STRUCTURED FAILURE: EU & US Divergence. Part 5.
A guest piece by Owen Reynolds of Teklas Ventures, the venture arm of the FO associated to Teklas.
This piece is a guest piece written by our good friend Owen Reynolds from Teklas Ventures, the VC arm of a family office associated with Teklas.
Owen is an armchair economist and leads Teklas Ventures, the venture arm of an automotive family office, covering both venture fund investment and direct industrial tech investment strategies. He is a former US Peace Corps Volunteer, founder of a sustainable construction company, and economist at the US FERC. After his MBA, he started in impact investing at an Omidyar fund in the US, then spent two fund cycles with Expon Capital in Luxembourg.
The ability to rise above failure is an inherent component of the dynamism of the US economy and its corporate culture.
The American culture and legal framework not only allow for failure, but almost encourages it. That structure around failure makes it feel safer and accepted socially, a slightly easier pill to swallow, despite being such an uncomfortable thing.
I would argue that failure has to be trained and curated as a tool. It’s an essential (albeit painful) learning mechanism to push yourself to your own limits—and sometimes overcome them. As I often remind my two daughters, “The only true failure can come if you quit” (thanks Rosie Revere, Engineer!)
Legal Framework
American law (and more broadly, Anglo-Saxon law) is case law, based on logical inference from previous cases. It was historically the predominant form of legal doctrine. There are downsides to be sure—in the US every state has different laws, in addition to national precedent.
Napolean changed all that messiness by mandating a detailed Code Civil in 1804 that attempted to detail a contingency for all of life’s possibilities. Similar rigid code law systems (Napoleonic Law) that followed remain common across most of Europe. The upsides of clarity and simplicity, though, leave little wiggle room for interpretation—the grey area of ever-evolving business practice.
In contrast, the US’ two centuries of case law, with an emphasis on possession and ownership, lends itself malleable to complex business negotiations. Everything is seen as a negotiation. That expectation of a negotiated outcome in the US has played critically into bankruptcy law, as well as the culture of negotiation and failure.
Bankruptcy
Bankruptcy has biblical references, such as the Jubilee on the seventh, seventh year. It developed naturally in pre-Napoleonic Europe, usually allowing a forgiveness of debts and a fresh start in exchange for giving up your assets.
Napoleonic law has since tended to “save” the debtor, though at a high cost, particularly to company founders. Here there is some variability. France has extremely favorable debtor support, owing to direct Napoleonic influence. In contrast, Germany has far more significant creditor rights, which also has the knock on effect of incentivizing larger credit markets.
The result across coded law, though, is that it is particularly difficult for companies to go bankrupt. Whether compensating the creditor (Germany) or saving the debtor (France), the cost is born by the entrepreneur. As the graphic below shows, the costs to the entrepreneur in Western European countries (ex.: DNK, ESP, FRA, ITA, and especially DEU) are more significant than in the US. While most of these countries benefit from streamlined bankruptcy proceedings, the cost of bankruptcies to entrepreneurs dictates the likelihood of innovators taking on such a personal risk.
The Knock-Ons
There is also a follow-on quirk on many code law regimes that impacts board management. In French and German law in particular, it is quite easy for board members to be lumped into the “management” in a bankruptcy proceeding if they had any active role in a company. This obviously disincentivizes very active board participation, as anyone who’s been on a cross-Atlantic board can attest to.
In startup land, you want very active, enthusiastic board members—but the law stands clearly against that impulse.
Another knock-on effect in the startup world in particular is liquidating and giving back capital. In the US, it’s not unheard of to raise a round of capital (often Seed or Series A) ahead of significant product-market fit, not find that PMF, and return the capital to the investors. If it’s done properly, this elicits trust and comes with the tacit understanding that the venture capital firm will take a serious look at the founder’s next company.
In Europe, I’ve asked founders to do the same—and it’s never worked. The danger of bankruptcy on a personal basis makes returning capital in the face of no PMF an impossible option to choose.
Back to School
Lots of ink has been spilled on the greater corporate risk-taking culture in the US compared to Europe, but little on the early reasons.
As I mentioned in the first post in this Series (Culture), schools are forced to play a filter function more frequently in Europe than in the US. Without the filter of high cost of universities, anyone can apply—thus emphasizing obedience over creativity.
In filtering students upward who are trained to follow the rules, the corporate soldiers in the making are praised for compliance. Risk and failure are eschewed. As a result, those students grow into and reinforce a risk-averse corporate culture.
Sports
While Europeans are entirely focused on soccer football, Americans have a near obsession with all other sports. I am “unathletic” by any American standards, and I still golfed for 12 years, did gymnastics for 10, played baseball for 5 years, swam for 3 years, won the Chicago city-wide diving champion once, and tried wrestling, judo, and rugby for a year or two each. Repeat: Americans loooove sports.
There’s strong evidence that failure in sports supports learning how to constructively fail in other areas of life. Every game is like a microcosm of life. You get a limited time on the field, some rules, and have to try to win. If you win: “yeah!”, then let’s try and repeat. If you lose: you learn to cope with the loss, constructively self-reflect, deal with the fear of repeating the same mistakes, and get back out there and do (hopefully) better. Sports is a daily training in grit.
One well-cited athletic academic wrote a book on failure that includes sections titled “Failure improves intrinsic motivation” and “Errors lead to optimal performance”.
Because sports are a series of failures, retrials, and repeats, there are lots of clever quotes on failure by athletes. This one is from one of my hometown favorites:
I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.
– Michael Jordan
So, while playing sports, failing, and getting back out there to try again isn’t the only way to learn to fail—it does seem to be part of the American way.
Failure isn’t always good, of course. Engineers can’t say “ooops, that bridge didn’t hold—let me give it another try.” But in sports and business, failure, iteration, self-reflection, and pivoting quickly without hesitation are critical to fast paced innovative environments.
Whatever it is, Americans do seem less bothered by looking like idiots, failing, and getting back up. Fumbling on the 1-yard line, wearing white socks with sandals, asking dumb questions to make sure they actually understand, or starting a new venture—all look like a lack of awareness from the outside. The seeming lack of awareness, however, is a symptom of trained fearlessness in the face of failure.
This is part of a series on the divergence of the EU and US economies and the impact on innovation and startups from one investors perspective. Feel free to read Owen's previous posts on Culture, Reserve Dollar Discrepancy, Monetary Premium & Investment, and The Land of Liquidity.
I am quite sure Europeans tend to be more active regarding their sport/workout life. Americans tend to want to outsmart and compete with their fellows within exteme situations, when European are interested in nurturing a balanced healthy lifestyle. We shouldn't be criticised because we prefer something more balanced and healthy