How to fail your business and still look good?

Entrepreneurship is a risky business – and the failure of your idea is the ultimate risk you take when starting a business. You cannot predict it and often it is beyond your control. There are many contradictory statistics on how many businesses actually fail, but it is undeniable that a large part of them end up closing – or at least pass through many failed stages before reaching success. It took Rovio six years and dozens of games before hitting the jackpot with Angry Birds. 

Today, failure and the importance of learning from it is celebrated in magazine articles, on conference stages, and all over entrepreneurial communities. Policy-makers in many countries have advocated “embracing failure” to encourage entrepreneurship. It is even promoted at the regional level: the European Union has launched the FACE Entrepreneurship project to fight against the fear of failure and to promote a risk-taking culture. 

But even with all this embracing, failure is still scary. It carries a financial, social and emotional cost. And, before anyone can experience a healthy learning process, they need to recover from all of that. 

“Part of understanding how entrepreneurs manage venture failure to support their emotional recovery and learning process is also to look at how they manage others perceptions towards venture failure,” explains Ewald Kibler, Assistant Professor of Entrepreneurship and the Director of the Master’s Program in Entrepreneurship and Innovation Management at the Aalto University Business School. “There is extensive research on how entrepreneurs are able to influence perceptions in very close settings like in classic pitching situations, where they have the opportunity to interact with the audience. But to influence the public’s perceptions is much more difficult –  you are on stage and don’t know the audience at all. And most of the time you have only one shot at creating a story about how your venture failed – once it is out there you can’t really influence it anymore.” 

To understand how entrepreneurs can manage impressions in the eyes of the public in order to reduce or at least minimize potential social stigmatization after failure, Kibler together with his colleague at Aalto Business School Teemu Kautonen joined a study which was started in Germany by two professors from the University of Hohenheim, Christoph Mandl and Elisabeth S.C. Berger. What they found is rather disappointing – the more entrepreneurs distance themselves from failure and blame it on external events (that is, something that’s unlikely to happen again and which wasn’t under their control in the first place), the more likely they are to create a positive perception in public’s eyes. In other words, when explaining your business failure to the public, owning up to your mistakes will only hurt you – it is better instead to blame it on others. 

To understand how public audiences judge different stories they used three dominant attributions of failure derived from attribution theory (a theory which is concerned with how individuals explain the causes of behavior and events): whether the failure was caused by factors internal or external to the entrepreneur; whether the factors leading to failure were under the entrepreneur’s control or not; and whether the cause of failure could or could not happen again. They created eight stories with different failure-impression scenarios which varied in terms of the three attributions mentioned above. 

For data collection they a used web-based survey focused on the German working population. After targeting almost seven thousand individuals aged 18-69 years from all 16 federal states of Germany, they screened out 601 usable responses which resulted in a final sample of 4808 failure-profile judgments. 

The analysis of these judgments lead to the finding that the more you distance yourself from your failure, the more this creates a positive perception in the eyes of the general public. It is best to blame it on external causes, uncontrollable situations and something that occurs only very rarely. Apparently, the global financial crisis, market fluctuations and geopolitical instability would all be good excuses for the public. “You can’t really blame entrepreneurs – it seems culturally embedded that the safest strategy when communicating with the public about the venture’s failure is to create distance instead of admitting one’s mistakes,” concludes Ewald Kibler, and he adds that “when you are off-stage and back in a private setting, explaining your failure will require a very different strategy; there it is expected that you admit to your mistakes and own up to them.”

To better understand the relationship between entrepreneurs, venture failure and society the researchers are already working on a new study to see which public failure stories entrepreneurs actually create. “Linking these two studies will give us a better sense of entrepreneurs’ real-life strategies in managing public perceptions after they fail with their venture – something that hasn’t been addressed yet,” Ewald Kibler states.

Read full paper:

• Kibler, E., Mandl, C., Kautonen, T., & Berger, E.S.C. 2017. Attributes of legitimate venture failure impressions. Journal of Business Venturing, 32(2), 145-161.