Bankruptcy: The Opportunity to Fail

25 Comments

A former mentor, and a very smart man, once told me that the greatest invention in this democracy and capitalist system we live in and know as the United States is, of all things, bankruptcy. Yep, bankruptcy… the opportunity to fail.

I mention this because I believe Jeremy Liew, venture capitalist at Lightspeed and subsequently, James Hong of Hotornot.com, posted some “must-read” thoughts and observations on this topic. In fact, I would encourage every entrepreneur to read what Jeremy and James just blogged.

Simply put, we live in a country that encourages dreamers to take risks, and the laws protect those “entrepreneurs” from the potentially excessive consequences of failure. Bankruptcy laws enable risk-takers to protect themselves and start over. There is no other nation on this planet that by its very by-laws fosters such an economic environment. This spirit, the acceptance of failure, while counter-intuitive, is crucial to this country’s enormous success within the world economy.

Consequently, it’s not a coincidence that in the world of technology, having some failures under your belt is actually a badge of honor. It means you’ve been around the block — you’ve made mistakes, ones to learn from — experiences that will make you stronger the next time around. In fact, the incredible and rapid rate of technology innovation almost requires that any entrepreneur worth his or her salt fully embrace failures as a very normal and acceptable part of the journey.

And as Jeremy and James implicitly advise all those dis/interested observers, who are unwisely kicking those who recently failed when they’re down: be warned, if your goal is to succeed, chances are 99 percent that you’ll experience failure along the way. And when the inevitable happens, let’s hope your peers are not as naïve and self-unaware as you’ve been.

It seems weird, I know. The ability for a U.S. entrepreneur to go bankrupt is actually the most important element of this country’s economic success and wealth. It’s a great example of why I love counterintuitive thinking.

25 Comments

Olympia

In RSA we are not quite that lucky! Failing has very severe consequences.. as any one with a failed business here can tell you!

Been lycky enough until now, second business still going strong.. hope I don’t have to face a system with somewhat less friendly aspect.

Simon

Humm, it’s a very interresting point of view. However it’s controversial.
In one hand we need to help entrepreneurs to take risks and eventually success.
On the other hand, one thing is not to be forgotten, these entrepreneurs do not play often with their own money and involve people in their bet.
I will completely agree with you if they drive their business in complete transparency with their investors (I’m less concerned by them who are advise people in business) and employees.
Do you believe it’s often true?
An entreprise is also a social asset, nobody wins without its environment (there is no internet success story’s creator who can tell he was the inventor of internet). Starting a company is not a game, it can be fun, but with it’s a responsibility towards folks and society. It’s difficult to tell people “sorry guys you were guineas pigs the next one might have a beter chance with me.”

Kevin O'Keefe

My best friend, who owns a Wisconsin bank, was against the recent changes in bankruptcy law for the very reasons you write about Robert.

But the credit card companies and banks, who literally wrote the bankruptcy code updates that went into law last year, took the heart of the bankruptcy laws you think are an entrepreneur’s ally.

Entrepreneurs, like me, often use credit card debt to finance a business that a bank would not finance and that would not yet merit angel or vc backing. Take those credit credit applications you usually toss in the garbage, fill them out and you have an instant loan.

Problem now is that such credit card debt is non dischargeable. In addition, debtors under the new bankruptcy law are often required to pay off over time debts that were previously dischargeable in bankruptcy.

P. Sachdeva

I’m from India. Most tech companies in India are doing low-end work like writing ERP applications for U.S and other foreign businesses and customer support call centers etc.

In last 15 years, we have not seen a single tech company of the scale of Google, Yahoo or even Skype being born in India. The reason is not the lack of education or talent among the Indians because when I visit the office of U.S. companies or even the businesses in Singapore, I see Indians working in senior positions in those companies all the time. There have been many successful startups in the U.S. with founders who were born and educated in India. So clearly Indians have the talent but what we lack in India is the appetite for risk and the respect for failures. Unfortunately in my country people can’t understand one simple rule and that is you can’t learn to swim without jumping in the water. The worst part is that I don’t see this attitude changing in near future.

Ronald Lewis

Failure is a fact of life. No one is immune to it. Throughout my life, I’ve allowed personal and professional wounds to greatly impact my future growth and positive outlook. While I still recovered, I still held on to past failures, mistakes, experiences, etc.

