Valuing failure: An experiment of VC reactions to an entrepreneur’s record of business creation

ABSTRACT

Venture capitalists (VCs) closely evaluate the track record of entrepreneurs when screening new venture proposals for possible investment. There remains, however, ambiguity about how VCs perceive failure in the entrepreneurial journey. This study unveils how VCs evaluate past entrepreneurial failures. Through a conjoint experiment with 52 VCs, we find that past failures are viewed favorably. Entrepreneurs who failed are evaluated more positively than novices and entrepreneurs who only have a record of success. Education at a top-tier university moderates this relationship and leverages the positive perception of failure. Further, perceptions of entrepreneurs with a top-tiered education who failed are even better when VCs share a similar top-tier education.

KEYWORDS:

• Entrepreneurial failure
• success
• venture capitalist
• general skills
• sensemaking

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Our pilot and postexperiment surveys confirm that respondents deduced the success on the basis of the number of start-ups and failures.

² Details on case construction and modeling equations can be made available upon request.

³ We do not present the results of the control variables in this paper to facilitate the understanding of our methods. The education-level variables were included along with the control variables to perform the tests for Hypotheses 1, 2, and 3 even though they are not presented in the corresponding tables of results. The results are available upon request.

⁴ We test the moderating effect of education on entrepreneurs who have one failure only or one failure and one or more successes since we did not have enough cases with multiple failures to perform the tests.

⁵ We did not obtain any negative and significant coefficient for the effect of at least two failures such that we reject the stigma hypothesis.

Additional information

Funding

The authors received financial support from the ESCP Foundation and Jean Baptiste Say Institute for the research, authorship, and/or publication of this article.