Failure is key to success

I read a BBC article on why Silicon Valley is successful as a center of entrepreneurship. There are a couple common lessons in it.  First, the success is driven from failure. The successes don't arise from organically or from past success. Success comes from lessons learned on how not to do things.  The second point is related to that lesson.  Silicon Valley has the infrastructure in place to allow failure, but more importantly, allow second and third chances. 

IBM Chairman Tom Watson said, "Would you like me to give you a formula for success? It's quite simple really.  Double your rate of failure."  This was well before Silicon Valley was what it is today, but the lesson clearly carries forward.  The important point is that the government needs to allow failure and expect failure from start-ups.  A completely laissez-faire government would let entrepreneurs get crushed by the burden of their failures.  However, the concept of the market "survival of the fittest" only works because people aren't actually killed by their early failures.  Of course, venture capitalist firms and banks aggregate the risk across many ideas, but the individuals starting have much of their private equity at stake.  Many business are started with second mortgages and credit card debt.

If the personal down-side risk of starting a venture is too much it will deter innovation.  If it is too little, there will be excess capital spent on bad ideas.  Government policy needs to walk the balance between making early stage capital available and too available.  The social safety net, including bankruptcy laws, needs to limit the personal risk without promoting unhealthy risks.

Finding that balance in practice is difficult.  Part of the benefit of the US is that each state can experiment with its laws and they vary significantly across the country.  I haven't studied it yet, but I would think that we could conclude that the social policies in California and Massachusetts are close to the right balance and may be a model to expand. 

This area of what government policy should be to promote development is a major area I hope to explore and document in this blog.  Hopefully, I learn something even if I make a few failures along the way.