Differing Perceptions of New Venture Failure: A Matched Exploratory Study of Venture Capitalists and Entrepreneurs

Abstract

* key factor [that caused our failure] was that our external market had changed after we introduced the product. * to provide the customer what he [or she] wanted cost us some jobs. * bad news is that we missed a lot of [problems] that had we been in the business before, we would have caught. * We had problems moving fast enough in an extraordinarily fast moving industry, so that we couldn't capitalize on the opportunity that we had created. The above quotes from entrepreneurs highlight some of the problems that haunt new ventures in their struggle to survive. In fact, Timmons (1994) notes that over 20 percent of new ventures fail within one year, and 66 percent fail within six years. The large percentage of failures and the perceived drain on national resources has been a point of contention. Robert Reich asserts that chronic entrepreneurialism is undermining America's competitive strength because entrepreneurial ventures splinter American manufacturing power into too many small pieces (Castro 1988, p. 48). The fact that a large percentage of new ventures fail is indisputable; however, others argue that the learning accrued by the failed entrepreneur may outweigh the costs to society (Shapero 1981; Vesper 1980). Nevertheless, given the societal costs involved, research is needed to examine the characteristics of new venture failure. Introducing the effects of venture capitalists (VC) on new venture survival is important because of the differences in failure rates of VC and non-VC backed firms. Although the overall rate of new venture failure is extremely high, Dorsey (1979) found that the failure rate of VC-funded enterprises is substantially lower. Only 18 percent of VC-funded companies failed within seven years compared to 75 percent of non-VC funded firms. Even though the failure rate is much lower for VC-funded entrepreneurs, VCs felt that 20 percent of those surviving ventures would fail to provide an adequate return (Ruhnka, Feldman, and Dean 1992). Ruhnka, Feldman, and Dean termed these ventures the living dead. Prior research points to a relationship between the presence of VC backing and new venture survival rates. Given that such a large percentage of new ventures fail, it is meaningful to investigate the perceived causes of their poor performance from the context of both the entrepreneur and the VC. The purpose of this exploratory study is to examine new venture failure from the viewpoint of both the entrepreneur and the VC using an attribution theory perspective (Weiner 1979). A fundamental question is posed: Do entrepreneurs and VCs perceive new venture failure differently? If so, why? Attribution theory provides a useful framework to examine the differences in perceptions regarding the causes of failure. Attributions have important implications for how the entrepreneur and the VC approach the problem of a failing venture (Ford 1985). Incorrect attributions may result in misapplication of resources that could ultimately cause future new venture failures. Venture Failure Factors Most organizational studies of new ventures have focused on successful endeavors; research on venture failures has been limited for a variety of reasons. First, it is difficult, if not impossible, to do financial analysis on failed new ventures because their financial data are typically not public. Thus, researchers must locate the failed entrepreneurs. As Bruno, Leidecker, and Harder (1986) note, even if an entrepreneur is identified, he or she may be hesitant to discuss the failure. Moreover, those entrepreneurs who do agree to an interview may not understand or be able to articulate the factors that contributed to their demise, especially if a lengthy period of time has passed since the failure (Bruno, Leidecker, and Harder 1986; Bruno and Leidecker 1987). In this instance, the entrepreneur may resort to sensemaking (post-hoc rationalizations of why the venture failed). …

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 287 citations exist upstream.