DANCEST 805 Lecture 13:
Chapter 10: Entrepreneurial failure
What’s business failure?
In this chapter, failure includes closure of one's firm as a result of a bankruptcy or receivership,
closure prior to bankruptcy to avoid further losses or an inability of the firm to operate in a manner
that would enable the firm to produce sufficient capital in order to remain viable as a firm.
The small number of studies considering entrepreneurial failure that have been conducted show
failure occurs as a result of many differing causes and these include a lack of markets, competition,
changes in customers' tastes, insufficient capital, ineffective planning and sometimes a lack of
resolve on the part of the business-owner. There is no definitive reason for business or
entrepreneurial failure, but it is imperative that, in order for one to find success in business, one
must first understand failure and the many reasons it can occur.
The terms `entrepreneurial failure' and `business failure' have been used synonymously in research
and been defined through the years in numerous fashions. Research has narrowed business failure
down to `failing to make a go of it' — a definition that includes bankruptcies, receiverships and the
closure of a business, ceasing operation prior to bankruptcy due to losses. Failure is also the
termination of a business that has fallen short of its goals and fails to satisfy principal investors'
expectations.
In spite of the negative connotations associated with failure, there is a positive side and that is an
entrepreneur's ability to learn from his or her failure and, ultimately, find success. In order for one to
find success in business, a complete understanding of failure, its antecedents, consequences and the
ultimate outcomes must be understood.
Entrepreneurial research has long pointed to two major causes of entrepreneurial failure — a lack of
capital and a lack of knowledge by the entrepreneur about the firm, its market and its industry. In
addition to these widely held views, research has indicated that, among the personal traits, fear of
failure is one of the major obstacles faced by start-up entrepreneurs and, in fact, is shown to be an
actual hindrance to their starting a new company.
Especially evident in today's economy is a lack of capital for start-ups or expansion of existing
businesses. Due to stringent lending regulations and excessive demands for upfront capital, many
entrepreneurs are turning to bootstrapping — an alternative method of raising capital.
1. Large and small failures
Failures in business can be categorized. In addition to being internal or external, failures can be either
large or small. There is no exact measure for classifying whether an event is large or small since these
are relative concepts, partly based on the viewpoint of the entrepreneur, so the perceived
magnitude of the dilemma is based on one's own perception of the problem. The importance of this
discussion of large and small failures ties directly with the concept of failures being either internal or
external. Small failures may include a flaw in the design of equipment or an incident involving failure
to give proper guidance to employees in need of assistance. These sometimes occur as a result of the
firm failing to adhere to its core beliefs.
Large failures within a firm can be traced to mostly exogenous or external origins, such as
`exceptional or historical conditions or society was undergoing large, dramatic change. The larger the
failure, the more dramatic and, therefore, the greater effect it will have on the external elements of
the firm. There is a direct correlation between the cause and size of a failure —the larger the failure,
the more external and more idiosyncratic.
When a firm has survived large failures in the past, there is usually no connection with current large
events that are occurring in spite of the entrepreneur or management being involved in both of the
situations. Future projects for firms are created slowly over time, just as large failures occur slowly
over time. This `slow growth' spreads the effect and ultimate cost of the failure over an extended
period, thereby allowing it to draw less attention to the cause, cost and consequence of the event.
Based on this, it can be assumed that the small failures affecting the entrepreneur and the company
can be considered indigenous while the large failures are exogenous.
Regardless of the amount of learning that occurs during a failure event, whatever is learned will be
beneficial to the future success of the entrepreneur.
2. Internal and external failures
Based on the information shown in Box 10.1, the internal factors of failure include poor management
— an event that occurs as a lack of entrepreneurial or managerial attention or focus. `While
everyone agrees that
bad management is the
prime cause of failure no
one agrees what "bad
management" means
nor how it can be
recognized except after
the company has
collapsed — tl7en
everyone agrees how
badly managed it was'. Many external factors are beyond the control of even the most capable
entrepreneur and will trigger. problems in new firms. These external factors include strong
competitor retaliation, ever-changing industries, loss of. major customers, changes in technologies
and market preferences, undercapitalisation and a reliance on unproductive or existing
management.
Some failed entrepreneurs `save face' by attributing their failures to others. One study found that
entrepreneurs often attribute failure to external causes, such as market conditions and financial
problems through a process known as attribution theory. This theory explains how people identify
and male judgments about stimuli and entrepreneurs tie the failure of their enterprises to external
factors, while attributing other firms' failures to internal causes. By doing this, entrepreneurs are able
to save face. They can retain their perception of themselves as able businesspeople without
admitting defeat.
A contrary argument is that failure appears to be primarily caused by internal or endogenous factors,
such as poor management within the firm. An argument in that direction is that there is an executive
limit at which time the entrepreneur’s ability to lead the firm becomes harmful. This "executive limit"
concept illustrates internal causes oÂŁ failure, specifically, a management coordination and control
problem.
The important issue one should take away from this section is that if the entrepreneur is unable or
unaware of the events occurring in the firm and does not take positive action, an entrepreneurial.
