Recent Research I: Learning Experience: How Does Past Failure Affect Entrepreneurial Success?

Experience can be an invaluable, and sometimes irreplaceable, asset during the intense and complicated process of building a new firm. Many theorists believe that past entrepreneurial experience, whether with successful or unsuccessful firms, prepares entrepreneurs for the pressures and risks involved in starting a company. In his book, New Venture Creation: Entrepreneurship for the 21st Century, JA Timmons observes that failure is a prerequisite for entrepreneurial success and that entrepreneurs frequently fail in creating their first company only to succeed in their second. Failures teach lessons that can only be imparted through "real world" experience and firsthand exposure to what can go wrong during the tenuous early stages of venture development.



In a recent article, however, Georg Metzger of the Centre for European Economic Research reports that not all entrepreneurial experiences are created equal. In general, prior experience with other start-ups increases the likelihood of success with future ventures. If at least one of its managing firm owners has had previous experience with forming a business, a new venture is likely to create more jobs than if none of the owners had any prior experience. On the other hand, if one of the managing owners has experienced a venture failure - meaning bankruptcy - the newer firm is likely to produce fewer jobs.



Metzger suggests that entrepreneurs who have been involved in start-ups that have gone bankrupt generally do not become more capable managers because of that experience. Instead, they tend to be intimidated when embarking on their next venture, which often leads that firm to generate fewer new jobs. Even entrepreneurs with no experience tend to create more employment opportunities than those with past failures, Metzger notes.



The article acknowledges there might be other causes of this reduced job growth besides intimidation. Entrepreneurs who have experienced bankruptcy in the past may have more limited ambitions for their new firm, choosing to focus on a smaller, more productive work environment rather than rapid growth. Regardless of the reasons for this effect, the impact of past start-up experiences tend to diminish over time.



Metzger's findings suggest that entrepreneurs who have experienced a firm bankruptcy in the past might require more, and not less, coaching from incubators, venture capitalists and start-up advisors. These clients may require special assistance tailored to help them overcome their initial hesitancy and to correct any behavioral patterns that may have led to the early end of their previous firm.



Read "Once Bitten, Twice Shy? The Performance of Entrepreneurial Restarts" at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=955756