new paper on innovation and tolerance for failure

Here's a quick post via Minnpost for my friends at org theory. Brad Allen summarizes:

Initial public offering firms backed by more failure-tolerant VCs not only produce a larger number of patents but also ones with larger impact, as reported in a paper titled “Tolerance For Failure And Corporate Innovation,” co-authored by Tracy Yue Wang, assistant professor of finance and insurance at the U of M’s Carlson School, and collaborator Dr. Xuan Tian, assistant professor of finance at the Kelley School of Business at Indiana University.

I'm sympathetic to this argument, since it fits my idealized notions about productive failure and fostering innovation in academic units. I'm no expert in the area, so I can't vouch for the empirical foundation (though I'm a little wary about period effects within the 1980-2006 observation period). Nevertheless, I like how Professors Wang and Tian operationalized the "failure-tolerance" of venture capital firms using the average duration of investment in past failed projects. Clever. From the manuscript's conclusion:

Other things equal, the longer the VC investor on average waits before terminating funding in an underperforming project, the more tolerant it is for early failures in its investments. We then examine whether such failure tolerance spurs innovation in a sample of VC-backed IPO firms between 1985 and 2006... We find that IPO firms backed by more failure-tolerant VC investors exhibit significantly higher innovation productivity. A rich set of empirical tests shows that this result is not driven by the endogenous matching between failure-tolerant VCs and startups with high ex-ante innovation potentials. Further, the analysis suggests that being financed by a failure-tolerant VC is particularly important for ventures with high ex-ante potentials but also high failure risk. VCs’ tolerance for failure allows the startups’ innovation potentials to be realized.

It all reminds me of an old quote attributed to Woody Allen: "If you're not failing every now and again, its a sign you're not doing anything very innovative."