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					Differing Perceptions of New Venture
Failure: A Matched Exploratory Study of
Venture Capitalists and Entrepreneurs'^
by Andrew L. Zacharakis, G. Dale Meyer, and Julio DeCastro

   Using an attribution theory viewpoint, from the entrepreneur's perception of the
this exploratory study examines new ven- event. Both the entrepreneur and VC
ture failure from the perspectives of both were more likely to attribute the failure of
the entrepreneur and the venture capi- other ventures to internal factors (the
talist (VC). Contrary to what should be fundamental attribution error). This
expected, given attribution theory, entre- study suggests that entrepreneurs and
preneurs acknowledge that internal VCs view failure differently. These differ-
causes contributed to their venture's fail- ences might cause misapplication of
ure. On the other hand, VCs attributed scarce entrepreneurial resources.
the failure to external causes, differing




     "The key factor [that caused our fail-                         business before, we would have
     ure] was that our external market had                          caught."
     changed after we introduced the prod-                       • "We had problems moving fast enough
     uct. "                                                         in an extraordinarily fast moving
                                                                    industry, so that we couldn't capital-
     "Eailure to provide the customer what                          ize on the opportunity that we had
     he [or she] wanted cost us some jobs."                         created."
     "The bad news is that we missed a lot                          The above quotes from entrepreneurs
     of [problems] that had we been in the highlight some of the problems that
                                                                 haunt new ventures in their struggle to
     Dr. Zacharakis is an assistant professor with the Arthur M. survive. In fact, Timmons (1994) notes
Blank Center for Entrepretieurship at Babson College. Dr.        that over 20 percent of new ventures fail
Zacharakis' primary research areas include the venture capital   within one year, and 66 percent fail with-
decision making process and entrepreneurial entry into foreign
markets. He has also presented research on venture failure,      in six years. The large percentage of fail-
price wars, and organization innovation.                         ures and the perceived drain on national
     Dr. Meyer is the Anderson Chaired Professor of              resources has been a point of con-
Entrepreneurial Development at the tJniversity of Colorado-      tention. Robert Reich asserts that
Boulder. His current research interests include new venture
creation; development of entrepreneurial teams in emerging
                                                                 "chronic entrepreneurialism" is under-
growth companies; alliances between larger firms and entre-      mining America's competitive strength
preneurial ventures; and venture capital processes.              because entrepreneurial ventures splin-
     Dr. DeCastro is associate professor of Strategy and         ter "American manufacturing power into
Organizational Management and the Ruth W. Van Kempen
Entrepreneurship Scholar at the University of Colorado-
                                                                 too many small pieces" (Castro 1988, p.
Boulder. His research examines new venture startups and dis-     48). The fact that a large percentage of
appearance, firm's competitive strategies, and the privatization new ventures fail is indisputable; how-
of state-owned enterprises.                                      ever, others argue that the learning
     *An earlier version of this article was presented at the
1993 Babson Entrepreneurship Research Conference.
                                                                 accnied by the failed entrepreneur may


                                              JULY 1999
outweigh the costs to society (Shapero        First, it is difficult, if not impossible, to
1981; Vesper 1980). Nevertheless, given       do financial analysis on failed new ven-
the societal costs involved, research is      tures because their financial data are typ-
needed to examine the characteristics of      ically not public. Thus, researchers must
new venture failure.                          locate the failed entrepreneurs. As
    Introducing the effects of venture cap-   Baino, Leidecker, and Harder (1986)
italists (VC) on new venture survival is      note, even if an entrepreneur is identi-
important because of the differences in       fied, he or she may be hesitant to discuss
failure rates of VC and non-VC backed         the failure. Moreover, those entrepre-
firms. Although the overall rate of new       neurs who do agree to an interview may
venture failure is extremely high, Dorsey     not understand or be able to articulate
(1979) found that the failure rate of VC-     the factors that contributed to their
funded enterprises is substantially lower.    demise, especially if a lengthy period of
Only 18 percent of VC-funded compa-           time has passed since the failure (Bruno,
nies failed within seven years compared       Leidecker, and Harder 1986; Bruno and
to 75 percent of non-VC funded firms.         Leidecker 1987). In this instance, the
Even though the failure rate is much          entrepreneur may resort to sensemaking
lower for VC-funded entrepreneurs, VCs        (post-hoc rationalizations of why the
felt that 20 percent of those surviving       venture failed). Attribution theory is of
ventures would fail to provide an ade-        help in understanding this process
quate return (Ruhnka, Feldman, and            because it deals with sensemaking; such
Dean 1992). Ruhnka, Feldman, and              rationalizations are addressed in attribu-
Dean termed these ventures the "living        tion theory (Huff and Schwenk 1990).
dead." Prior research points to a rela-
tionship between the presence of VC               Some research on new venture failure
backing and new venture survival rates.       suggests that the "liability of newness" is
                                              important (Stinchcombe 1965). This
    Given that such a large percentage of     viewpoint proposes that new organiza-
new ventures fail, it is meaningful to
investigate the perceived causes of their     tions fail from a combination of internal
poor performance from the context of          and external factors (Singh, Tucker, and
both the entrepreneur and the VC. The         House 1986; Venkataraman et al. 1990).
purpose of this exploratory study is to       A closely related subject, "liability of
examine new venture failure from the          smallness" (Aldrich and Auster 1986;
viewpoint of both the entrepreneur and        Stinchcombe 1965), deals with problems
the VC using an attribution theory per-       small organizations face in their external
spective (Weiner 1979). A fundamental         environments. The "liability of new-
question is posed: Do entrepreneurs and       ness/smallness" framework identifies
VCs perceive new venture failure differ-      problem factors (internal and external)
ently? If so, why? Attribution theory pro-    which inhibit new venture success.
vides a useful framework to examine the       Thus, this perspective provides a useful
differences in perceptions regarding the      tool for classifying research as either
causes of failure. Attributions have im-      focusing on internal factors, external fac-
portant implications for how the entre-       tors, or both.
preneur and the VC approach the prob-             One stream of research focuses on the
lem of a failing venture (Ford 1985). In-     transition from the founding entrepre-
correct attributions may result in misap-     neurial stage to higher growth rate
plication of resources that could ulti-       stages. As the firm progresses through its
mately cause future new venture failures.     life cycle (Kazanjian 1988), management
                                              aptitude becomes more important than
Venture Eailure Eactors                       entrepreneurial skill. It is argued that
  Most organizational studies of new          entrepreneurs reach an "executive limit"
ventures have focused on "successful"         (Meyer and Dean 1990) at which their
endeavors; research on venture failures       inability to mange the firm becomes
has been limited for a variety of reasons.    detrimental. In such cases, ventures that


