Failure: How it powers Silicon Valley and handcuffs Japan

After visiting Okinawa, Japan, and meeting with global experts on innovation, I’ve come to the conclusion that Silicon Valley’s greatest advantage isn’t its diversity; it is the fact that it accepts and glorifies failure. Like many other countries, Japan has tried replicating Silicon Valley. It built fancy tech parks, provided subsidies for R&D, and even created a magnificent new research university. Yet there are few tech startups, and there is little innovation; Japan’s economy is stagnant.

There is a reason for this stagnation.

In any country, innovation and economic growth come from startup ventures.  But most Japanese don’t want to take the risk of starting a business.  Indeed, the social stigma and financial repercussion of failure are so great that the founders of failed businesses become social outcasts; no one will work with them again or fund them; and all too often they end up committing suicide.

Jeff Char, who is a serial entrepreneur and CEO of Tokyo-based incubator J-Seed Ventures, told me that he sees huge opportunities for startups in Japan, and that there is almost no competition there. One of his new ventures, Piku Media, is a Groupon clone that has been able to rapidly create a new market.  In the Japanese tech industry, the playing field is wide open.  There is also no shortage of experienced engineering talent. But, because society doesn’t tolerate failure or respect entrepreneurs, Char can’t get engineers to leave their industry jobs to join his startups. He also can’t find any experienced entrepreneurs to lead his companies: once entrepreneurs fail, they are out of the game. Hence most ventures in Japan are managed by first-time entrepreneurs.  And of course they make the same mistakes as their predecessors — because there is no one for them to learn from.

In the old days, most businesses were in manufacturing, services, or retail. A business failure was associated with unethical practices or mismanagement. Things moved slowly. But the tech world is very different. Even though the basics of building a business are always the same, technology changes rapidly and so requires the creation of new business models. New technologies and business models are developed through experimentation. Entrepreneurs start risky ventures to test their ideas and raise financing from others who have been down the path before—and achieved success. And they learn from one another.  Innovation is a by-product of this synergy and experimentation.

This is something that Silicon Valley figured out long ago, and that is how it left other tech centers in the dust.  Failure is regarded as a badge of honor, not as an object of shame. When you meet tech entrepreneurs in Palo Alto or Berkeley and ask them what they do, they typically tell you about their current startup; then they start showing off about all of their previous failures—because to have failed means to have gained experience and to have learned.

Japan is an extreme, but things aren’t that different in other parts of the world. In Germany, for example, company founders are held personally liable for unpaid debt for up to 30 years—even after they declare bankruptcy. So if the business fails, they lose their house; their savings; practically everything they have. What’s worse: the Japanese and German entrepreneurs may also face criminal penalties and go to jail. So they try to avoid business exit at any cost—even if this means personally absorbing business losses. The result is that you see very few business startups, and those companies that are started take few risks.

The lesson that other regions need to learn from Silicon Valley is to glorify and embrace their failed entrepreneurs. Countries such as Germany, Japan, France, and India need to change their laws to allow high-tech companies to be started and shut down more easily. Their leaders need to work toward removing the stigma associated with failure. Their public needs to be educated to understand that, in the high-tech world at least, experimentation and risk-taking are the paths to success; that success is often preceded by one or more failures. This must be discussed frequently by political leaders and taught in schools. They should establish venture funds for entrepreneurs who are starting their second or third businesses after failing.

Innovation and growth result from courage, risk-taking, and opportunity.  Japan, and countries offering similar discouragement to their potential entrepreneurs, won’t see significant innovation and economic growth until they appreciate entrepreneurs’ human qualities and build on them.

Cross-posted from Vivek Wadhwa’s blog on Tech Crunch.