January 23, 2013 9 min read

This story appears in the January 2013 issue of . Subscribe »

On Oct. 11, 1868, a young and ambitious telegrapher from northern Ohio applied for a patent for an invention, a gadget he called an electrographic vote-recorder, which he hoped would be used to tally votes cast by members of the House of Representatives. Regrettably, the House declined to buy the recorder. But 21-year-old Thomas Alva Edison was unbowed by this failed business venture, and three months later he sold the rights to his next invention, a form of stock ticker known as a printing telegraph.

Edison was the quintessential American entrepreneur, committed not only to advancing technology -- even inventing new industries -- but also to securing ample profit for his labors. Yet for all his success, Edison embraced his role as a champion of failure. For the man who held 1,093 patents--who changed the way Americans lived every bit as much as Bill Gates or Steve Jobs would a century later--failure was elemental to the process of innovation. "Results!" Edison once exclaimed, as recounted in Edison, His Life and Inventions by Frank Lewis Dyer and Thomas Commerford Martin. "Why, man, I have gotten a lot of results! I know several thousand things that won't work."

The intrinsic value of failure is a lesson that should not be lost on 21st-century entrepreneurs. Failure can teach not only what one is doing wrong, but also how to do it right the next time. It can be a useful, even transformational, force for better business practices. And it is best not to shove it under the rug, because it is, at some point, inevitable.

Once a taboo subject, failure is something business owners are now willing to discuss in polite company and even in organized arenas. There is FailCon, a global series of conferences at which tech movers and shakers share stories of their defeats (see "Falling upward," page 36). The Canada office of Engineers Without Borders, which works on development projects in Africa, has spun off a venture called Admitting Failure, which encourages nongovernmental organizations to contribute stories of their own failures, so that all NGOs can learn from what has already been proved not to work. There's even an online magazine called Failure, which chronicles the foibles, frailties and general ineptitude of the human species, including a regular historical accounting titled "This Day in Failure." "I thought there would be more of a fear of failure than there has been," says Jason Zasky, the co-founder and editor. "I think people at this point are more accepting of the fact that they're going to fail at a personal level."

Among startup companies, too, failure is simply a way of life. According to the most recent figures from the U.S. Bureau of Labor Statistics, American businesses founded in 2003 had a 55.3 percent five-year survival rate; for those founded in 2006, the number fell to 49.3 percent. The 10-year survival rate for businesses founded in 1998 was 37 percent.

For venture-backed companies, the failure rate is estimated by the National Venture Capital Association at 40 percent. However, a study by Harvard Business School's Shikhar Ghosh, as reported by The Wall Street Journal, indicates that the number of venture-capital-backed startups that do not return investors' money is actually closer to 75 percent.

Whatever the numbers, it is clear that failure has lessons to impart. Not least among them -- as many of us were taught at a young age -- is that you don't know whether you'll succeed if you don't try. The novelist J.K. Rowling, author of the Harry Potter series, famously seized on the theme in her 2008 commencement address at Harvard, in which she celebrated what she called "the fringe benefits" of failure. "It is impossible to live without failing at something," Rowling said, "unless you live so cautiously that you might as well not have lived at all, in which case, you fail by default."

"Oh my gosh -- yes!" Tim Ogilvie says, when asked whether failure is more instructional than success. "It's not even close."

Ogilvie is CEO of Peer Insight, an innovation consultancy based in Washington, D.C., with Fortune 500 clients. He's also an entrepreneur, having started three businesses. Ogilvie argues that failure is, in fact, the inspiration for countless startups that seek to fill a void in a particular marketplace. His first company, for example, developed software that could be used by a delivery service to open and close a special enclosure outside a home. That business, Brivo Systems, was conceived after he noticed that too many people were getting "Sorry we missed you" notes from UPS instead of receiving their e-commerce packages. "They tried to deliver it," he says. "That's a failure."

