Business failure: Fatal blow or learning experience? Johan Wiklund Whitman School of Management Syracuse University USA

Success and failure Strong success bias in entrepreneurship research  We all love successful entrepreneurs To understand success we need to understand failure What if the strategies associated with success are also associated with failure? Then our research is heavily biased Compare with learning to bet by studying only those that WIN THE MOST at the horse races  ”Bet large sums on horses with high odds”

Example: Risk and performance Failing businesses

Consequences of failure I focus on the consequences of failure, not how to avoid failure Very little research Consequences for individual and society Consequences extend beyond financial aspects

Severity of consequences is important Influences willingness to start businesses Influences the lives for those who fail and their families Influences possibilities for learning

Severity of consequences of failure affects start-up rates Impossible to know beforehand the outcomes of entrepreneurial efforts  Genuine uncertainty Severe consequences of entrepreneurial failure reduces willingness to try  Large potential losses compared to other career alternatives  Why bet the farm if you don’t have to? Severe consequences of entrepreneurial failure reduces learning potential  Emotional distress

Financial consequences of failure Substantial despite bankruptcy laws  36% of all Swedes asking for debt restructuring are failed entrepreneurs 4% of all Swedes are self-employed  Their debt is larger

Stigma of failure Percentage who would not do business with someone who has failed

Personal consequences of failure New Zeeland data

Consequence = Imbalance risk – reward Potential downside risk Potential upside reward Employment Self-employment

In sum The opportunity cost of entrepreneurship is too high Entrepreneurship not an attractive alternative for those with strong position in labor market Entrepreneurship a last resort when employment alternatives are lacking I have extensive evidence from Sweden

Failure = learning experience? Entrepreneurs have strong emotional attachment to their businesses Losing a business induces feelings of grief and loss Entrepreneurs need to attribute failure to reasonable causes  Feedback information is needed Grief can stand in the way of reasonable attribution and thus learning

Personal consequences of failure New Zeeland data

Learning from failure Amount of feedback information available  What went wrong?  Why did things go wrong? Amount of grief  Rational interpretation  Risk for depression

Johan Wiklund Learning, feedback and grief Considerable learning Limited scope for learning Missed opportunities to learn Minimal learning Grief Feedback Much Little

Implications for policy makers I Liberal bankruptcy laws have positive consequences for individuals and the economy Reduces the opportunity cost of entrepreneurship vis-à-vis other employment options Increases willingness to start businesses Increases chances that failed entrepreneurs can learn and start again

Implications for policy makers II Examples liberal bankruptcy laws  Reorganization (rather than liquidation) bankruptcy  Fast bankruptcy process  Fresh start (i.e., discharge from debt)  Automatic stay of assets  Allowing managers to stay rather than appointing trustee  Low barriers for incorporating companies (sole proprietorship bad alternative) Low minimal share capital

Implications for educators Handling failure should be integral part of entrepreneurship courses Entrepreneurs have strong emotional bonds to their firms and failure leads to grief Learning from failure is neither automatic nor instantaneous Understanding that grief is likely and how to handle it makes students:  Better prepared for running a business  Better prepared to learn from failure

Implications for researchers Much more research on failure is needed Individual level:  Emotional consequences?  Financial consequences?  Learning effects?  Willingness to come back? System level:  Consequences of “failure laws” on start-up rates? Failing firms should be included in entrepreneurship research to avoid bias