                  JOURNAL OF SMALL BUSINESS MANAGEMENT
do not replace the entrepreneur with a Harder found that the perceived causes
professional manager are more apt to fail were consistent between the two time
(Flamholtz 1986; Hambrick and Crozier periods. The causes were categorized as
1985; Hofer and Charan 1984; Tashakori product/market (external), financial (ex-
1980). This "executive limit" concept ternal), and managerial (internal).
illustrates internal causes of failure,       It is apparent from prior research that
specifically, a management coordination survival determinants are perceived in
and control problem.                       different ways by different people. Most
    Research on the external determinants strikingly, entrepreneurs and VCs appear
of survival focuses on economic policies to view causes of failure differently. En-
that affect failure. For example, Clute trepreneurs more frequently attribute
and Garman (1980) found that small failure to external factors (competitive
business owners believe that Federal market conditions and financing prob-
Reserve policies that affect the supply of lems), whereas VCs more frequently
money greatly influence their survival. attribute failure to internal factors (man-
Adverse government actions, such as the agement problems). This difference in
tightening of monetary policy, are per- perceptions may affect which solutions
ceived to limit the entrepreneur's ability are pursued when a venture starts to fail.
to acquire financing because their new In other words, the entrepreneur and the
businesses with little track record cannot VC may advocate different solutions
compete for financing with older, more based on their perceptions. Since new
established firms.                         ventures are resource constrained, it is
    Researchers have attempted to exam- critical that the two parties agree on the
ine the causes of failure from the per- best available course of action.
spectives of both VCs and entrepreneurs.      Weiner (1979) points out that percep-
Ruhnka, Feldman, and Dean (1992) tions about situations vary by their locus
queried VC firms about why certain ven- of causality (internal versus external),
tures fail to provide an adequate return. stability (temporary versus permanent),
They focused on "living dead" ventures and controllability. Depending on the
which haven't yet failed but have slim nature of the perception, decision-mak-
prospects of providing the return origi- ers will react accordingly (Ford 1985).
nally expected by the VC firm and the Thus, erroneous attributions can lead to
entrepreneur. The primary reasons given actions that fail to correct the problem
by the VCs for substandard performance (or actions that may even exacerbate the
are poor management and unfavorable problem). Considering the limited
market factors. Research from the per- resources of entrepreneurial organiza-
spective of the VC appears to view both tions, such a mistake could be disas-
poor internal factors (poor management) trous. Since it appears that entrepreneurs
and external problems (such as market and VCs have different perceptions
factors) as contributing to new venture about failure factors, understanding
failure, although VCs weigh poor man- these differences may contribute to an
agement factors more heavily (Ruhnka, improvement in decision-making and
Feldman, and Dean 1992).                   thereby new venture survival. Attribution
    Researchers have also viewed the theory is a useful framework for better
phenomena of new venture survival understanding these potential differ-
from the entrepreneur's perspective. ences. This preliminary study will ex-
Bruno, Leidecker, and Harder (1986) plore these discrepant perceptions in the
investigated Northern California high context of attribution.
technology firms from two periods,
those founded in the 1960s and those Attribution Theory
founded in the 1980s. The researchers         Attribution theory explains how peo-
conducted interviews with several failed ple perceive and make judgments about
entrepreneurs to assess the causes of stimuli (Fiske and Taylor 1991; Shaver
failure. In general, Bruno, Leidecker, and and Scott 1991; Weiner 1979). However,


