We have established that failure is an experience that is an ever-present possibility facing those who engage in entrepreneurship. However, although most (if not all) entrepreneurs will eventually be forced to face failure, these experiences are not homogeneous in nature, and in fact, individuals will vary substantially with regard to how they endure failure (in particular, see Chapter 2). In this chapter, we focus on an area of particular interest with regard to how individuals experience failure – namely, the amount of time and effort entrepreneurs spend prolonging the failure experience. Specifically, we examine what factors – both intrinsic and extrinsic – cause entrepreneurs to delay the decision to terminate their business ventures even when presented with evidence that failure will most likely be the ultimate decision. We will also see how these delays can both help and hinder entrepreneurs in their subsequent efforts to move on after failure.
Although we may expect that underperforming firms will be selected out of an economy, the evidence suggests that performance often does not explain survival (Baden-Fuller Reference Baden-Fuller1989; Karakaya Reference Karakaya2000; van Witteloostuijn Reference van Witteloostuijn1998). Indeed, Meyer and Zucker (Reference Meyer and Zucker1989) pointed out that “efficient performance is only one—and not necessarily the most important—determinant of organizational survival.” It has been argued that an economy suffers when underperforming firms persist rather than fail (McGrath and Cardon Reference McGrath and Cardon1997); they are seen to squander resources, occupy market positions better filled by others, and increase uncertainty for stakeholders of entrepreneurial firms (Karakaya Reference Karakaya2000; McGrath and Cardon Reference McGrath and Cardon1997; Ruhnka, Feldman, and Dean Reference Ruhnka, Feldman and Dean1992). These firms have been labeled as living dead (Bourgeois and Eisenhardt, Reference 109Bourgeois and Eisenhardt1987; Ruhnka et al., Reference Ruhnka, Feldman and Dean1992), underperforming (Gimeno, Folta, Cooper, and Woo Reference Gimeno, Folta, Cooper and Woo1997), permanently failing organizations (Meyer and Zucker Reference Meyer and Zucker1989), and chronic failures (van Witteloostuijn Reference van Witteloostuijn1998). These underperforming firms – “organizations whose performance, by any standard, falls short of expectations … yet whose existence continues” (Meyer and Zucker Reference Meyer and Zucker1989: 19) – can exist over an extended period (Gimeno et al. Reference Gimeno, Folta, Cooper and Woo1997; Karakaya Reference Karakaya2000; van Witteloostuijn Reference van Witteloostuijn1998).
Considerable scholarly effort has been invested in trying to explain why some entrepreneurs delay closing their poorly performing businesses. In Figure 4.1, we offer a model of the causes and consequences of the delayed decision to terminate a failing firm (based largely on (DeTienne, Shepherd, and De Castro) [Reference DeTienne, Shepherd and De Castro2008], (Gimeno et al.) [Reference Gimeno, Folta, Cooper and Woo1997], and (Shepherd, Wiklund, and Haynie) [Reference Shepherd, Wiklund and Haynie2009]). In the center of the figure is the delayed decision to terminate a failing business, which can be exacerbated by procrastination and/or the entrepreneur's performance threshold. The performance threshold is influenced by expectations of firm performance turnaround, motivation to justify previous entrepreneurial decisions, and the desire to be consistent with previous entrepreneurial decisions. The nature of these relationships depends on the entrepreneur's extrinsic motivation and values. A delayed decision to terminate a failing business has consequences for the financial and emotional costs borne by the entrepreneur, and in turn, impact his or her speed of recovery. In the sections that follow, we develop the nature of these relationships.