I’ve learned that failure doesn’t make you a bad individual or professional, but someone who is human. I took failures to heart, as I felt I wasn’t good enough, or capable enough. I also realized that I wasn’t aligning myself with the right ideas, people, and projects.

It’s imperative to find the right mix of ingredients to thrive in anything you wish to be successful in. This includes love, careers, groups, etc. You also must identify your strengths and weaknesses, and find a balance that will work for you.

For example, I knew from an early age that I had no desire to be an “employee”. So, I’ve aways had an entrepreneurial spirit, but until recently, only discovered where my true passions lie in my pursuit of independence and freedom. Knowing that I’ve discovered where my talents are best suited is a rewarding feeling.

Finally, for those who have been slighted by toxic people, have suffered unjust treatment, etc.: You’ll recover. Time is your best friend — allow it to do its work.

Peter

I concur that America’s free market institutions encourage a spirit of entrepreneurship that is unequalled elsewhere. But bankruptcy protection is antithetical to those institutions. It’s a subsidy, plain and simple, to those willing to take a risk from those content not to take such risks. And as a lover of free markets I certainly wouldn’t call any government intervention into the voluntary contractual obligations of risk takers “the most important element of this country’s economic success”.

http://www.mises.org/journals/jls/14/14_2.pdf

Peter

km4

Agree with points above but the number of companies ( mainly Fortune 1000 ones ) that ‘game’ the US bankruptcy system to find safe harbor to relieve themselves of enormous debt and stupidness has become a standard business practice. Our archaic 1933 BK laws need to be changed to mitigate these fraudulent cases.

Randy Smythe

Robert thanks for the post. I’ve had three businesses in my career and prior to them I worked as a freelancer in TV production. I’ve actually had one job (for one year) over the last 22 years. Two of the businesses were modest successes and the most recent one was at first a tremendous success and then a miserable failure. I learned far more from the failure than I did from the success. Failure is certainly not fun but it is often the necessary ingredient for real success.

That’s what I’m looking forward to.

John Wesley

Very nice to see a fresh perspective. We get used to the Tech sites mocking failed startups and it begins to affect your confidence. I’m happy to someone defending failure.

Anon

Hmmm, I tend to agree but…my dad’s was a serial entrepreneur.

Do you have any idea what that was like for a kid, growing up? Another year – another city, another company. Thinking: will it all go bust again…and if so, how long until it happens?

If you’re going the entrepreneur route, I recommend that you wait before you have some success before you start having kids.

I’m also an ex-pat American living in Berlin, Germany. What this country largely lacks is the spark of originality and creativity coming from America’s entrepreneurs. As an American, you take all that for granted until you move away. Americans really have a knack for coming up with new ideas, and should be proud of this.

Robert Young

@Anne Koark,
That’s a great story… thanks for sharing. What you’re doing is precisely the lesson that any country/society desiring economic prosperity via innovation must learn.

And thanks for all the other comments… especially those that highlight the international (non-US) perspectives… they really help shed light on the cultural differences.

Anand Gupta

Is there data available on the contribution of different causes of bankruptcy? It would be instructive to know, how many are due to medical reasons, irresponsible behavior etc. and how many are due to entreprenureship.

Eddie

Oh yes, I forgot to add … I think its very interesting to see the U.K. making inroads in the cultural acceptance of entrepreneurship but at the same time, I think such cultural inroads will take a longer time before they gain traction in other parts of the world (e.g., look at all the trouble China Central Government is having just trying to keep order in their own house with corruption still at the heart of the mental model there, as well as problems in South Korea). It remains to be seen how quickly the EU can glue together and culturally promote entrepreneurship and actually “encourage” people to fail so they can learn rather than embarrass them for such failures. I suppose India is probably not far behind the U.K. since the U.K. has had influence in India but I don’t know enough about India and if it is internally complex like (or unlike) China.

Michael Marconi

I think this is still the primary reason that the US leads many of the developments in the IT world.

Like Mat, I live in the UK and I spent a year studying entrepreneurship in technology at the London Business School. In one case-study after another, we saw that many of those who ultimately succeed have learned from past failures and have had the opportunity to try again.

As an aside, I think the American culture is also more accepting of the fact that people who take large risks should reap the benefits of large rewards. This is still not as palatable to many people here in the UK.

