The importance of tolerating failure

A new working paper tackles an interesting topic: the relationship between tolerance for failure and innovation. In particular, authors Xuan Tian and Tracy Y. Wang looked at venture capitalists’ tolerance for failure  — and its effect on the innovativeness of the young companies they invested in.

One of Tian and Wang’s interesting findings: Venture-backed companies that eventually conducted IPOs (initial public offerings) and were backed by more failure-tolerant venture capitalists were significantly more innovative than other venture-backed IPO companies. 

What’s more, the researchers’ analysis suggests that what particularly matters is investment at an early stage by a failure-tolerant investor.   Venture capitalists, Tian and Wang conclude, appear to influence the culture of the early-stage start-ups they invest in — and failure-tolerant early investors result in IPO companies that are more innovative. 

Tian and Wang measured VCs’ failure tolerance by looking at how long the VCs continued to invest in prior companies that they eventually wrote off.  The authors’ measured innovativeness by looking at a company’s patents and the impact of those patents.