                                    JULY 1999
these attributions are frequently biased       neur's previous beliefs. Thus, the entre-
or in error. In fact, the fundamental attri-   preneur is likely to attribute the current
bution error is to "attribute another's        negative outcomes to external factors.
behavior to dispositional qualities, rather    For example, an entrepreneur who has
than to situational factors" (Fiske and        experienced success utilizing a product
Taylor 1991, p. 73), On the other hand,        improvement strategy may fail to recog-
people tend to attribute their own prob-       nize that those very same actions might
lems to situational factors. Thus, attribu-    also result in negative outcomes (mean-
tion theory predicts that people are like-     ing developing a product that consumers
ly to attribute their failures to external     don't want), especially if the product im-
causes (Bettman and Weitz 1983;                provement strategy had been successful
McArthur 1972) whereas they will               in the past. Under this scenario, the
attribute other people's failures to inter-    entrepreneur may attribute the weak
nal causes. For example, Wagner and            demand to external factors, such as a
Gooding (1997) had 102 managers from           recessionary economy.
an executive MBA program participate in            Although attribution and sensemaking
an experiment in which they read sce-          are slightly different, they both imply
narios of business situations. When the        that entrepreneurs will attribute their dif-
scenarios had the participants in the role     ficulties to external factors. By identify-
of the manager, they attributed strong         ing external causes, such as changes in
performance to their efforts and weak          product/market conditions or financing
performance to external factors. People        problems, entrepreneurs exonerate
resort to such self-serving attributions to    themselves and protect their egos. In
maintain their self-perception as astute       addition, the entrepreneur may believe
business persons, because admitting per-       that capital will be more forthcoming if
sonal fault would imply that they were         the problem is external, since the cause
incapable (Bettman and Weitz 1983; Lau         of failure was not poor management but
and Russel 1980; Riess et al, 1981; Staw,      market or external forces. This discus-
McKechnie, and Puffer 1983), In other          sion suggests the following proposition:
words, people prefer to be a victim of         Pf Entrepreneurs more frequently attri-
circumstance rather than of their own              bute poor performance to external
doing. For example, an entrepreneur               factors rather than to internal factors.
whose venture faces impending failure              However, as Ford (1985) points out,
may attribute that failure to external         "constituents expect decision-makers to
causes because such an attribution             be in control" (p, 777), The entrepreneur
spares the entrepreneur's ego.                 who places all blame on external factors
   In fact. Cox (1992) asserts that failed     is signaling an inability to realistically ap-
entrepreneurs attribute their troubles to      praise the situation. If the entrepreneur
external causes over 85 percent of the         requests more capital to alleviate the
time (he generated this estimate from          problem, the VC will likely become
secondary sources),They may think that         wary, Schwenk (1990) asserts that self-
ascribing their problems to external fac-      serving attributions, such as those that
tors is the best strategy for negotiating      place the culpability on external factors,
with a VC—if they can convince the VC          decrease stakeholder (VC) confidence.
that their firm's stniggles are due to         Decreased confidence is apt to result in
external causes, the VC will be more           decreased future support, possibly has-
likely to help them ride out the storm.        tening the venture's failure. This expla-
   Huff anci Schwenk (1990) propose            nation is congaient with the Ruhnka,
"sensemaking" as a complementary               Feldman, and Dean (1992) findings that
viewpoint. During good times, entrepre-        VCs tend to view internal factors as caus-
neurs believe that success is attributable     ing failure. In other words, VCs general-
to their efforts. However, a subsequent        ly hold entrepreneurs responsible for
bad outcome challenges the entrepre-           their difficulties. This suggests that:



