Abstract
In this paper, we analyze how previously failed entrepreneurs fare with their current venture in terms of survival compared with novices. While previous studies have focused on the superior learning effects of failure experience, we point to the selection process that takes place before failed entrepreneurs become business owners again. One potential driver of this process is entrepreneurial talent. We find that failed entrepreneurs are less likely to survive with their current venture. This result persists for several subgroups of entrepreneurs, if we consider the number of past failure events, or if we control for the inclination of entrepreneurs to pursue high-risk projects. Overall, our results are consistent with the hypothesis that previously failed entrepreneurs are those with below-average entrepreneurial talent.
Highlights
We find that entrepreneurs whose previous business has failed keep new businesses running for less time than novices do
The human capital approach suggests that failure experience is a learning opportunity of entrepreneurs and that we have a positive selection of entrepreneurs with respect to entrepreneurial talent at the end of the closure-restart process
It is commonly assumed that failed entrepreneurs have higher chances of success than novices when starting a new business
Summary
The observed outcomes of businesses of failed secondchance entrepreneurs relative to those of novice entrepreneurs are as likely to be the result of an underlying selection process as the effect of learning. We are among the first to explicitly examine the relationship between the previous failure experience of entrepreneurs and the outcome of the current venture using a large representative dataset of young firms. We describe the selection process, deduce a hypothesis about the potential effect of failure experience on survival in a followup venture by applying existing theoretical models to our research question, and apply considerations on selection next to learning in the interpretation of our results. We first review the theoretical arguments on learning from past entrepreneurial experience including entrepreneurial failure and on selection with a focus on what they imply for the relative performance of failed entrepreneurs and novices (Section 2).
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