From Unemployed to Business Owner: Learning through Experimentation.

Abstract

Recent research in entrepreneurship has started to emphasize the view of entrepreneurship as experimentation, broadly understood as taking deliberate actions to reduce uncertainties concerning the viability of an idea. Building on this work, this paper employs unique, nationally representative data to examine the entrepreneurial process in an institutional context that offers protection against early failure and makes entrepreneurs more inclined to experiment after they found a venture. We document that entrepreneurs who transition into self-employment from unemployment engage in a greater number of both core and peripheral experimentation activities compared to other entrepreneurs. We also look at how individual characteristics influence the level of experimentation and find that there is more experimentation among individuals with higher human capital. The findings are robust to multiple alternative measures of experimentation. To validate that tolerance for failure is the main mechanism leading to experimentation, we look at an alternative pathway towards entrepreneurship that also offers insurance against failure— hybrid entrepreneurship--and find that both settings are associated with higher levels of experimentation. The study contributes to the literature by providing large-scale evidence for the link between tolerance for failure and experimentation. In doing so, it adopts a process view on entrepreneurial phenomena and gives complementary empirical insights on experimentation in terms of the actions entrepreneurs take in order to reduce the uncertainties of opportunity exploitation.