                  JOURNAL OF SMALL BUSINESS MANAGEMENT
P2- Venture capitalists more frequently ing personal contacts within the VC and
     attribute poor performance to internal entrepreneur communities, A qualitative
     causes, such as poor management, approach allows us to gain a "deep un-
     than to external causes.                derstanding" (Meyer and Zacharakis
     If entrepreneurs were logical, their 1992) of entrepreneur and VC percep-
explanations of their own venture's fail- tions of failure which should guide a
ure should coincide with their explana- subsequent larger study, assuming we
tions of all other venture failures. How- can find a way to identify and gain
ever, following attribution theory, they access to appropriate participants.
are likely to commit the fimdamental at-
tribution error (Fiske and Taylor 1991)- Methodology
So when discussing their own ventures,          The data gathering phase of this study
entrepreneurs will be more likely to consisted of in-depth structured inter-
name external factors as the cause of the views with entrepreneurs and their
failure. On the other hand, attribution respective VCs, The interviews were
theory suggests that entrepreneurs will transcribed and content analyzed.
more likely attribute other entrepreneurs' Factors leading to failure were identified
difficulties to dispositional qualities for both the entrepreneur's specific firm,
(internal factors). When evaluating sce- as well as for new ventures in general.
narios which described other managers These factors were then ranked accord-
as in charge, the managers in Wagner ing to the frequency with which they
and Gooding's (1997) experiment attrib- were cited. For the purposes of this
uted poor results to the manager rather study, failure was defined as bankmptcy
than to external factors. Moreover, the (which included six firms). The other
 participants also attributed good results two firms were considered "failing" by
to external factors rather than to the the VC who arranged for us to talk with
 manager (Wagner and Gooding 1997), the entrepreneur.
 Likewise, entrepreneurs may feel that a
 weak local economy is responsible for Entrepreneur Interviews
 their own firm's problems, but that            Due to the stigma associated with fail-
 another entrepreneur's problems are a ure, it was difficult to find failed or fail-
 function of poor leadership. This discus- ing entrepreneurs willing to participate
 sion leads to the following proposition:    in this study, Peterson and Ridgway
 Pj,- Entrepreneurs more frequently attri- (1985) note that questions regarding fail-
      bute the poor performance of other ure are potentially threatening because
      ventures to internal factors, whereas they relate to "issues of self preservation"
      they more frequently attribute their (Blair et al, 1977, p, 3l6), However, most
      own poor performance to external of the entrepreneurs who were contact-
     factors.                                ed were willing to grant interviews, with
      The attribution framework is highly only a few refusing. None of the entre-
 interesting and has significant implica- preneurs who declined to be inter-
 tions for entrepreneur/VC interaction viewed cited explicitly a reluctance to
 and how the parties work together in speak about their organization's failure
 overcoming problems. Yet studying fal- as a reason for declining to participate,
 tering or failed ventures is difficult.        Peterson and Ridgway (1985) stress
  Entrepreneurs in faltering firms are the importance of making interviews
  tremendously busy trying to salvage their non-threatening in order to reduce
  "baby," Likewise, once a venture fails, it response bias. Therefore, questions were
  is hard to gather data about privately carefully structured and ordered to
  held firms. Before expending significant reduce the perceived negativity of each
  time and resources on overcoming these question (Sudman and Bradburn 1974),
  research problems, we chose to do a In addition, we used open-ended ques-
  focused, qualitative investigation utiliz- tions which, according to Bradburn and


                                      JULY 1999
  Sudman (1980), are perceived as less            The convenience sample consists of
 threatening than close-ended questions.      eight high-tech entrepreneurs from
     Even though the study relies on the      Colorado's Front Range region. All the
 VCs and entrepreneur's recollection of       firms were involved in manufacturing.
 the events leading to failure, retrospec-    Failed and failing firms were identified
 tive sensemaking should not be a signif-     by personal knowledge and with the
 icant problem in this case because what      help of VCs friendly to the authors and
 is important in this study are the causes    our university. All the firms were over
 to which they attributed failure, not the    five years old and employed from ten to
 actual causes of failure (Salancik and       over 500 employees. Table 1 further
 Meindl 1984; Schwenk 1990), Addition-        describes the demographics of the firms.
 ally, no prescriptions are offered in this
 study to address failure. This distinction   Venture Capitalist Interviews
 is important because, as Cox (1992)              Upon completion of the entrepreneur
 warns, researchers of new venture fail-      interviews, interviews were conducted
 ure often make prescriptions based on        with the entrepreneur's former venture
 flawed studies that fail to account for      capitalist, if (s)he was available (only five
 response bias. In particular. Cox notes      VCs were accessible). There were two
the tendency of failed entrepreneurs to       VC firms and four different VC officers of
make self-preserving attributions, which      those firms (one of the VC officers
means they may not realistically evaluate     responded on two of the ventures). Both
the true factors leading to their demise.     firms were over 10 years of age and had
Recognizing this potential pitfall, this      $78 million and $118 million under man-
study makes no prescriptions on how to        agement, respectively. The primary focus
avoid failure. Instead, we hope the study     for both VC firms was early stage invest-
offers insights into the tendency to make     ments (seed through second stage), and
self-serving attributions (see Proposition    they tended to invest in high technology
1), thereby encouraging entrepreneurs         ventures. All the VC officers were part-
and VCs to take a step back and delve         ners in the firm and had been with the
                                              VC firm from its inception. Table 1 also
into the underlying causes of problems
                                              briefly provides demographics for the
that all new ventures inevitably face.
                                              participating VC firms. It was suspected


                                   Table 1
                      Entrepreneur and VC Demographics
Entrepreneur
 Industry                       6 computer hardware
                                2 computer software
 Firm age at time of failure    Greater than 3 years, less than 5 years ,        2 firms
                                Greater than 5 years, less than 10 years       ,, 6 firms
Number of Employees             1 0 - 24 ,,,, 3 firms
                                2 5 - 99 ..,, 2 firms
                                over 100 ,,, 3 firms
Venture Capitalist Firms (M    •• 2)
                                =
Age                              10 years, 11 years
 Capital under management        $78 million, 118 million
Preferred investment amount      $250,000-750,000; $500,000 - $1M
Stage of investment              Seed-First Stage; Seed-Second Stage


