Growthology: Learning from business failure

There is a substantial body of research on the failure of new businesses. Among other topics, researchers have explored the causes of firm failure, the jobs destroyed by these business closings, and the impact of this churning on our economy more generally. In this post, we consider research that highlights a silver lining to the failure of a new business:? the benefits of this experience for a serial entrepreneur?s next endeavor. Yongwook Paik, a 2008 Kauffman Dissertation Fellow, examines the effects of prior firm-founding experience on subsequent firm performance in a paper?based on research for his PhD dissertation in Economics (see executive summary here).?

Paik hypothesizes that prior firm founding experience increases both the human capital and social capital of serial entrepreneurs, allowing them to build the skills they need for greater success in their next endeavor. Using data from U.S. venture-capital-financed semiconductor firms that entered the market during 1995-1999, Paik analyzes the effect of founders? prior firm-founding experiences on the survival rate and the annualized rate of return on investment in subsequent ventures.? He also takes into account selection effect of serial entrepreneurs and the role venture capitalists play by selecting the most promising new businesses and mentoring new companies. Comparing ?serial entrepreneurs? (those who have founded a company previously) to ?novice entrepreneurs (first-time founders), he finds that the survival rate of firms founded by serial entrepreneurs is substantially higher than that of firms founded by novice entrepreneurs, but that serial entrepreneurs do not see a greater annualized return on their investments.? Firm-founding experience, it seems, allows entrepreneurs to build the skills needed for early-stage firm survival, but not necessarily those that lead to greater financial success. In addition, he finds that the mentoring of venture capitalists helps a young firm survive in its early phases and results in a higher rate of return on investment.

This study offers significant insight into the way that entrepreneurs build the skills they need for later success and serves as an important reminder to venture capitalists and other funders of new businesses that serial entrepreneurs? previous failures are not indicators of future failure.? In fact, these experiences may lead to greater future success.

Source: http://www.growthology.org/growthology/2012/12/learning-from-business-failure.html

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