Figure 4.1: Conceptual model of entrepreneurial persistence and its consequence
Procrastination and persisting with a poorly performing firm
Procrastination refers to the deferment of an action or activity that could be interpreted as emotionally unpleasant but that is important from a cognitive perspective since it will likely produce positive future outcomes (van Eerde Reference 115van Eerde2003). It happens when these emotionally unpleasant hazards are avoided, resulting in the suspension of further activity (Lazarus and Folkman Reference Lazarus and Folkman1984). In these instances, the expectation of the threat produces a negative emotional response (e.g., anxiety, fear, sadness, etc.). By evading these situations, entrepreneurs can reduce these negative emotions, which signify a negative reinforcement that further perpetuates these types of behaviors (Anderson Reference Anderson2003e; Milgram, Sroloff, and Rosenbaum Reference Milgram, Sroloff and Rosenbaum1988). For example, entrepreneurs may engage in procrastination because it delays the decision to declare their business bankrupt, thereby forcing them to cease ownership or management of their venture. Although this decision can be emotionally overwhelming, it is an essential duty because the sooner it is completed, the lower the financial cost of venture failure. Additionally, previous research has indicated that tasks associated with higher levels of anticipated negative emotions are more likely to invoke procrastination than those associated with lower levels of anticipated negative emotions (Anderson Reference Anderson2003a).
Based on this perspective, it seems as if procrastination is a particularly salient factor to consider in the context of entrepreneurship. It is possible that entrepreneurs could engage in procrastination as a way to delay the decision to take action and formally declare their ventures insolvent, which would result in the cessation of their active involvement as owners and managers of the business. Although the decision to terminate a business can be emotionally overwhelming (Byrne and Shepherd Reference Byrne and Shepherd2015), it is an important action to take because doing so will stop an entrepreneur from “throwing good money after bad” – that is, to stop investing resources into the business that will not receive a sufficient return and will likely be lost when the business fails.
There are several possible mechanisms underlying this procrastination, one of which is the notion that it is more difficult to learn and easier to ignore or forget negative information. Research has indicated that under certain conditions, individuals find it more difficult to learn negative information (Amir, Coles, Brigidi, and Foa Reference 108Amir, Coles, Brigidi and Foa2001). Additionally, investigations into the mechanism involved in forgetting have uncovered that negative information is indeed more easily forgotten than neutral or positive information (Myers, Brewin, and Power Reference Myers, Brewin and Power1998). Taken together, these findings suggest that one of the reasons why procrastination might occur is that the negative information that should be considered when deciding to terminate a failing business might be easier to ignore and more difficult to remember, therefore providing a convenient cognitive side step in the decision-making process. For instance, entrepreneurs who are presented with information that sales for their venture have increased but that they are still losing money at an alarming rate could potentially register and focus on the positive information regarding sales and not learn or quickly forget that the business is still failing in terms of overall performance. This could in turn substantially increase the likelihood for procrastination.
There are a number of factors that might influence the anticipated negative emotions associated with a given task, thereby enhancing the likelihood of procrastination. First, decisions that are perceived as irreversible tend to result in producing higher levels of negative emotions (Anderson Reference Anderson2003a). In an excellent review of the factors that influence decision avoidance, Anderson (Reference Anderson2003a) discussed the mechanism underlying the relationship between the perceived irreversibility of decisions and the likelihood of decision avoidance. In his review, Anderson noted that when individuals are presented with decisions they believe will be irreversible, they are much more likely to experience anticipated regret over making those decisions. That is, when thinking about the possibility of making a decision that cannot be reversed, individuals tend to focus on the potential negative outcomes of making an incorrect choice and, as a result, experience anticipated regret over that choice, which can in turn cause them to prolong the decision-making process. As an example, consider entrepreneurs who are faced with the decision to terminate one business in order to pursue a new and promising opportunity. While it is possible for entrepreneurs who dissolve one venture to begin another, the decision to end the first business is final and irreversible. When analyzing the termination decision, such entrepreneurs will likely consider how they will feel if their new enterprise does not end up being successful, leading them to experience feelings of anticipated regret over a decision they have not actually made yet.
Second, the likelihood of procrastination can be substantially influenced by what entrepreneurs attribute the actual cause of the failure to be. If entrepreneurs feel that they are personally responsible for the failure outcome, it is likely that they will expect to experience higher levels of negative emotions as a result of the final decision. Entrepreneurs often perceive their ventures as extensions of their own identities (Bruno, McQuarrie, and Torgrimson Reference Bruno, McQuarrie and Torgrimson1992; Cova and Svanfeldt Reference Cova and Svanfeldt1993) and are thus more likely to assign personal responsibility to the ultimate failure of their firms.