                 JOURNAL OF SMALL BUSINESS MANAGEMENT
that the VCs would find the interviews          the most appropriate subgroup under
less threatening because most ascribed          the external or internal heading.
causes of failure are external to the VCs           Inter-judge reliability was about 84
involvement (meaning factors such as            percent for the initial classification of
product market conditions or inadequate         whether the theme was either an exter-
management). Even so, the interview             nal or an internal factor. Overall inter-
was parallel to the entrepreneur inter-         judge reliability (consistency of classify-
view to facilitate comparative analysis.        ing into all possible subcategories) was
                                                65 percent, Berelson (1952) reports that
Analysis                                        inter-judge reliability typically ranges
     Structured interviews were used to         from 66 percent to 95 percent. Although
build a database on venture failure. Con-       the classification into subcategories is at
tent analysis was then conducted on             the low end of the spectrum, the lower
each interview transcript following the         inter-judge reliability may be due to the
general guidelines put forth by Weber           fine-grained nature of the subcategories.
(1985), Content analysis is particularly        In order to gain a richer understanding
useful in entrepreneurship research             of the failure factors at this preliminary
(Marino, Castaldi, and DoUinger 1989), It       stage, some of the sub-categories used
identifies the manifest content of a com-       were somewhat related and overlapping.
munication (Berelson 1952) and entails              Once the content analysis was com-
counting the number of references un-
derlying a particular theme. In addition,       pleted, each identified factor was
content analysis can also assess the "in-       weighted according to the ranking that
tensity of certain statements" (Marino,         the respondent explicitly gave for that
Castaldi, and DoUinger, p, 56), Again, the       factor or according to the frequency with
major goal of this study is to identify the     which the respondent cited the factor.
causal attributions put forth to explain         For example, some of the respondents
venture failures; specifically, attributions     ranked the failure causes verbally
of internal or external causes. Internal         (meaning they said "first, external fac-
 causes originate within the entrepreneur-       tors,,, second, internal factors,,,"). Other
 ial firm and include poor management,           respondents did not explicitly rank the
 obsolete technology, and initial under-         causes. In such cases, the ranking was
 capitalization. External causes originate       determined by the frequency (or the per-
 outside of the entrepreneurial firm and         centage of time) with which the respon-
 include product market conditions, com-         dent spoke about that factor (Weber
 petition, availability of financing, and        1985),
 material costs.                                     Since the three judges did not com-
     Three judges were trained by the            pletely agree on the categorization of
 authors to categorize themes from the           every theme, only those themes that
 interview transcripts, A transcript from a      were agreed upon by at least two of the
 "trial" interview (one used to test and         coders were considered. Each ranked
 refine the understandability of the struc-      response was reverse scored (ranging
 tured interview instrument) was used to         from five down to one). That is, the first
 train the judges (Weber 1985), Theme            ranked factor for each respondent was
 categories were derived from literature,        scored a five, the second ranked was
 from the "trial" interview, and from initial     scored a four, and so forth. Some factors
 examination of the trial interview tran-        were deemed a tie because the respon-
  script. The groupings were subdivided           dent gave equal attention to each factor
  under external and internal factors. The        in his or her reply. In such cases, the
  judges categorized the themes into the          subsequent factors were scored as if the
  most appropriate classification by first        preceding factors hadn't tied. For
  assessing whether the respondent was            instance, if two factors were deemed the
  citing a factor external or internal to the     most important, they tied for the number
  firm, and then designating the theme to         one ranking and each received a score


                                        JULY 1999
                                       Table 2
                         Firm-Specifjc Failure Determinants
          Entrepreneur                               Venture Capitalist
               (                                           (n=5)
E- Poor external Market Conditions         25    E- Poor External Market Conditions 40
I- Poor Management Strategy                13       Lack of Management Skill         9
I- Lack of Capitalization                   9       Poor Product Timing              4
E- Poor Supplier/Vendor Relations           9       Poor Management Strategy         3
I- Key People Incompetent                   9       Lack of Capitalization           3
I- Lack of Management Skill                 7       Failed Implementation            2
I- Lack of Management Vision                5
I- Poor Product Design                      5
I- Failed Implementation                    5
E- Poor VC/Shareholder Cooperation          4
I- Lack of Technical Capabilities           4
E- Low Funding Availability                 3
   E- external factor I- internal factor


of five. The next most important factor         VCs. Nonetheless, it is hoped that this
was ranked as number three and                  exploratory investigation sparks interest
received a score of three. Aggregated           in further research. Readers are asked to
rankings were then compiled for both            keep the focused sample in mind when
the entrepreneurs and the VCs. The two          interpreting these results.
lists were then compared to assess
whether the entrepreneurs and the VCs           Firm Specific Failure Factors
in fact had different perceptions of ven-           Both the entrepreneur and the respec-
ture failure.                                   tive VC were queried as to the causes of
                                                failure of the specific venture in which
Results                                         they were involved. Table 2 summarizes
   The small sample size prevents us            the results.
from generalizing the results of this study         It appears that entrepreneurs within
to the population of entrepreneurs and          this sample primarily attribute their


