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

Diego Zunino (), Mirjam Praag and Gary Dushnitsky ()
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Diego Zunino: Copenhagen Business School
Gary Dushnitsky: London Business School

No 11017, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: entrepreneur; venture; failure; luck; skill; investors; crowdfunding; experiment (search for similar items in EconPapers)
JEL-codes: G24 G32 L26 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2017-09
New Economics Papers: this item is included in nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Badge of Honor or Scarlet Letter? Unpacking Investors' Judgment of Entrepreneurs' Past Failure (2017)
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