Failure can teach us hard facts

Insolvencies in Scotland showed a “positive slowing in the number of business failures” to the tune of around 27 per cent – a sign that the recovery is in full swing, with a return, albeit gradual, to growth.

The credit for the dropping failure rate is given to trade creditors, banks and HM Revenue & Customs who are currently more likely to explore alternative solutions rather than taking insolvency action against struggling companies.

However, might it be that the start-up space within the Scottish economy would be better served if more young companies were to fail? This may seem like a controversial statement, but looked at rationally it might not be so radical.

In almost every angel portfolio there is a certain amount of “living dead”. The so-called “zombie” companies that are struggling to cope, or barely hanging on. These are tying up some of our best talent that may be otherwise occupied being innovative and entrepreneurial somewhere else.

These companies are ticking along and, were they not propped up, they would otherwise fail in the natural selection of the business world. Bringing in enough to keep the wolf from the door isn’t good enough – it doesn’t result in businesses that contribute to the return to a strong economy, and it doesn’t create attractive investment opportunities.

In this country, failure is a shameful word. And this attitude is holding us back. Famously, the US has a completely different attitude to failure – and embraces the benefits that can be achieved by having been involved in a couple of business bombs. Failure is a learning curve, a rite of passage. Many articles are written about why failure is the bedrock of entrepreneurial success – so why are we in the UK so hung up on it? Or more to the point, what is the use in going to such lengths to avoid it, when the outcome might be surprisingly good?

Across the pond, business angels have cottoned on to failure as a valuable learning experience. In fact, it is now seen by investors as a prerequisite for success. At a time when the key factor in deciding whether or not to invest in a start-up is the composition of the top team, an approach which is becoming common for US investors is to set clear criteria for what they expect from management.

In doing so, the investor demands three key things from the chief executive. Firstly, the senior executive must have worked in a corporate environment. Secondly, they must have worked for a start-up, and thirdly, they must have previously been chief executive of another business or organisation.

Nine times out of ten, the tick in the box of the second criterion will have been achieved through experience in a failed start-up venture. These demands are becoming more stringent, and start-up Scotland has much to learn from this approach to create a vibrant economy.

This tickbox exercise isn’t a belt and braces approach. It’s a sensible recognition that the talent required to run and grow a profitable business is different from that required to come up with and develop technical or creative ideas – and that all types of experience counts.

l Nelson Gray is a business angel, mentor, non-executive director and fund manager. Gareth Magee is a corporate finance partner at Scott-Moncrieff accountants and business advisers. The pair have collaborated on a number of start-up and investment projects in Scotland.