                                      Table 3
                           General Failure Determinants
          Entrepreneur                              Venture Capitalist
               (.n=8)                                      ()
I- Lack of Management Skill                20      Lack of Management Skill        18
I- Poor Management Strategy                15      Poor Management Strategy        13
I- Lack of Capitalization                  14      Lack of Capitalization          13
I- Lack of Vision                          13   E- Poor External Market Conditions 10
I- Poor Product Design                     11      Poor Product Design              5
I- Key Personnel Incompetent                9      Poor Product Timing              5
I- Poor Utilization of Debt                 7
E- Poor VC/Shareholder Cooperation          5
I- Poor Product Timing                      4
E- Poor External Market Conditions          3
   E- external factor I- internal factor


                  JOURNAL OF SMALL BUSINESS MANAGEMENT
failure to internal and not the hypothe- this study also examined their percep-
sized external factors. Although the most tions about new venture failure in gen-
frequently cited factor for failure was eral (see Table 3).
poor external market conditions (which          Entrepreneurs attributed new venture
include competition, slow market failure in general to internal factors 89
growth, and small market size), the percent of the time. The following quote
examination of the aggregate frequency illustrate the tendency to attribute failure
of the factors finds that internal factors to internal causes, when one is not dis-
were cited 58 percent of the time. Poor cussing one's own firm:
management strategy is the most fre-            Marketing efforts. Sales efforts to be
quently cited internal cause of venture         even more specific. Or lack thereof.
failure. Some examples of this reasoning         You see too many products out there
include:                                        but they're not a new mouse trap.
     The lack of research and information       People can't buy into it.
     about what the product would do or Although this result is in the same direc-
     where our market was [hurt us]. It tion as the results shown in Table 2
     seemed at times - monthly — like our {internal factors were cited 58 percent of
    focus might change. It is extremely the time when considering one's own
     hard to get a game plan, when we are firm), it appears that entrepreneurs with-
     [always] changing. Focus keeps mov- in this sample were more apt to attribute
     ing down somewhere else and then the failure of other new ventures to
     back to another place.                  internal causes, while still leaving room
     Lack of knowledge, lack of education for external causes to explain their own
     and lack of experience in the field.    problems.
The candor of the entrepreneurs illus-          VC perceptions about new venture
trates their willingness to see personal failure in general were consistent with
 mistakes as contributing to failure. As the Ruhnka, Feldman, and Dean (1992)
 can be seen by the sample quotes, entre- study. VCs overwhelmingly attributed
 preneurs do not necessarily attribute fail- the failure of most new ventures to inter-
 ures to external causes.                    nal causes (84 percent). The following
     Examination of the VC perceptions is quote is illustrative:
 surprising in that VCs tended to attribute      The major cause of failure is probably
 failure to external factors. VCs attributed     management and its inability to rec-
 external factors to venture failure 66 per-     ognize the marketplace and accurate-
 cent of the time. As with the entrepre-         ly assess market size and accessibility.
 neurs, the most frequently cited cause The results of the content analysis seem
 was poor external market conditions. to indicate that entrepreneurs, as well as
 Sample quotes follow:                       VCs, are prone to making the funda-
      There was a depressed cycle in the mental attribution error.
      market.
                                             Discussion
      They had extremely strong competitors
      in the industry.                           "There are a hundred reasons for suc-
 These results would seem to contradict cess and there are a thousand reasons
 the Ruhnka, Feldman, and Dean (1992) for failure," noted one of the participat-
 study that found that VCs saw manage- ing VCs. The question is whether the
 ment weakness as the primary determi- entrepreneur's assessment and the VCs
 nant of poor venture performance. VCs assessment agree with each other. If the
 within this sample weren't inclined to entrepreneur and VC don't agree, it is
 attribute failure to management weak- likely that they might misinterpret prob-
 ness (^internal factors).                    lems early on when there is still time to
                                              take corrective action. The content
 Failure Factors in General                   analysis from our focused sample indi-
      In addition to exploring entrepreneur cates some surprising results and incon-
 perceptions about firm-specific failures. sistencies.


