investor confidence. This open communication helps in building a solid foundation of trust, which is crucial for any future business relationship. Investors appreciate when founders provide clear, detailed accounts of their failures, including what actions they took to address the issues and what lessons they learned. This approach shows that the founder is not only aware of their shortcomings but is also proactive in turning their experiences into valuable insights for future ventures.
Ultimately, investors want to know that founders have the self-awareness and humility to acknowledge their mistakes, coupled with the determination to learn from them and improve. This combination of accountability, transparency, and a growth mindset reassures investors that the founder is capable of navigating future challenges more effectively, making them a more attractive investment prospect.
Learning from Failure
Investors seek founders who learn and adapt from their failures, demonstrating resilience and growth. The process begins with post-mortem diagnostics, where a thorough analysis is conducted to understand the root causes of failure. This involves using various frameworks and methodologies to dissect what went wrong and why. By systematically evaluating each aspect of their venture, founders can identify the key factors that led to the collapse. This detailed review is crucial as it provides the insights necessary to avoid repeating the same mistakes in the future.
Self-reflection and adaptation are vital components of learning from failure. Investors favor founders who show evidence of personal development and a willingness to adapt their strategies based on past experiences. This self-reflection often involves a deep dive into personal and professional shortcomings, acknowledging areas where the founder may have fallen short, and committing to improvement. Adapting strategies based on these reflections signals a proactive mindset, demonstrating that the founder is not only aware of their mistakes but also prepared to take corrective actions to prevent future failures.
Implementing lessons learned from past failures is another critical aspect investors look for. Founders should be able to provide concrete examples of how their previous setbacks have informed their current and future decisions. This could include changes in business models, improved risk management practices, or the adoption of more robust decision-making processes. Evidence of such improvements reassures investors that the founder is capable of making better choices moving forward. For instance, if a founder previously failed due to poor financial management, showing how they have since implemented rigorous budgeting and financial oversight mechanisms can be compelling.
Ultimately, investors want to see that founders can turn their failures into valuable learning experiences. This involves not just understanding what went wrong but actively using that knowledge to drive future success. Demonstrating resilience, a commitment to personal and strategic growth, and the ability to implement lessons learned effectively are all indicators that a founder is well-equipped to navigate the challenges of future ventures. By showcasing these qualities, founders can build investor confidence, highlighting their potential for long-term success despite past setbacks.
Handling Failure Gracefully
How founders handle the aftermath of failure can significantly impact investor perceptions. Effective management of this period demonstrates maturity, responsibility, and resilience, which are crucial traits for any successful entrepreneur.
Transparent communication with stakeholders is paramount. Keeping investors, employees, and customers informed about the failure and the steps being taken to address it helps maintain trust. Honest and open dialogue is crucial; it demonstrates the founder’s integrity and commitment to facing challenges head-on. By providing clear and timely updates, founders can mitigate the negative impact of the failure and preserve their credibility.
Supporting the team during this difficult time is also essential. Founders should take proactive steps to assist employees with their transition, such as providing references, career coaching, or financial assistance where possible. Ensuring a smooth transition helps team members move forward and fosters goodwill. This support not only reflects positively on the founder but also helps maintain a positive company culture, even in the face of failure.
Maintaining investor relationships through regular updates and engagement is another critical aspect. Founders should keep investors informed about the situation, demonstrating transparency and accountability. By showing a commitment to learning from the failure and applying those lessons to future ventures, founders can reassure investors of their dedication and potential for future success. This ongoing communication helps maintain investor confidence and lays the groundwork for future collaboration.
Winding down the venture responsibly is also crucial to handling failure gracefully. This involves ensuring all obligations are met, such as paying outstanding debts, fulfilling contractual commitments, and appropriately distributing any remaining assets. A respectful termination process, which includes addressing all legal and financial loose ends, helps maintain professional relationships and protects the founder’s reputation. By closing the business in a manner that is considerate and thorough, founders can leave a positive impression on all involved parties.
The Investor’s Perspective
Investors’ thought processes, emotional responses, and cognitive biases significantly shape their decisions regarding failed founders. Evaluating a founder who has experienced failure involves a nuanced balancing act between recognizing past shortcomings and assessing the potential for future success. Investors look for critical criteria such as a growth mindset, adaptability, and the ability to learn from mistakes. Founders who demonstrate these qualities are more likely to be seen as capable of leveraging their past experiences to drive future ventures.