But failure, it can be said, is in the eye of the entrepreneur. Expectations often dictate what constitutes a lack of success, as do market forces beyond any one person's control. "I don't think about failure," Ogilvie says. "I use the word experiment. I think, I've got a hypothesis about a business, and I'm going to do an experiment to test the hypothesis. Just that language alone makes you less prone to self-delusion."

Defining failure can be a tricky business. "I say sometimes that success is failure's close relative," says Mark Williamson, CEO of Mountain View, Calif.-based Zoodles, his third startup, which provides web content for children. "The difference between success and failure in a startup is sometimes so small. I know a company that, if they didn't get acquired, would have probably had to wind down the business. Sometimes that final outcome, that acquisition, is viewed as a success, where, if it had to wind it down, it would have been a failure."

Ogilvie founded Peer Insight in 2004, inspired by the idea that noncompeting companies could learn about innovation from one another when assembled into "microconsortia." (Putting competitors in the same room, he figured, would only stifle the discussion.) Three years in, growth stalled. "It was a break-even business," Ogilvie says. "That doesn't work for entrepreneurs. You can't grow if you can't build new service lines."

But Ogilvie did have a wealth of knowledge concerning innovation. Using the information Peer Insight had collected, he ditched the consortia approach and began building a consulting firm. "Today they classically call that a pivot," Ogilvie says. "The consortia business failed. Now we look at it and say that first business was the scaffolding we put up to build a reputation in the market and a body of knowledge around innovation. And the scaffolding is always ugly. You have to say, 'Wait, behind this is something that's really beautiful.'"

That ability to pivot is a theme in the work of Stanford psychologist Carol Dweck, who theorizes that perception of one's own intelligence and abilities often dictates how a person will respond to failure. She has characterized people as having either a "growth mindset," which welcomes the challenge inherent in failure, or a "fixed mindset," which resists any challenge that might be unsuccessful. Dweck has applied similar traits, on a larger scale, to businesses.

"Sometimes you're in a crisis mode that feels like something really negative, like a big cut in your budget," Dweck says. "But companies have told me that if they approach it in a growth mindset, they think, 'OK, what's a creative way to deal with this? How might this be a blessing in disguise? Maybe we can reorganize in a way that will be more effective going forward, maybe collaborate with other units in the company.' It leads them to think in ways they might not have before, to come up with more innovative solutions that leave them better off."

Dweck says business in Silicon Valley has thrived in part from an embrace of failure. "To me what makes Silicon Valley unique is this emphasis on 'fail often,'" she says. "Fail often, and you'll succeed sooner. I think the East Coast has never replicated Silicon Valley, and maybe never will, because there is this atmosphere of learning from setbacks. It's really characteristic here."

The trial-and-error approach constitutes a business model that might be called "failing smart" -- the idea that there is a right way to go wrong, a way that allows you to learn and to right your ship before catastrophe strikes and move forward, stronger than ever. Tim Harford, author of the highly touted 2011 book Adapt: Why Success Always Starts with Failure, says entrepreneurs should be willing to try new ways of doing things, ways that offer no guarantee of success. Yet he acknowledges that experimentation is not always a popular business model. "Every now and then I hear people paying lip service to trial and error," he says. "But generally we don't do very well with the idea that we're just muddling through. I think the world is probably a better place because of so many entrepreneurs who have been willing to set things up and ignore the possibility of failure."

While that type of dogged determination is admirable, reluctance to admit failure can be costly. Ogilvie says it's important for businesses, especially startups, to conduct trial-and-error experiments that yield results in a reasonable time frame--30 days, say, rather than several months. Identifying failure early, he points out, is preferable to burning through 90 percent of initial capital before figuring out what's not working. He views an entrepreneur's reaction to failure as yet another valuable skill required to keep a company moving forward.

"We are future-proofing the economy, future-proofing our own role as entrepreneurs in the economy," Ogilvie says. "It's the work of problem-choosing and problem-framing and experiment-designing. It's the work that computers can't do." Edison, no doubt, would be delighted.