Ramana Nanda and Matthew Rhodes-Kropf have a working paper out titled “Innovation and the Financial Guillotine” (where guillotine refers to investors’ willingness to kill an investment). Having your startup choose a strategy of high tolerance for failure in theory helps your startup and your employees feel like they can take risks to try something very innovative. The same goes for investors (and governments)—choose to tolerate failure to promote innovation. When Nanda and Rhodes-Kropf modeled investment choice decisions and their interaction with failure tolerance, they find that choosing a broad strategy of failure tolerance leads to funding less radical innovation and more incremental innovation. The issue is that by promoting failure tolerance, you make it harder to kill projects. Not being able to kill projects is a risky proposition.
My interpretation is that simplifying your startup or investment choices by employing a broad strategy of failure tolerance is not a good replacement for project-by-project considerations (the authors sort of get at this but don’t say it directly, so I could be wrong).
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