Investors’ perspectives are also influenced by their own experiences and biases. Previous successes or failures with similar investments can color their judgment, leading to optimism or caution. Cultural biases towards failure can also play a role, with some investors viewing failure as a badge of honor and learning, while others may see it as a red flag. In particular, investors who have been entrepreneurs themselves may empathize more deeply with the founder’s journey, understanding the challenges and appreciating the growth that comes from failure.
Emotional reactions, such as disappointment and hope, significantly impact investor decisions. Disappointment in a founder’s failure can be mitigated by evidence of personal and professional growth, improved decision-making skills, and strategic pivots. Investors must be aware of cognitive biases that can skew their perceptions. For instance, a bias towards optimism might lead them to overlook persistent issues, while risk aversion might result in an overly negative assessment.
Another crucial factor is the need for investors to justify their decisions to their fund’s limited partners (LPs). Crafting a compelling narrative about why a previously failed founder is now a good investment is essential. Investors must be able to articulate how the founder’s resilience, adaptability, and lessons learned from failure position them for future success. This narrative is not only important for gaining internal buy-in but also for maintaining confidence among LPs.
A Brain-Based Framework for Assessing Previous Failure
So what can we learn from our understanding of failure to be better prepared to leverage it as an opportunity rather than an obstacle? We know there are biological underpinnings for all of the emotions that arise from it. We also know there are tactics we can use to manage those emotions effectively. We know that investors seek to understand the root causes of failure and gain insights into how founders manage the experience.
From my experience (and research) I see seven core characteristics that founders can focus on when navigating failure to prepare themselves for future endeavors and make them more attractive to future investors – a brain-based framework to help founders fail forward with grace.
- Grace of Closure/Liquidation: Did they maintain relationships and uphold ethical responsibilities during the closure?
- Reflection Time: Did they take time to reflect and enhance your strategic thinking and decision-making?
- Diagnostics of Failure: Have they identified the root causes of the failure and developed effective strategies?
- Proof of Learning: Can they demonstrate tangible insights and improvements from their failures?
- Growth Mindset: Do they own the failure and see it as a stepping stone in their growth?
- Anti-Fragility: In what ways have they thrived under stress and volatility to improve their abilities?
- Employee NPS: How do stakeholders rate their abilities and potential for future success?
Let’s explore each of these characteristics, the science behind them, and what makes them attractive to investors.
Grace of Closure/Liquidation
The grace of closure or liquidation refers to how a founder handles the end of a venture. This includes how they communicate with stakeholders, manage financial obligations, and provide support to their team during the transition. Handling closure with grace is a sign of strong leadership and ethical responsibility. It ensures relationships with investors, employees, and customers are maintained, preserving the founder’s reputation and network. Research in the Journal of Business Venturing highlights how founders managing failures gracefully are more likely to retain investor support in future ventures. Maintaining positive social interactions and ethical behavior activates the brain’s reward system, promoting long-term well-being and professional relationships.
A notable example is Kathryn Minshew, co-founder and CEO of The Muse, a career development platform. Before The Muse, Minshew co-founded Pretty Young Professionals, a networking site for women. When Pretty Young Professionals failed due to co-founder disagreements and a lack of sustainable business model, Minshew focused on maintaining transparent communication and supporting her team through the transition. She handled the shutdown ethically, ensuring all financial obligations were met and keeping her investors informed throughout the process. Reflecting on the experience, Minshew said, “It was one of the hardest periods of my career, but it taught me invaluable lessons about leadership, resilience, and the importance of transparency. I wouldn’t be where I am today without those tough times.” This approach not only preserved her reputation but also helped her secure support for her next venture, The Muse, which has since become a successful career resource platform.
Reflection Time
Reflection time refers to the deliberate period founders take to analyze their failures, understand what went wrong, and derive actionable insights. Neuroscientific research supports the benefits of reflection. A study published in the Academy of Management Journal found individuals who engage in reflection after a failure show significant improvements in performance in subsequent tasks. This process engages the prefrontal cortex, enhancing strategic thinking and decision-making abilities. Reflective practices also activate the brain’s default mode network, involved in self-referential thinking and problem-solving.
