Personal Experience: A Most Vicious and Limited Circle!? On the Role of Entrepreneurial Experience for Firm Survival



Personal Experience: A Most Vicious and Limited Circle!?

behind their ambition to start up or grow a business (Westhead and Wright
1998). Including portfolio entrepreneurs in the present consideration would mean
moving too far from the central focus of this paper

Derivation of hypotheses

As discussed above, the survival of a firm depends on many factors. Never-
theless, the capability of the entrepreneur to make the right decisions should play
an important role for a firm’s success. An individual’s human capital is a meas-
ure for this capability: the higher her/his human capital the more likely an entre-
preneur is to do a better job. This effect is suggested by the human capital theory.
The theory hypothesizes that investment in skills through formal educational
attainment, on-the-job training or professional experience increases the produc-
tivity of workers (Becker 1985; Mincer 1974). Yet the theory need not be limited
to employees. It is similarly appropriate when applied to entrepreneurs, to ex-
plain differences in the success of businesses. Experience of self-employment
enhances entrepreneurship-specific human capital and increases the individual’s
ability to manage a firm well. Only this indirect effect of entrepreneurial experi-
ence on firm survival can be derived based on the original human capital theory.

Cressy (1996) developed a more purposeful model based on the model of en-
trepreneurial choice (Evans and Jovanovic 1989). The model of entrepreneurial
choice regards the decision to enter self-employment as dependent on expected
future returns, which are related to the decision-maker’s human capital. In
Cressy’s variety, human capital has a direct effect as it is used in modeling the
utility of both self-employment and wage employment. Following his model,
experience increases the probability of making the most of self-employment,
through a process of entrepreneurial learning. As a consequence, it improves
survival. Indeed, ex-entrepreneurs who embark on a new entrepreneurial venture
should have learned from their experience otherwise they wouldn’t return (Stam
et al. 2006). Learning effects are also suggested by Chialvo and Bak (1999) who
simply conclude: “If an adaptive system [novice entrepreneurs in this context] is
placed in a new environment, or otherwise subjected to learn something new, the
likelihood of making mistakes is generally larger than the chance to be initially
right” (Chialvo and Bak 1999, p. 1139).

Enhanced human capital based on specific experience also lowers the nega-
tive effects of what Van den Steen (2004) calls ‘choice-driven over-optimism’.
This refers to the basic range of alternatives an individual has. From a set of al-
ternatives, they choose the one that promises the most success. The actual choice
made is, nevertheless, the one about which they are also most optimistic - fre-
quently over-optimistic. This drives the probability of failure. The choice bias
“tends to disappear with sufficient experience with the particular choice prob-
lem” (Van den Steen 2004, p.2). This enables experienced entrepreneurs to as-



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