Learning from mistakes: new study provides framework for entrepreneurs to bounce back from business failure

The business world is packed with successful entrepreneurs and business tycoons who were forced to overcome at least one initial failure before their ventures took off. Stories of Walt Disney, James Dyson and Henry Ford are well documented, but less certain is how individuals can bounce back from entrepreneurial misfire and leverage this failure.

New research led by Dr Amit Rawal, Lecturer in Management at Bayes Business School, along with Professor David Sarpong, Aston Business School, has developed a framework to guide a failed entrepreneur on how they can start again, as well as predicting the likely outcome of this relaunch.

The research reviewed 180 publications on entrepreneurial failure to frame the possible causes of an initial business demise, a failed business owner’s experiences, and the lessons they have learned from this failure to recover and go again.

Causes of venture failure

In order to effectively capture lessons for future success, the study first explored possible reasons for venture failure:

• Reported ‘real’ causes of failure – firm dynamics linked to a lack of ‘functional managerial capabilities’, including inability to make effective decisions and lack of institutional support.
• Entrepreneur’s perceived causes of failure – how an entrepreneur apportions blame for a business’s failing between internal factors that is more likely to yield successful learning outcomes, external factors tends to ignore the root of the problem. Literature generally finds female entrepreneurs are more likely to voluntarily exit a firm as opposed to failing, than males. Recent papers also show ethnic and minority group entrepreneurs often see their cultural values as reasons behind venture failure, and an entrepreneur’s geographical location is also often influential towards the factors they seek to blame.

Experiences and implications of entrepreneurial failure

The research then analysed how entrepreneurs saw their own roles in the failure of a venture, focussing on the handling of emotions.

• Negative emotions– failed entrepreneurs commonly experience stigma and feelings of inferiority, guilt and embarrassment. This self-stigma is a reason many do not look to start another venture, and in more serious cases can lead to long-term health issues – not to mention financial ruin.
• Positive implications of failure – alongside the negative feelings associated with failure, research also points to common positive behavioural effects – including relief and resilience development.
• Older entrepreneurs are less likely to look to restart, while homosexual and female entrepreneurs face greater levels of stigma and are less likely to try and start another business than heterosexual and male counterparts. Cross-cultural differences can impact how entrepreneurial failure is viewed, as well as national bankruptcy policies and regulation. Failed US entrepreneurs, for example, see failure in a more positive light than Europeans.

Overcoming business failure

Reflection and coping mechanisms – entrepreneurs who take stock, grieve and acknowledge how they feel about their business failure might develop and engage in building networks, coaching, and raising money. A positive, resilient attitude to failure is associated with bouncing back, while prolonged grief jeopardises chances of this.

The resulting framework provides a recommended flow of the thought and reflective process that entrepreneurs should take if they wish to succeed in future. It also identifies possible gaps in literature to explore in future.

Dr Rawal said:

“More than 60 per cent of businesses fail within their first three years, and this figure is rising with global political tensions and economic turbulence.

“Much is publicised about these business failings in society and in the media, but little work has been done to examine the factors which lead failed business owners to reset and go again.

“Our comprehensive review of studies into why business ventures fail, and the factors that dictate whether owners have the desire to start again, offers several practical implications for entrepreneurs, researchers and practitioners.

“Unsuccessful entrepreneurs who wish to restart should use our framework as a guide to redevise strategies and bounce back. Meanwhile, successful firm owners can use the framework to mitigate against the risks of failure – which could be critical during economic hardship.

“It can also inform entrepreneur educational programmes by focusing on how individuals can manage their own failures and turn them into positives, while helping policymakers build recovery schemes for unsuccessful entrepreneurs to help them retain the drive to deliver jobs and prosperity.”

‘How do entrepreneurs experience business failure and rebound to venture again? A review of literature and research agenda’ by Dr Amit Rawal and Professor David Sarpong is published in the International Review of Entrepreneurship.