A notable example is Steve Jobs after his ousting from Apple in 1985. During his time away, Jobs reflected deeply on his experiences and failures, which led to significant personal and professional growth. As he said in his famous Stanford commencement speech, “I didn’t see it then. But it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything”. Jobs went on to found NeXT and acquire Pixar, both ventures that benefited from his newfound lightness of being. When Jobs returned to Apple in 1997, this reflection time had transformed him into a more effective and visionary leader, ultimately driving Apple to unprecedented success.
Diagnostics of Failure
Diagnostics of failure involves a systematic analysis of the reasons behind a venture’s failure. This includes identifying blind spots, biases, relationship dynamics, market conditions, and team composition issues contributing to the failure. A thorough diagnosis helps founders avoid repeating the same mistakes and develop more effective strategies for future ventures. According to a study by CB Insights, 70% of startup failures can be attributed to premature scaling and lack of market need, highlighting the importance of accurate diagnostics. Neurobiologically, this involves engaging the prefrontal cortex to systematically analyze past failures and develop strategies for future success
A prime example is Reid Hoffman, co-founder of LinkedIn, who experienced failure with his first venture, SocialNet. Hoffman conducted an in-depth analysis of SocialNet’s shortcomings, realizing that the idea lacked a clearly identifiable purpose by offering dating, roommate matching, and professional networking. As Hoffman said, “One of the things I learned from that whole experience, was that you should focus on one domain that really matters to people and just do that really well.” Hoffman used these insights to guide the later development of LinkedIn. By understanding the precise reasons for SocialNet’s failure, Hoffman was able to create a more targeted and viable business model with LinkedIn, ultimately leading to its success and significant market impact.
Proof of Learning
Proof of learning refers to the ability of a founder to demonstrate what they have learned from their experiences, particularly from their failures. This involves reflecting on past mistakes, identifying key takeaways, and applying these lessons to future ventures. Proving that they have learned from failure is a sign of resilience and adaptability, qualities that are highly valued by investors. Research published in the Harvard Business Review emphasizes that founders who can articulate their learnings are more likely to gain investor trust and support for subsequent ventures. Engaging in self-reflection and continuous learning activates the brain’s executive functions, enhancing problem-solving skills and fostering a growth mindset that is crucial for long-term success in entrepreneurship.
A notable example is Howard Schultz, former CEO of Starbucks. Before leading Starbucks to global success, Schultz founded a company called Il Giornale, which faced significant financial difficulties. Despite the challenges, Schultz learned valuable lessons about the importance of brand experience, customer engagement, and financial management. Reflecting on his journey, Schultz said, “The failures and struggles with Il Giornale were instrumental in shaping my understanding of what it takes to build a lasting brand. Every mistake was a lesson that contributed to the success of Starbucks.” His ability to demonstrate proof of learning from his initial setbacks helped him secure investor confidence and ultimately led to the growth of Starbucks into an iconic global brand. Schultz’s resilience and commitment to learning from failure underscored his capability as a visionary leader.
Growth Mindset
A growth mindset, defined by psychologist Carol Dweck, is the belief that abilities and intelligence develop through dedication and hard work. This mindset enhances neuroplasticity—the brain’s ability to form new neural connections—fostering resilience and adaptability. Entrepreneurs with a growth mindset are more likely to embrace challenges and persist through setbacks, crucial for pivoting and innovating after failure. Neuroscientific research supports this by showing individuals with a growth mindset exhibit greater activation in brain areas associated with learning and error correction, such as the anterior cingulate cortex and the prefrontal cortex. This enhanced neural activity helps entrepreneurs process feedback more effectively and implement necessary changes to improve their ventures.
A notable example of the growth mindset in action is Stewart Butterfield, co-founder of Slack. Before Slack, Butterfield co-founded a gaming company called Glitch, which ultimately failed to gain traction and was shut down. Instead of being discouraged, Butterfield took the lessons he learned from Glitch and applied them to his next venture. Reflecting on the experience, he said, “The failure of Glitch taught me about the importance of adaptability and listening to what users truly need.” This mindset of continuous learning and adaptation helped Butterfield and his team pivot to create Slack, a workplace communication tool that quickly gained massive popularity. His ability to embrace challenges and persist through setbacks demonstrates the power of a growth mindset in fostering resilience and innovation, ultimately leading to the success of Slack.
