While conventional wisdom is to learn from entrepreneurial successes in starting new businesses, it is also important to learn from business failure. Why would you want to study failure?

It is about lessons learnt, not the failure in itself. Failure needs to be defined, acknowledged and accepted into any new beginning; an opportunity to reflect and improve next time.

Starting a new business is a risk but where there is no risk, there is no reward. It’s the reward of entrepreneurship that should encourage one to start again after a failure.

With low survival rates, it’s surprising anyone ever starts a business at all. Commonly used evidence from the UK and the US indicates that 70 per cent fail within just three years, the majority after 18-24 months and 90 per cent fail by their 10th year.

However, according to research from Stanford and the University of Michigan, “failed entrepreneurs are far more likely to be successful in their second go-around, provided they try again and analyse where and why they went wrong”.

It is important to bear in mind that not every failure leads to success or even a great learning opportunity. But failure is a vitally important part of the start-up ecosystem, perhaps as important as success.

It has been commonly argued that in the US, failure is treated differently, almost positively compared to European attitudes, where failure carries a stigma, reputations are tarnished and people labelled; many consequently give up, thinking they are not good enough, holding them back from taking any positive action.

Being a start-up entrepreneur is about resilience, passion, drive, commitment, stamina and energy to shoulder the ups and downs and accepting that not every idea is going to succeed; starting a business is not for the faint hearted.

In the US, would-be entrepreneurs are taught that failure is not an end in itself but an essential part of the learning process. Lessons learned from ‘failing’ can lead to a new understanding and opportunities or, ideas that might have not been evident initially and the drive behind a successful second attempt or more; every failure can also be a new beginning, a real motivator, a positive step in the business journey, but every start-up business needs a clear ‘next step’ strategy.

Entrepreneurs face a dilemma. In the UK, as in Malta, there is a focus on a business plan especially if external finance is required. This is not always the case in the US.

It can be difficult to reduce risk without resources and it can be difficult to persuade resource owners to commit to a venture when risk is still high. In the US, entrepreneurs cope with this by adopting the lean principle. Hence failure is an accepted practice.

Lean experimentation allows entrepreneurs to resolve risks quickly and with limited resource expenditure, by relying on a “minimum viable product”, that is, the smallest possible set of activities required to (rigorously) test a business model hypothesis.

Research from Harvard Business School of 2,000 businesses that received venture funding between 2004 and 2010 identified different definitions of failure.

“If failure means liquidating all assets, with investors losing all their money, an estimated 30 to 40 per cent of high potential US start-ups failed. If failure is defined as failing to see the projected return on investment – say, a specific revenue growth rate or date to break even on cash flow – then more than 95 per cent of start-ups fail.”

Overall, non venture-backed companies fail more often than venture-backed companies in the first four years of existence, typically because they don’t have the capital to keep going if the business model doesn’t work. Venture-backed companies tend to fail following their fourth years – after investors stop injecting more capital.

Start-ups try to bring a new product to the market. They don’t have that much time or that much money. They can’t do market research, so failure becomes their market research, hence the lean principle. Many businesses are not viable in the first place.

Principally, there are three main reasons: lack of market research and validating a proposition, spending time in the marketplace, engaging with potential customers, understanding customer purchasing behaviour and if they will buy their product;

Lack of finance in developing the operational infrastructure (systems, processes, and people) and applying an adequate strategy to succeed because of the lack of sufficient working capital either in the form of internal cash or line of credit;

Inexperience and lack of business acumen about the complexity of business. Studies have shown that the deficient management competence negatively influences the direction of new ventures.

Louis Naudi is Hon. Professor and Fellow, Chartered Institute of Marketing and Chartered Institute of Marketing.