                                      JULY 1999
     It is somewhat surprising, for exam-       entrepreneurs we spoke with have had
 ple, that entrepreneurs admit that inter-      past or subsequent records of success.
  nal factors (cited 58 percent of the time)    One of the entrepreneurs had had two
 played a major role in their own ven-          previous successful startups and four of
 ture's problems. "Just a plain lack of         the entrepreneurs have had subsequent
 knowledge on my part inhibited our suc-        successful foundings. However, it should
 cess," acknowledged one entrepreneur.          be noted that there weren't any apparent
 This entrepreneur, albeit somewhat             systematic differences between those
 more strongly than others, was quick to        entrepreneurs who have had previous or
 note some of his own personal short-           subsequent successful entrepreneurial
 comings. Another entrepreneur revealed,        experiences and those who have not. It
 "We assembled an inadequate manage-            appears that the isolated failure doesn't
 ment team and we were late taking cor-         represent a repudiation of the entrepre-
 rective actions." Why were these entre-        neur's general ability. Thus, the entre-
 preneurs so forthcoming? Several possi-        preneurs in the sample can point to their
 ble explanations exist. First, a multitude     successes and rationalize that the failure
 of researchers have ascribed a strong
                                                was an anomaly.
 internal locus of control to entrepreneurs
 (for example, Timmons 1994), Decision-            It is interesting that the entrepreneurs
 makers like to project the sense of being      tended to attribute the failure of other
 in control (Salancik and Meindl 1984), If      new ventures to those in charge of these
 the entrepreneurs attribute their prob-        ventures at a substantially higher rate
 lems to external factors, they are admit-      than for themselves (89 percent versus
 ting that they cannot control the success      58 percent). For example, one entrepre-
 or failure of their firm. On the other         neur said:
 hand, attributing failure to internal fac-        / think that the product really doesn't
 tors signals that the entrepreneur can            meet a need. I think that even if it does
 control his or her own fate. Such an attri-       meet a need, that the money wasn't
bution may enable the entrepreneur to              managed well enough to help the
raise support for future ventures. The             product to get to where it needed to
following quote illustrates the strong             get. The [entrepreneurial] team is at
locus of control of one entrepreneur:              the root of most failures.
     You know maybe it is my philosophy        Assuming that the entrepreneur's ven-
     but I tend not to view things so much     ture is representative of all new ventures,
     in terms of directly whether they are     one wonders why the results of Table 2
     successes or failures. People who view    and Table 3 don't more closely match.
     things as failures tend to want to for-   Basically, while entrepreneurs acknowl-
    get it as opposed to just viewing it as    edge internal factors as contributors to
     an outcome from which you can gar-        their own venture's failure, they believe
     ner a lot of information and knowl-       that internal factors are the predominant
     edge and then apply that in other situ-   determinant for other venture failures.
    ations. As a result, it becomes some-      Let's take a closer look at the entrepre-
     thing of a success for you.               neur cited earlier in this paragraph. He
    Second, most of the entrepreneurs in       suggests that as long as the product
this sample were initially identified by       meets a need and the firm is well man-
various VCs as being "more willing to          aged, it should succeed. Yet, he indicat-
talk," It is conceivable that the VCs iden-    ed that while his product met a need,
tified those entrepreneurs whom they
                                               unilateral revisions on the part of a key
felt were victims of circumstance. Thus,
this sample of entrepreneurs might have        vendor where responsible for his firm's
been more open because they did not            decline. Why wasn't his entrepreneurial
feel that the failure was attributable pri-    team able to overcome this difficulty?
marily to their incompetence. Finally, it      This finding should cause entrepreneurs
must be acknowledged that most of the          to pause; are their self-attributions cor-
                                               rect, or are the attributions about others

10                JOURNAL OF SMALL BUSINESS MANAGEMENT
correct? An error is being made in one how the VC uses "we" in the following
direction or the other, or possibly both. quote, implying active involvement in
    The VC responses to specific firm fail- the venture:
ures (attributing the failure to external       We couldn't compete price wise. It's a
factors 66 percent of the time) were           brutally competitive industry. Tbis
especially surprising since they contra-       market is a very difficult market to
dict the Ruhnka, Feldman, and Dean             launcb a new startup in. One can
(1992) findings. For example, one VC           argue tbat tbe industry is oversupplied
focused on competition (external factor)       as it is witb products of tbis type. The
and the difficulty a small firm had com-       price pressures are enormous, and
peting with these larger organizations.        unless you're a very large, bigb vol-
    Competition. We bad a credibility          ume, low cost producer, you are not
    issue of being a small company in tbe      going to be able to compete. And in
    industry coupled witb tbe fact tbat our    tbis case, we were a startup trying to
   product was a major commitment for          be a low cost supplier... there is just no
    tbe buyer. Tbis put us at a disadvan-      way we could do tbat. And, we were
    tage relative to our larger competitors. late. We missed our window.
The level of competition and changing Again, this VC attributes problems to
market dynamics are factors that the fierce competition rather than to poor
entrepreneur and VC could have antici- management decisions. Thus, VCs were
pated. In that sense, the VCs statement possibly making self-serving attributions
might be considered internal, but the to maintain their self-perception as
tone and nature of the comment imply astute business persons (Bettman and
that the "playing field was uneven;" Weitz 1983), In effect, the VCs were shar-
smaller entrepreneurial firms may not ing the venture leadership role with the
have the resources to overcome their entrepreneur.
"liability of smallness" (Stinchcombe          The fact that the results of Table 3 (by
1965), Moreover, when one looks at the VCs) contradict those of Table 2 (by
Runka, Feldman, and Dean (1992) find- entrepreneurs) lends further credence to
ings that poor management is the prob- the explanation that the VCs were too
lem, it is apparent that the VCs tone is heavily involved in the individual ven-
far more understanding when examining ture's demise. When it was one of the
a particular venture in his portfolio. It is VCs' chosen ventures, the VC attributed
plausible that when the VCs were talking the failure to external factors; but, when
about a specific firm (and thereby a spe- the VC was detached from a venture, he
cific entrepreneur), they might have or she tended to attribute failure to inter-
been reluctant to attribute failure to that nal causes (84 percent of the time). For
individual. Again, since the entrepre- example, the same VC cited above
neurs that we spoke to were identified focused on the management team when
by VCs as "more willing to talk," the VCs discussing failure in general,
might have suggested entrepreneurs             [Entrepreneurs often] don't build a
whose failure was out of their control,         complete management team. They
because such entrepreneurs were per-           fight these things because they want to
ceived as more willing to discuss the fail-     be totally in cbarge. If tbe manage-
ure,                                            ment team doesn't execute, tbe com-
    A second, more likely, explanation         pany can fail.
might be that the VCs in this sample These findings seem to match those
were so involved in the day-to-day oper- expected under attribution theory.
ations that they were essentially occupy- People tend to attribute their own fail-
ing a managerial role. In other words, ures to environmental circumstances, but
they weren't far enough removed from others' failures to personal flaws (Fiske
the situation to objectively view the and Taylor 1991), VCs tend to attribute
causes of failure. For example, notice failure to internal causes such as man-