Anti-Fragility
Anti-fragility, a concept introduced by Nassim Nicholas Taleb, describes systems that grow stronger in response to stress and volatility. Unlike resilience, which merely withstands shocks, anti-fragility thrives on them and becomes better. From a neurobiological perspective, anti-fragility is associated with the brain’s stress response systems. The hypothalamic-pituitary-adrenal (HPA) axis, regulating stress hormones like cortisol, plays a crucial role in how we respond to stress. Exposure to manageable stressors can enhance resilience and cognitive flexibility, supported by research on stress inoculation training. This training helps individuals develop coping mechanisms that improve their ability to handle future stressors more effectively.
Arianna Huffington is a prime example of anti-fragility. Before founding the Huffington Post, Huffington faced the significant setback of her political book’s failure, which was met with harsh criticism and poor sales. Rather than being deterred, Huffington embraced the stress and volatility of this experience. She analyzed the feedback, learned from the criticism, and used it to refine her approach. This period of intense scrutiny and failure acted as a stress inoculation, enhancing her resilience and cognitive flexibility. So when Huffington launched the Huffington Post, she understood how to thrive on stress and volatility allowed in order to navigate the challenges of building a new media venture. Huffington’s journey exemplifies the core characteristics of anti-fragility: rather than merely surviving setbacks, she used them to become stronger and more innovative. Her success with the Huffington Post, transforming it into a leading media platform, highlights how embracing failure can lead to greater achievements and sustained growth.
Employee NPS
Employee NPS (Net Promoter Score) is a metric that measures the likelihood of employees to recommend their workplace to others. A high eNPS indicates strong employee satisfaction and engagement, which are critical for fostering a positive work environment and driving organizational success. Research in the Harvard Business Review highlights that companies with high eNPS scores tend to perform better overall, with increased productivity and lower turnover rates. Positive employee feedback activates the brain’s reward system, reinforcing effective management behaviors and creating a virtuous cycle of continuous improvement and employee loyalty.
A notable example of a founder with a high NPS is Ben Horowitz, co-founder of Opsware and later Andreessen Horowitz. After Opsware faced significant challenges, including near bankruptcy during the dot-com bust, Horowitz’s transparent communication and strong leadership were widely hailed by his employees and investors. His ability to maintain trust and morale during tough times earned him high regard from his team. This positive perception was crucial when he and Marc Andreessen founded their venture capital firm, Andreessen Horowitz. The strong support from previous stakeholders helped them raise significant capital, enabling the firm to become one of the most influential in Silicon Valley. Horowitz’s high Founder NPS, built on his proven leadership and execution, illustrates how stakeholder confidence can drive future success and growth.
Key Takeaways
By integrating these seven characteristics into their approach, founders can transform failure from a paralyzing obstacle into a powerful catalyst for growth and innovation. Each setback, misstep, and obstacle encountered holds the potential to shape founders into stronger, more insightful leaders. Like the Kintsugi artists repairing broken pottery with gold and turning each crack into a testament to resilience and beauty, failures in entrepreneurship are not just scars but the golden lines that outline your journey, making you ever-stronger and more valuable.
Investors don’t only care about innovative ideas and promising markets. They look for that indomitable spirit that emerges from the fires of entrepreneurial struggles. Show them your journey, your learnings, and your transformed self. Let them see that each failure has been a stepping stone, leading to deeper insights, stronger strategies, and unwavering resolve.
As you forge ahead, remember the path of entrepreneurship is paved with lessons, not just successes. Cultivate a growth mindset, take time to reflect, embrace anti-fragility, and continually prove your learning. Handle closures with grace, diagnose failures meticulously, and always strive to improve the elegance and grace with which you lead through good times and bad. These are not just strategies—they are the foundations of a resilient and adaptable entrepreneurial spirit.
To every founder who has faced the sting of failure, this is your call to action: redefine your narrative. Embrace your failures with pride and let them be the gold that binds your journey. Engage with your investors, your team, and your community with transparency and a commitment to growth. Show them every setback has been a lesson learned and every fall an opportunity to rise stronger.
Step forward with confidence. Your failures do not define you; they refine you. They are the crucible through which you forge your entrepreneurial identity. Embrace them, learn from them, and let them propel you towards a future of uncharted possibilities and unprecedented successes.
In the end, the beauty of entrepreneurship lies not in the absence of failure but in the mastery of turning every failure into a golden thread that weaves the fabric of your success. Keep innovating, keep learning, and above all, keep moving forward. The future belongs to those who dare to fail!
References
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