Last month Inc. magazine ran an article titled “Why Silicon Valley Loves Failure” about how failure has moved beyond a buzzword in the land of Internet startups. The author (Eric Markowitz – @EricMarkowitz) shared the story of mid-’90s entrepreneur Kamran Elahian. Elahian had custom plates for his Ferrari F355 made with the word “Momenta.” Momenta was the name of a company that he founded in back 1989. Great, so what you say? There are thousands of Silicon Valley entrepreneurs who drive around with their company’s name on the vanity plates. The interesting point was that Elahian chose the name of his previous company that had already gone bankrupt back in 1992. When ask why he chose his failed company, Elahian responded with “It’s to remind me not to be too proud. Unlike other entrepreneurs who put the names of successful companies on license plates, I decided to put my biggest failure. That way, I have to be reminded of it every time I get in the car.” He had moved beyond accepting his failure to being proud of his failures (see my post on the idea of a having a Failure Resume).

Markowitz goes on to describe how the angel investor and founder of 500 Startups Dave McClure described an alternate name for his incubator as “fail factory” and suggested that they were “trying to ‘manufacture fail’ on a regular basis, and we think that’s how you learn.” McClure went on to suggest that “Getting used to that, bouncing back from that, being able to figure out what people hate and turn that into what people love…if you’re not willing to take the risk of failing and not experience failure, you’re never going to figure out what the right path is to success.” Like the explorers Lewis and Clark, McClure recognized the reality that sometimes you are going to take the wrong path and have to double back to find an alternate route. It’s not failure it is exploration and discovery.

New business failure has been around as long as there have been entrepreneurs crazy enough to think that they could succeed. So why has there been a shift in Silicon Valley from a culture of tolerating failure to one of embracing failure?

Markowitz sites a couple of factors that have changed recently that have made it easier to embrace failure: 1) the advent of cloud technologies and 2) a shift in understanding what it takes to be a successful entrepreneur.

Prior to cloud computing most startups would require tens of millions of dollars to procure the necessary hardware to launch their companies. Today companies need only to spend a few hundred thousand dollars to procure the same equipment and services from a cloud based provider. This reduction in startup expense has enabled more investments in riskier startups which results in more failures. A low cost failure is much easier to stomach than an expensive one.

In my opinion the second shift is the more important one. The realization that entrepreneurs who have failed might be just as likely (perhaps even more likely) to succeed on their next company as a new entrepreneur. Ned Staebler, vice president for economic development at Wayne State University explains that “This shift hasn’t occurred out of some transcendental revelation. Rather, investors have seen numerous resilient entrepreneurs learn from their mistakes and have a big success after one or more failures. As rational actors, investors want to be a part of that success.”

In the land of startups where the probability of success is extremely low, finding an entrepreneur with an untarnished record is near impossible. What always struck me as a paradox was that these leaders knew more when they finished than when they started about what it takes to succeed and yet were labeled as failures. To be clear I am not suggesting that we embrace incompetence or not doing your homework but instead I am suggesting that with most innovation work we do not truly know what the outcome will be unless we actually try it and frequently we will miss the mark or we will simply get it wrong.

So if failure is a likely outcome with innovation work how do organizations move forward? How do you accept failure as a likely outcome and plan for it to occur? For any organization large or small, Fortune 50 or non-profit I would suggest starting with three steps:

1. Openly acknowledge failure and the role of failure in driving new ideas. Understand how failed projects have a role in your innovation portfolio/funnel and explain to the organization how you will try many things and some of them will not pan out but that everyone is expected to explain what they did, what they learned, and what they would do differently next time.
2. Create the right culture and processes for when something fails before you begin this innovation work. What will happen when a project gets shutdown or cancelled. What happens to the executive responsible for the project? What will happen to those leading the work? How will they transition onto new innovation work or possibly back into the core business lines.
3. Set clear expectations on measurements, goals, and decision criteria before you begin innovation projects. What are you going to hold the intrapreneurs accountable for? What are they going to hold the organization and leaders accountable for? This should not be purely vanity metrics like “revenue” that can be bought with unsustainable marketing spend but real actionable startup metrics like customer conversion (see Eric Ries’ book The Lean Startup for some good examples).

Food for thought:

• Does your organization acknowledge the role of failure? Do your leaders talk about failure within the organization – including their own?
• What is your organization’s culture around failure? Are employees forced to wear the scarlet letter “F” around after a failure?
• Are you setting clear goals and expectations for your innovation work? What are your decision criteria for continuing a project versus when to shut it down?