How Failure Is Viewed in the Innovation Community: Seattle Startups and VCs Weigh In

1/16/09Follow @gthuang

Last week, I reported that Voyager Capital managing director Erik Benson said failure is seen as a “black mark” in the Seattle innovation community—more so than in places like the San Francisco Bay Area or New England. I’ve been asking around at local startups and investment firms to see what people’s reactions are, and (if it’s true) to hear what can be done about it.

The issue has definitely touched a nerve. For the most part, the entrepreneurs I hit up tended to agree with Benson’s assertion, while investors generally disagreed. I’m not sure what that means yet—maybe it’s all a matter of perspective—but there is definitely something to this discussion. And definitely a divide.

Local entrepreneur Matt Hulett, the CEO of Mpire (which runs the ad network Widgetbucks) and a fourth-generation Seattleite, says he strongly agrees with Benson. “The culture in the Northwest is very conservative. It’s one of the reasons why entrepreneurs based in the Northwest look first to Silicon Valley to fund big ideas. If you are building a truly disruptive company, then you are bound to fail,” he said in an e-mail. “In the Northwest, the demeanor is usually around ‘prove first.’ The proof is most likely around a proven management team as well as some traction on the business model.”

And why is that? “It could be that we’re more enterprise software and telecom/wireless focused in this state, or maybe we’re just built that way,” says Hulett. “Truth is, in the Northwest, having done something in a big company (Amazon, Microsoft, etc.) will be more highly valued than having tried a number of startups.”

Interesting take, but Bill Bryant, a Seattle-based venture partner with Draper Fisher Jurvetson (and an investor in Mpire), disagrees. “I think it’s more a function of ‘survivor bias,’” Bryant says. “There are all too few startups to begin with, so the successes, and the failures, tend to stand out more than in the Valley. In a small sample size, when ‘failed previously funded entrepreneurs’ do not get support for their next project, it’s simply more visible. Statistically and culturally, I do not believe that investors shy away from failed entrepreneurs any more so than investors in, say, the Bay Area—and they do so for the same reasons—that they didn’t demonstrate quality strategic leadership, were not good at execution, failed to attract a quality team, and generally squandered their initial capital backing.” That litany, Bryant adds, will not allow you to raise capital in any community.

But entrepreneurs and startup observers—not all, but most I talked to—see some problems specific to the Seattle area. Nathan Kaiser, founder of the startup-resource site nPost, says, “Seattle does have an aversion to failure, even though failure may at times be the key to success. Any number of successful entrepreneurs had failed at previous startups,” he says. “We need to be more open to failure in this town.”

Tony Wright, co-founder of RescueTime, generally agrees with Kaiser and Hulett. “In general, I think that VCs have patterns that they look for, and probably base their investment criteria on what they’ve experienced,” he says. “If you look at the pedigree of most VCs up here, I think you see a lot of them come from senior management at big companies. As a result, I think they fund people who look great ‘on paper’—MBA guys who have methodically moved their way up the corporate ladder, or senior technologists from Amazon or Microsoft—people who have no failure on their resume, partially because they’ve never taken any risks where they could fail.”

Wright continues, “I think VCs in the Valley probably get a ton more exposure to people who succeeded without paying their dues at a big company. They’ve learned that non-traditional stories can be a good foundation for startup success.”

Local angel investors disagree that entrepreneurs need to have only successes on their resumes to get support. Rebecca Lovell, program director at the Alliance of Angels, says, “There is no question our group has a proclivity to support serial entrepreneurs who have had some startup success under their belt, and in many cases, gotten the band back together to do it again,” she says. “Some are certainly battle-tested by a combination of success and failures, but as far as the latter is concerned, there is really only one thing we won’t tolerate: dishonesty…Much better to be truthful about setbacks and show what you’ve learned from your mistakes, than overstate the success of your last venture.”

Investor Geoff Entress, who not long ago gave a popular talk on why startups fail, said he doesn’t get the sense that failure is seen as a black mark in Seattle. In tough times, he says, “the best entrepreneurs will change and make it work. But even they will fail sometimes.” Entress points to the experience of his own startup, UrbanEarth, which went belly-up in 2000. “Nobody held it against us,” he says.

Maybe the whole thing is best summed up by Seattle-area entrepreneur and investor Martin Tobias of Kashless and Ignition Partners. “I think that any investors that are less tolerant of failure are silly and stupid,” he says.

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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