Is fear of failure a bad thing when starting a business?

Peter Josty is Executive Director of the Centre for Innovation Studies in Calgary.

Fear of failure is common among people when they think about starting a new business. According to the 2023 Global Entrepreneurship Monitor (GEM) report, 55 per cent of adult Canadians said they would not start a business for fear it might fail.

This is a rational feeling as 30 per cent of new businesses fail in the first two years, Fifty per cent do not survive beyond five years and only one-third survive to 10 years.

Fear of failure has been rising in Canada over the last decade, as shown in data (See graph below) from the Global Entrepreneurship Monitor.

Source: Peter Josty, from GEM Canada annual reports.

We don’t understand the reasons behind this steady increase in fear of failure. The COVID-19 pandemic seems to have had a small effect in 2020 and 2021, but the trend started much earlier than that. The rise is not unique to Canada, as many other countries have seen a rise in fear of failure over this period. The rise in the U.K. has been almost identical to the rise in Canada.

International comparisons

By international comparison, Canada ranked sixth-highest (with 55 per cent) among 46 countries in 2023 for fear of failure, behind countries like China (64.5 per cent), India (62.8 per cent), Saudi Arabia (60.8 per cent), South Africa (59.5 per cent) and Romania (58.1 per cent). 

Canada is similar to the U.K., where 53 per cent of the adult population said fear of failure would prevent them starting a business. The U.S. has a smaller rate (45 per cent), similar to the Canadian rate five years ago.

The fear of failure rate in Canada increased by 55 per cent in the last decade, while in the U.S. it increased 46 per cent. Because of this, the gap between Canada and the U.S. has widened considerably in the last decade. In 2023 the gap was four per cent; in 2023 it was 10 per cent. 

The lowest fear of failure is found in South Korea, where only 27 per cent say they have a fear of failure that would prevent them from starting a business. However, South Korea has a startup rate about half that of Canada, so the fear of failure is clearly not directly related to the rate of startups.

Rate of startups in Canada has increased

Rather paradoxically – given 55 per cent of Canadians say fear of failure would prevent them from starting a new business – over the last decade the rate of startups has increased steadily in Canada. The graph below shows the “total early-stage entrepreneurship activity” (TEA) measure from the GEM Canada reports. TEA is the percentage of the adult population actively trying to start a new company, plus the percentage running a new company less than 3.5 years old.

Source: Peter Josty, from GEM Canada reports

Gender

Typically, women have a slightly higher fear of failure than men, by roughly 10 per cent in 2021. There is debate whether this reflects a lack of self-confidence or self-efficacy, or whether it reflects a more realistic assessment of risks.

Skills and opportunities

Despite the high level of fear of failure, 57 per cent of Canadians say they have the knowledge, skills and experience required to start a business, and 63 per cent say there are good opportunities to start a business in their area.

These numbers are higher than in the U.S., where 49 per cent of Americans say they have the knowledge skills and experience to start a business, and 54 per cent see good opportunities.

What entrepreneurs say

In a study published in the Harvard Business Review, James Hayton and Gabriella Cacciotti interviewed 65 entrepreneurs in the U.K. and Canada, asking about their fear of failure.

The lean startup movement advocates failing “fast and often.” However, no one really wants to fail. Failure has many ramifications, including potential bankruptcy, repossession of startup founders’ homes, social stigma, and people losing their livelihoods. Hayton and Cacciotti identified seven sources of fear:

• financial security
• ability to fund the venture
• personal ability/self-esteem
• potential of the idea
• threats to social esteem
• the venture’s ability to execute
• opportunity costs

They found that not all of these fears had the same effect. Fears relating to the potential of the idea and their personal ability to develop a successful venture inhibited their progress and led to lots of “paralysis by analysis.”

However, Hayton and Cacciotti found that many of the other fears actually led to more motivation and greater efforts to succeed. One entrepreneur was quoted as saying, “Fear pushes me to work harder, to take more care of what I am doing, and to educate myself to be the best I can as I am developing these businesses.”

Antidotes to fear

The study revealed that entrepreneurs found a number of ways to mitigate fear of failure, including:

• Having a proactive, problem-solving response.
• Learning was a powerful antidote to fear of failure, helping to mitigate one’s doubts by increasing one’s capabilities.
• Reaching out to mentors and local communities.

A recent report by the Business Development Bank of Canada identified four distinct groups of skills that are critical for entrepreneurial success:

• grit and relationship skills
• leadership and people skills
• marketing and financial skills
• operational administration skills

Conclusion

Uncertainty and ambiguity are defining features of the challenge of entrepreneurship. Fear of failure is a normal part of this. While fear of failure has been rising in Canada, it has not prevented the rise in the rate of startups. When starting a business, fear of failure can have both negative and positive effects.

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