If Founders Fail Once, They Are More Likely To Do So Again

Failing with a start-up is usually considered as a valuable experience whose insights will help the founders to be more successful in their next start-up. However, this is a false conclusion, as a recent study by ZEW Mannheim and the Institute for SME Research (ifm) at the University of Mannheim shows. On the contrary, there is an above-average probability that those founders will fail again with future start-ups.

The probability that a start-up of founders who had previously failed will survive the first year is 3.8 percentage points lower than that of first-time founders. It is even 6.5 percentage points lower if founders did not voluntarily give up their previous business but had to file for bankruptcy. In that case, they are also 3.9 percentage points more likely to file for bankruptcy again with their new business.

The ZEW study suggests that a failed start-up reflects the below-average entrepreneurial skills of the founders. Failed founders differ from first-time founders in many characteristics, such as their age, educational background, managerial experience, as well as in the sector of the start-up. “In our empirical analysis, we controlled for all these variables and showed that they are not decisive for the fact that start-ups of failed founders survive less often than those of first-time founders. Rather, the reason seems to be that failed founders on average lack entrepreneurial skills,” says Dr. Sandra Gottschalk, one of the authors of the study and a researcher in the ZEW’s “Economics of Innovation and Industrial Dynamics” Department.

According to the study, funding programmes that make it easier for all failed founders to start a new business without making any further distinctions should therefore be viewed critically. “With the goal formulated in the coalition agreement to establish a ‘culture of second chances’, the federal government wants to make it easier for founders to receive support with start-up financing. Our study indicates that a differentiated approach would make more sense,” states Dr. Bettina Müller, author of the study and a researcher at the ifm Institute at the University of Mannheim. It would be advisable to filter out promising entrepreneurs from the group of failed founders and provide them with targeted support. Supporting the entire group of failed founders in further start-ups would consume resources without creating value. These resources could be used more sensibly elsewhere. Such an approach harms both the individual entrepreneurs and society as a whole.

The ZEW study is based on data from the IAB/ZEW Start-up Panel, which tracks the development of newly founded enterprises over several years and provides extensive firm-specific information. For this purpose, about 6,000 enterprises are interviewed by telephone every year on behalf of ZEW and the Institute for Employment Research (IAB).