Serial entrepreneurs are people who continually come up with new ideas and start businesses. These people tend to be highly successful when embarking on new projects because they can draw from their prior experience to make informed business decisions. In this study, researchers examine how serial entrepreneurs respond to failure: Are serial entrepreneurs more likely than amateurs to change industries from one venture to the next? Further, how does changing industries after a failed venture affect how well serial entrepreneurs perform in their next venture?
ENTREPRENEURS AND INDUSTRY CHANGE
According to past findings, entrepreneurs often learn from successful experiences, but tend to draw false conclusions from unsuccessful ones. After a failure, entrepreneurs will look to the cause of the failure to gain insight into how they can achieve success in future ventures. However, they are likely to draw false conclusions because they have only had a handful of experiences to learn from and can often be unwilling to acknowledge the true causes of their failure.
In fact, research suggests that entrepreneurs may blame factors out of their control for their failures and view successes as resulting from their own actions. They will tend to view failure as a consequence of some external factor, such as industry experience, rather than their own abilities. Therefore, the researchers of this study predicted that entrepreneurs who have experienced a failure will be more likely to consider switching industries than those who have experienced a success.
THE COST OF CHANGING INDUSTRIES
In this study (Eggers & Song, 2014), the researchers found that serial entrepreneurs indeed respond differently to success and failure. Entrepreneurs whose first venture had failed were more likely to change industries than those whose first venture had succeeded. The industry switch happens because they blame their original industry for their failure. According to the study’s findings, this kind of industry switching is especially likely for male entrepreneurs, young entrepreneurs, and less-educated entrepreneurs.
Additionally, the decision to change industries is tied to lowered performance in the new venture because entrepreneurs lack the relevant, industry-specific expertise to achieve success in an unfamiliar industry. This study also showed that entrepreneurs, regardless of their level of experience, suffer a penalty from changing industries. This finding is important because it reveals that entrepreneurs who change industries will do so at a cost, even if they have achieved success in the past.
PRACTICAL IMPLICATIONS FOR ENTREPRENEURS AND INVESTORS
Serial entrepreneurs who want to be successful at a new venture in the same industry are well-equipped with the expertise they have gained from previous ventures. However, this expertise is less applicable in an unfamiliar industry. Therefore, the researchers suggest that other types of experience (e.g., strategy, management style, decision-making style), which tend to be more adaptable than industry-specific experience, could be more useful for entrepreneurs who start a business in an unfamiliar industry.
This study has implications for investors looking to fund a new venture. Investors will be more successful if they work with entrepreneurs who have already established themselves in the industry relevant to their venture. When investors fund ventures led by entrepreneurs who have changed industries, they should make sure these individuals have managerial skills and other skills that will help them adapt to an unfamiliar context.
Eggers, J. P., & Song, L. (2014). Dealing with Failure: Serial Entrepreneurs and the Costs of Changing Industries Between Ventures. Academy of Management Journal, 58(6), 1785-1803.