                                     JULY 1999                                      11
agement capability as long as they are         or the VC might be attributing the failure
professionally distanced.                      to external factors to preserve his or her
                                               own ego. In either case, the implication
Conclusions, Limitations, and                  is clear—if VCs fail to keep their profes-
Future Research                                sional detachment, they may be inclined
    Hambrick and Crozier (1985) point to make faulty attributions. Such a case
 out that entrepreneurs (like everybody would be extremely detrimental to the
 else) frequently fail to recognize their entrepreneur, because it might deprive
 limitations. As such, they may be him or her of a "voice of reason," The
 inclined to incorrectly attribute their dif- VC wouldn't correctly assess the prob-
 ficulties to external factors. However, our lem, thereby failing to suggest a better
 exploratory study suggests that entrepre- course of action. Unfortunately, the
 neurs do acknowledge that internal fac- entrepreneur's limited resources don't
tors contribute to their difficulties. Never- allow too many false steps.
theless, they view the difficulties of oth-
ers far more harshly (attributing internal        This study has brought forth several
factors 58 percent of the time for their intriguing results. However, it must be
ventures, but 89 percent of the time for acknowledged that the nature of this
others' ventures). This discrepancy sug- study, especially the small sample size,
gests that entrepreneurs are inaccurately makes these results tentative. In particu-
attributing the causes of their difficulties lar, the sample wasn't conducive to sta-
or those of other entrepreneurs, because tistical analysis, because of the small
in aggregate the individual firm failure sample size, A larger sample is needed
factors should match failure factors for to test whether these hypotheses are
firms in general.                             generalizable to other VCs and entrepre-
    If indeed the entrepreneurs are inac- neurs. It is unfortunate that time and
curate in their attributions, their chances money prevent most researchers from
of survival in future ventures could be conducting large scale personal inter-
greatly diminished because they are views, but this in-depth smaller study
probably directing their problem-solving has allowed us to gain a deeper knowl-
efforts to the wrong place. Thus, if entre- edge which can guide future model
preneurs erroneously attribute external development and research design.
f'actors (or internal factors, for that mat-      The study of entrepreneurial failure is
ter), they may misapply their energy and important and valuable in assisting entre-
resources. Given that entrepreneurs pos- preneurs and VCs in overcoming the
sess limited resources, such actions problems that new ventures face. How-
could threaten organization survival. ever, the question remains as to whether
However, it is encouraging to note that large-scale empirical research is feasible.
entrepreneurs cited internal causes (58 Once a venture fails, it is difficult to
percent of the time) as failure factors for locate many secondary sources of data
their own firms. It suggests that entre- for what are mostly privately held firms.
preneurs do realistically appraise the sit- It is also difficult to contact the entrepre-
uation, not immediately blaming exter- neur once a firm ceases to exist. Even
nal factors. Therefore, they may be more when the entrepreneur is located, he or
effective in correcting problems, at least she may resist participating because of
in their future ventures.                     the pain of the failure. The question is
    The most surprising finding in this how to overcome these obstacles.
study is that VCs attribute failure to Clearly, appropriately structuring our
external causes when viewing a specific interviews helped, but an anonymous
firm. Again, it was suggested that this and confidential survey might reduce
finding might be a function of the VCs "halo effects," Although the interviews
close personal involvement in the entre- might be biased, the interesting part of
preneurial firm. Thus, the VC might be this study is the discrepancy between the
engaging in "impression management," entrepreneurs and VCs,


12               JOURNAL OF SMALL BUSINESS MANAGEMENT
   Overall, this study highlights the dan-  Clute, R.C, and G.B. Garman (1980).
gers of inaccurate attributions. If entre-      "The Effect of U.S. Economic Policies
preneurs incorrectly assess a situation,       on the Rate of Business Failure,"
they may pursue the wrong course of            American fournal of Small Business
action. A series of wrong attributions will     5(1), 6-12.
likely lead to failure in entrepreneurial   Cox, L.W. (1992). "The Perception of the
firms. It is hoped that this study will cre-   Causes of Small Business Success and
ate a higher awareness of these pitfalls.      Failure: An Attributional Perspective,"
                                                in Emerging Entrepreneurial Strate-
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