Risk

Failed Entrepreneurs Find More Success the Second Time


Failed Entrepreneurs Find More Success the Second Time

Photograph by Phil Augustavo

Given the slight chances of success, it’s a marvel anyone ever starts a business at all. One-third of new ventures close within two years, half within five years, and so on: only one in four is still around 15 years after opening day. But all that failure may offer its own reward, according to new research from a pair of economists from Stanford and the University of Michigan. They found that failed entrepreneurs are far more likely to be successful in their second go-around, provided they try again.

The entrepreneurship studies that grab headlines tend to focus on investor-backed, technology startups. Those types of firms aren’t the norm. Most new businesses are still small, local retailers. To understand how these enterprises fare, Francine Lafontaine and Kathryn Shaw studied the successes and failures of retail entrepreneurs in Texas from 1990 to 2011. Over the 21-year-period, 2.4 million retail businesses opened and 2.2 million closed. Three out of every four were founded by first-time business owners.

Lafontaine and Shaw found that the Texas retailers were less successful than the national average for small businesses: One in four closed after a year; half after two. What happened next was telling. Of the first-time entrepreneurs whose businesses closed quickly, the overwhelming majority—71 percent—didn’t bother to try again. But the tenacious 29 percent who did were more likely to be successful the second, third, and even tenth time around. Somewhat paradoxically, their success rate increased with their number of past failures.

The researchers argue that experience, even when it’s not positive, is invaluable—that entrepreneurs learn effectively from mistakes as well as from successes. They even found that serial entrepreneurs are successful in new types of businesses. Experience owning a hair salon translates into more success at running a clothing store. (There’s one important exception: First-time-restaurant owners, no matter their business background, tend to fail; serial restaurateurs are more successful.)

This paints a different picture from previous research, which suggested that failed entrepreneurs are more likely to fail in subsequent attempts. Writing in the Harvard Business Review, a trio of researchers presented findings that, among 576 entrepreneurs in the U.K., those who take on one project after another are less capable of learning from failure compared to entrepreneurs who pursue multiple businesses at the same time. They wrote:

Serial entrepreneurs’ greater propensity to remain overoptimistic may be due in part to the deep pain, even trauma, they feel when their projects fail—pain that is especially acute precisely because they involve themselves in only one business at a time. Psychological research suggests that strong emotions often prompt people to blame others or external events rather than themselves so that they can maintain some semblance of self-esteem and a sense of control. This ‘attributional bias’ appears to make serial entrepreneurs less capable of learning from failure.

Looking at a different population, over a different time period, in a country with different regulatory structures, the Texas research concluded that serial entrepreneurs were in fact quite able to learn from past mistakes. Among people who are willing to try again, the odds of success rise. Don’t count the failures out quite yet.

Schrager is an economist and writer in New York City. Follow her on Twitter: @AllisonSchrager.

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