Eddie

Mat wrote in response:

Strangely, the UK doesn’t like it’s
entrepreneurs to be too successful either. We
suffer from something called the “tall poppy
syndrome”, which means that if someone makes it
too big society takes a certain pleasure in
waiting for a fall or setback. I don’t know
whether that exists in the US as well, but my
impression is that US society tends to applaud
success much more.

In America what usually happens is that the guys who really make it big time usually don’t know when to relax and when enough is enough so they tend to get a “god” complex and think they are above the U.S. laws … if they become too noticeable, then they get whacked by the government to make the masses feel justified that there are guys who spend jail time (examples of course are Milken in the 80s with junk bonds and the Enron 3 Stooges of Fastow / Lay / Skilling (of course Lay got off easy but 2 out of 3 in jail is better than none for the U.S. Feds). Oh Gordon Gecko where are you Mr. Gecko?

Peter

disagree.

our greatest ‘invention’, as a country, would have to be the Constitution. as for the ‘democracy’ we have in the US, it is largely due to that piece of paper, and geography (Guns, Germs, & Steel), but meaningful democracy is something altogether different. Saddam held elections, too.

as for the dreadfulness of capitalism, Enron is but one of the many spectacular ‘market failures’ we’ve seen recently. i prefer to take the long view.

that’s not to say that the notion of bankruptcy is not important, in some respects, to the entrepreneurial spirit, but i would be very hesitant to put too much emphasis on it without some evidence beyond the merely anecdotal.

:)

Anne Koark

Robert:

I am British and have been living in Germany for 21 years. In 2003 I went bankrupt with my company. Here failure is completely stigmatized. So much so that many entrepreneurs affected by failure are suicidal. In an attempt to change this way of thinking, I wrote a book in German called “Insolvent and nevertheless successful” which was 7 months on the economic bestseller list. I hold speeches on my insolvency and my way of thinking. The learning factor plays a great role here. Amazingly, I was invited to speak at a conference for the EU-Commission in Brussels. The speech is in English and can be found unter Afternoon Part 2 here:
http://europa.eu.int/comm/enterprise/entrepreneurship/supportmeasures/failurebankruptcy/conference.htm
Also I was on stage twice in 2006 with the Federal Justice Minister. The mindset is not only essential for getting back on your feet after a fall, but also for the viewing of the legislation in this area.
Have won two big entrepreneur prizes here for the destigmatization of failure. Delighted to see the discussion here.

Mat

Robert:

I am an entrepreneur in the UK with 5 start-ups under my belt. Two succeeded, Two failed, the fifth? Well that’s what I having fun with now!

The US vs. UK comparison game is one that I have had fun playing with friends and colleagues through start-ups, fund raising, boom times and bust times. All things considered, the US still looks like the best place to start a business, especially a tech business, but the gap is closing slowly.

Culturally the UK has become more accepting of entrepreneurs in the last 10 years. The start up rate in the UK is higher than ever and many more people dream of owning their own business.

From a legal perspective, it’s easier than ever to incorporate a new business (£100 and about 1 hour online, plus a week for tax and revenue registration) and the risk of failure is lower as bankruptcy laws have made it less onerous to fail.

Socially, however, there is still a stigma attached to failure. Battle scars of business are not worn with the same pride as in the US.

Strangely, the UK doesn’t like it’s entrepreneurs to be too successful either. We suffer from something called the “tall poppy syndrome”, which means that if someone makes it too big society takes a certain pleasure in waiting for a fall or setback. I don’t know whether that exists in the US as well, but my impression is that US society tends to applaud success much more.

Damon Billian

Robert:

Awesome thoughts from you. I found the posts by James and Jeremy to be very thought-provoking.

Aside:
America actually appears to embrace people that come back from failures, be they personal or professional failures. I am probably somewhat biased being American, but I haven’t experienced the same acceptance of failure in my travels outside of the USA. I believe that there’s a huge list of rock stars, politicians, & businessmen/businesswomen that have come back from obstacles most of us don’t have to face.

Good stuff…

Danny de Wit

Very well put and very true.

As someone who works in many countries, including the US, I can confirm, there’s no country on the world that comes close to the entrepreneurial infrastructure of the USA.

Unfortunately, it does become more and more difficult for people from outside the USA to ‘come and play’.

Which in my opinion is the other halve that is required for continued success, because without exporting all that goodness to the rest of the world, the economic model will breakdown.

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