Greater tolerance for early failure yields greater corporate innovations says U of M research
Contacts: Erin Rath, Carlson School of Management, erath@umn.edu, (612) 624-7940
Ryan Mathre, University News Service, mathre@umn.edu, (612) 625-0552
MINNEAPOLIS / ST. PAUL (10/20/2009) — “If at first you don’t succeed, try, try again” may be more than a cliché when it comes to venture capital firms spurring greater innovation.
According to a study by Tracy Y. Wang , assistant professor of finance at the University of Minnesota's Carlson School of Management and Xuan Tian, assistant professor of finance at the Kelley School of Business at Indiana University, when venture capital investors allow for failure and missed targets early on by start-up entrepreneurial firms in which they are investing, the end result is greater innovation from these firms down the line.
"Motivating innovation remains a big challenge for many organizations because innovation is unpredictable and involves a high probability of failure. Therefore, tolerating failures in the exploration process is critical for achieving successful innovation,” said Wang.
Wang and Tian find that when venture capital investors allow entrepreneurial firms to tackle and overcome difficulties at the early stages of development and resist terminating their investment prematurely even thought targets aren’t met, they allow firms to realize their innovation potential. Additionally, when venture capital investors have a high tolerance for failure early on, this allowance affects the underlying culture of the corporation and encourages and sustains innovation productivity even after the venture capital investors are no longer involved with the corporation. These findings are reached through the development of a novel empirical approach measuring the venture capital investors’ failure tolerance based on the average investment duration in their past failed projects.
To read the full paper, visit: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1399707
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