If at first you don’t succeed

Are investors averse to past failure when it comes to funding? Or can cues about an entrepreneur’s skill tip the odds?

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Most entrepreneurs live by the mantra of getting back in the saddle when you fall off the horse. Tolerance of failure is generally acknowledged to be part of the basic entrepreneurial tool kit. But what about investors? How do they view previous entrepreneurial attempts? If there’s a failed venture in your past, will it hamper your chances of securing funding in the future?

Nowadays more than ever before, entrepreneurs and investors are debating these questions. Emotions can run high. Gary Dushnitsky, Associate Professor of Strategy and Entrepreneurship at London Business School, has opted to take a data-driven approach to better understand these important issues.

Together with Diego Zunino, Assistant Professor of Strategy and Entrepreneurship at SKEMa Business School and Mirjam Van Praag, Professor of Entrepreneurship and Organisation at the University of Amsterdam, Dushnitsky has run a large-scale field experiment, which suggests that investors do not exhibit irrational aversion to failure. And these findings represent significant implications for entrepreneurial activity moving forward – activity that will be vital in spurring new economic growth in the wake of the Covid-19 pandemic.


Past failures and separating mistakes from misfortune

Dushnitsky’s research is predicated on an understanding that success and failure are essentially asymmetric: “If you’re successful in a previous venture, we can assume two things: first, you have the entrepreneurial skills to grow wings, and second, you have luck on your side,” he says.

Failure, on the other hand, could be down to a lack of skill and mistakes you have made along the way. It could equally be due to bad luck as many businesses are experiencing these days. An outright case of misfortune – be it a natural disaster, a financial crisis or an unexpected regulatory shift – can prove detrimental and result in perfectly able founders being knocked off course.

“Success and failure are contingent on the same things but they are not symmetric – in fact, they offer very different insights into a founder’s entrepreneurial skill. To succeed you need skills and luck. If you fail, it could be that you don’t have the entrepreneurial smarts. But equally you might just be unlucky and something outside your control knocks your business to the curb.”

But are investors mindful of this? Do they look beyond a previous failure? Or do they automatically discount anyone who has failed in the past, irrespective of whether it was due to mistakes or misfortune.

A rational investor should be able to appreciate this distinction, says Dushnitsky. They should be able to conclude that while success might be diagnostic of entrepreneurial skill, failure is not.

Moreover, if there’s credible evidence of entrepreneurial skill on the part of the founder, the rational investor will be willing to forgive past failure and get behind a viable new business to avoid leaving money on the table.

Testing the hypothesis

To test this hypothesis, Dushnitsky and his colleagues mocked up two new business pitches and recruiter 600+ volunteers – potential investors – who considered an equity crowdfunding investment opportunity.

Both pitches were based on real-life business ideas, one of which had successfully secured funding while the other had not. The initial response from the volunteer investors mirrored the real-life outcomes: the unsuccessful business pitch was instantly deemed less attractive by the respondents, giving the researchers a “sanity check” on the reliability of the material. 

Dushnitsky et al then ran their experiment, manipulating each pitch to assess the impact of previous failure on investors’ perceptions.

One group was presented with information about a (fictional) previous start-up that had successfully launched. A second group got the identical pitch, but were told that a previous venture had failed. 

To test the hypothesis further, the researchers then told investors that both (fictional) founders had featured on the ‘Forbes 30 Under 30’ list – credible cues to indicate real entrepreneurial acumen.

So, do investors behave irrationally?

Reassuringly, Dushnitsky’s findings suggest that while investors pay attention to past outcomes, they also heeded additional informational cues. When there are credible indicators of skill, the investors fully incorporate this information into their assessment which drives the likelihood that they will invest in the new business by almost 15%. 


A recent survey of leading European platforms published by California Management Review established that 47% of people who have raised money through equity crowdfunding have tried their hand at starting up more than once. Where perhaps 20 or 30 years ago, an entrepreneur might have failed to start up and never attempted it again, today more of us are going through what Dushnitsky calls “episodes of entrepreneurship.”

“We are living in the age of experimental capitalism, where lean start-ups and agility have become part of the common business lexicon. Add to that what we know from the work of colleagues like Lynda Gratton and Andrew Scott about human beings living longer and experiencing a less linear and more of a multi-stage life, and two things are statistically probable: more of us will attempt entrepreneurship across our lifetime, and more of us will do this twice or more.”

Dushnitsky’s findings provide insights that should be useful both to investors and to entrepreneurs:


  1. Investors

    Assessing a new business idea naturally entails finding out as much as possible about the founder. We suggest that investors pay strong attention to cues and evidence of skill on the part of founder regardless of past failures, because it is possible that founders will fail through no fault of their own. Investors would do well to avoid anchoring decisions on previous outcomes. Basing a decision to forego an investment because of a founder’s past failure could effectively amount to ‘leaving money on the table.’


  2. Entrepreneurs

    Founders might choose to underreport previous experiences especially if there is a failure in their past, but our results point to an important contingency. They should be prepared to fully disclose past experience, but take care to focus on positive evidence of. These cues should be credible – for example for a reputable third party – such as inclusion the Forbes list or others, praise or positive feedback from a prominent investor or acceptance into a prestigious accelerator.

We are living in entrepreneurial times, says Dushnitsky.

As the world starts the long road towards economic recovery from the Covid-19 pandemic, entrepreneurial activity will have a vital role to play in kick-starting and driving essential new growth.

The current crisis has taught us that having a job in a company offers very little actual safety or stability. But the trends point to us all being entrepreneurs in some shape or form. However we emerge from this crisis, priorities will evolve and there are bound to be major social and economic changes. Each change posits a set of opportunities. I suspect we will see people taking hold of new opportunities to benefit themselves and our society, heralding a new social order and new normal.”

If failure can be attenuated by a credible cue that points to skill, and investors behave rationally and these cues are taken on board, says Dushnitsky, there’s all the more reason to keep positive. 


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