Personal Experience: A Most Vicious and Limited Circle!?
ence affect the probability of business failure? Not every firm closure can be
considered as a business failure. Thus, failures have been disentangled from the
total number of firm closures and analyzed separately. Two types of failure types
can be identified: bankruptcy and the voluntary closure of a firm in financial
distress. The results of the analyses suggest that experiences indicating success
lower the risk of failing with a restart. Contrarily, negative experience, i.e. previ-
ous entrepreneurial failure, raises the risk of failing again. This means that the
hypotheses - that experience initiates learning and thus more success - must be
rejected. In particular, the assumption that experience of failure induces higher
level learning is dismissed as the opposite is found to be true: failure experience
increases the risk of further failure.
Theoretical perspectives
The survival analysis herein focuses on effects arising from entrepreneurial
experience - particularly effects arising from failure experience. It is therefore
necessary to disentangle failure experience from each entrepreneur’s body of
experience. This is not easy to do on the basis of the observable facts. What is
observable is if and how an entrepreneur previously abandoned a firm. From this
one can distinguish four cases: (1) the entrepreneur has not previously partici-
pated in a firm, (2) the entrepreneur is still a participant in a firm founded at an
earlier date, (3) the entrepreneur has ceased to participate a firm which is cur-
rently still a going concern, or (4) a previous venture on the part of the entrepre-
neur was closed down. Based on these states a previous business failure can only
be assumed in the latter case, i.e. if a venture was actually closed. But even in the
case of closure it is difficult to detect a business failure. In reality, “the definition
of failure used has, to a large extent, depended on the nature of the data avail-
able” (Everett and Watson 1998, p. 374).
One way to define failure is to use an objective measure, such as bankruptcy.
Bankruptcy is a technical term meaning financially difficult situations like an
inability to pay creditors or excessive debts, and is thus attributable to objective
and concrete factors. Personal bankruptcies, i.e. bankruptcies for individuals
rather than for business entities, are relevant when the entrepreneurs are sole
proprietors or entrepreneurs in liberal professions. But legally forced involuntary
closures due to bankruptcy are not the only type of closure. There are also ‘vol-
untary’ firm closures. The reasons for voluntary closures are not obvious and can
be diverse. For example, an entrepreneur might choose to close his or her busi-
ness in order to avoid bankruptcy, to go back to employment, to go into retire-
ment, to make a clean break and open a different business, or due to other sub-
jective motives.
Owing to the wide range of reasons for closure, additional information has to
be used to disentangle business failures from the set of voluntary firm closures.
Smith (1987) points out that signals from the payment behavior of buyers can