Imagine you are given 10 dollars to invest by allocating them between 3 different entrepreneurs (you have to invest in all 3) who are starting a software company (which you know nothing of) and as far as you can tell the only difference between them is their track record. The first has had 1 previous company, which generated a 5x (so they got back 5 dollars for every dollar invested) return for the investors.

The second has had 3 companies and all of them have either closed or sold for loss.
The third is just starting her first company.

How would you allocate the money? who has a better chance of making it?  the more experienced? the most successful? or maybe it’s the purest of minds out of the 3 (the one who hasn’t tried yet).

An interesting research explains who and why.

Most of us would allocate the 10 dollars something like 7,2,1 or 6,3,1 (accordingly) under the assumption that the experienced entrepreneur that failed has more chances to succeed than the girl who has never even tried.

A surprising research conducted by Harvard business school  looked at several thousand venture-capital-backed companies from 1986 to 2003 to conclude that failure in previous ventures does not increase the chances of success in future ones while successful entrepreneur increase their chances to succeed in the next venture. Basically it means that you should put the same amount of dollars for the experienced yet failed entrepreneur as you put on the newbie and both of them should be lower than the money placed on the first successful entrepreneur (8,1,1 or 6,2,2 and so on).

This goes contrary to intuition and common wisdom in the silicon valley in which “serial entrepreneurs” celebrate the amount of companies they started regardless of their success rate. Failed entrepreneurs also have a better chance of getting venture money under the assumption that they implement the lessons learned and succeed next time.

Personally i found this highly surprising as well. The first start-up i joined as an employee  in the late 90s (happy dot.com days) burned though 30 million dollar in 5 years just to end as a write-off to the investors. I always felt that i got a lot of the “what not to dos”  from that experience and it helped me avoid a lot of mistakes when it was time to run a company along with my colleagues who went through that failing experience with me.

So how can it be that you learn nothing from failures?
A different study led by the neuroscientist Earl Miller at the Massachusetts Institute of Technology tracked monkeys as they go though a learning experience on a two-choice visual task (come on, this is not that different from running start-ups..). The study finds that monkeys had impressive wining streaks by implementing lessons from previous tasks in the next one while failing monkeys learned nothing from failure and in the following task after a failure had pure chance odds of success (same as the monkey doing the task for the first time).

Apparently, our brain does  not learn from failures by default. Bringing it back to people, the researchers suggest celebrating successes to increase dopamine in the brain which helps register the learned lessons. Also,  in order to learn from failures we must make a conscious effort to try and register the relevant lessons.

I personally think this is actually a valuable feature of our mind that helps us sustain a high self-impression in the face of failures so that we don’t forgo trying all together just because we failed before (after all, statistically speaking, for the failed entrepreneur and the non-experienced one this is a roulette game so the more you try , the better your chances of hitting success).

Here are some of my thoughts on the matter:

1. Failing is better than not trying – At least from an evolutionary perspective, it seems that the preference is towards trying and failing over avoiding risks. that could be the reason why the brain is not learning as much from failures, to avoid the situation in which the registration of  failures deters from trying (even thought failure in life-threatening situations might not be such a great thing for the individual..).

2. Selective dual personality– I am of the opinion that entrepreneurship is all about selective dual-personality. One personality should be able to sustain consistent blows to the self-esteem and keep on going with motivation. The second personality is about acknowledging criticism and learning from it. The ability to switch between the two as needed, is golden.

3. Trying without fear of failure is bad – on the other hand, just trying over and over and taking risks without ever fearing failure is futile. The fear of failure is what keeps you thinking and learning from past experiences much in the same way that worried parents think and talk about all the things that have, can and might go wrong only to make sure they take all the necessary precautions to mitigate risks while allowing their kids a normal development.

4. Learn from other people’s mistakes – a wise person learns from their mistakes and a smart person learns from the mistakes of others (i personally think it’s a jewish saying but i might be biased here). It’s good to work in a start-up before starting one as it would put you in an even better position to learn from the mistake of others.