Badge of Honor or Scarlet Letter? Unpacking Investors’ Judgment of Entrepreneurs’ Past Failure

Diego Zunino, Gary Dushnitsky, Mirjam Van Praag

    Research output: Working paperResearch

    Abstract

    Research shows that most ventures fail, yet it has devoted limited attention to the consequences of entrepreneurs’ past failure for investors’ decisions. Our motivating insight is that failure can be due to bad luck, lack of skill or both. Therefore, failure conveys ambiguous information about skill. We predict that investors will discount entrepreneurs that experienced past failure. However, in the presence of a signal of skill, the magnitude of the failure discount is reduced. We test our predictions using an online experiment where respondents are potential investors in seed stage ventures via equity crowdfunding. Respondents evaluate a realistic investment opportunity in a between-subjects design, where we decompose the effect of failure into luck and skill. Our results indicate that investors discount entrepreneurs who have experienced failure. Past failure in the presence of a signal of skill, however, is not discounted. The findings indicate no discount of failure based on the “failed” label only. Overall, our analysis sheds light on the rationality of investors. In a world where entrepreneurial failure is prevalent, we find that investors are sensitive to its core drivers: luck and skill.
    Original languageEnglish
    Place of PublicationBonn
    PublisherIZA
    Number of pages34
    Publication statusPublished - 2017
    SeriesIZA Discussion Paper
    Number11017
    SeriesCentre for Economic Policy Research. Discussion Papers
    Number12329
    ISSN0265-8003

    Keywords

    • Entrepreneur
    • Venture
    • Failure
    • Luck
    • Skill
    • Investors
    • Crowdfunding
    • Experiment

    Cite this

    Zunino, D., Dushnitsky, G., & Van Praag, M. (2017). Badge of Honor or Scarlet Letter? Unpacking Investors’ Judgment of Entrepreneurs’ Past Failure. Bonn: IZA. IZA Discussion Paper, No. 11017, Centre for Economic Policy Research. Discussion Papers, No. 12329