Finally, when entrepreneurs perceive that their own actions have caused the negative outcome (compared to situations in which they perceive others’ actions to have caused the failure), it is likely that they will generate higher levels of negative emotions, which could in turn increase the likelihood that they will postpone business failure. When considered together, there are likely a number of factors involved in the decision to declare that a business has failed that might enhance the possibility of procrastination.
Thus, although the negative financial consequences of persistence can be substantial (Garland, Sandefur, and Rogers Reference Garland, Sandefur and Rogers1990; Ross and Staw Reference Ross and Staw1986, Reference Ross and Staw1993), from a procrastination perspective, the emotional byproducts of persistence remain comparatively unexplored. This point is illustrated by Anderson who, after a thorough review of the literature, concluded that “it is interesting to note that the vast majority of [procrastination] studies support the conclusion that emotional goals influence decision avoidance but that post-decisional emotions are infrequently measured… . It is reasonable to assume that people make choices that reduce negative emotions” (Anderson Reference Anderson2003a: 142). This consideration of the potential emotional consequences of failure can be very influential in prolonging the decision to terminate. Next, we shift our attention to how developing acceptable performance thresholds and evaluating actual performance relative to those thresholds can also influence the decision to delay terminating a failing business.
Performance thresholds in the decision to terminate
Gimeno and colleagues (Gimeno et al. Reference Gimeno, Folta, Cooper and Woo1997) found that firm performance relative to a performance threshold plays a role in explaining organizational survival (or, said differently, in delaying failure decisions). A firm performance threshold refers to “the level of performance below which the dominant organizational constituents will act to dissolve the organization” (Gimeno et al. Reference Gimeno, Folta, Cooper and Woo1997: 750). This notion of a threshold for performance is consistent with pain thresholds (Forys and Dahlquist Reference Forys and Dahlquist2007), risk thresholds (Monahan and Silver Reference Monahan and Silver2003), and aspiration levels (Kahneman and Tversky Reference Kahneman and Tversky1979). More specifically, pain thresholds represent levels of physical discomfort individuals utilize to determine acceptable versus unacceptable experiences of pain. When an individual experiences pain below his or her threshold, he or she is unlikely to disengage in or retreat from the stimulus responsible for that pain. However, once this threshold has been exceeded, it is highly likely that the individual will seek to disengage from the pain-producing activity. Similarly, risk thresholds are of common interest, particularly within the field of forensic sciences and the study of judicial decision making regarding potential violent criminals. In this context, individuals tasked with making decisions regarding the potential violent risk posed by those brought before them most often employ a risk threshold. Individuals deemed to be below this threshold are usually determined not to pose a significant risk for violence, whereas individuals who exceed this perceived threshold are deemed potential violent threats and are thus often subjected to containment in either mental or prison facilities. Finally, aspiration levels represent “the smallest outcome that would be deemed satisfactory by the decision maker” (Schneider Reference Schneider1992: 1053). These aspiration thresholds provide a convenient cognitive heuristic that allows for the simplification of decision making: change happens when results are below the perceived threshold, and persistence happens when performance exceeds this level (Greve Reference Greve2002).
The notion of a threshold for firm performance explains why Firm A that is performing worse than Firm B may survive while Firm B fails. That is, the entrepreneur of Firm A has a threshold for firm performance that is lower than the entrepreneur of Firm B. As Figure 4.2 shows, Firm B is in fact outperforming Firm A from an objective performance perspective, but the threshold used to determine acceptable performance levels for Entrepreneur A is substantially lower than that employed by Entrepreneur B. Therefore, based upon this comparison, it is more likely that Entrepreneur B would ultimately determine that Firm B's performance is unacceptable, thereby deciding to terminate the firm, than it would be for Entrepreneur A to come to a similar conclusion. This situation is primarily due to the fact that the subjective thresholds that each has assigned as criteria to make this decision are substantially different from one another. The question then becomes what explains why some entrepreneurs have a lower threshold for performance and thus delay failure decisions.
Figure 4.2: Subjective threshold evaluation
Heterogeneity in entrepreneurs’ performance thresholds
An explanation for variance in entrepreneurs’ firm performance thresholds appears to depend on the (1) expectations of (or hopes for) firm performance turnaround, (2) motivation to justify previous entrepreneurial decisions, (3) desire to be consistent with previous entrepreneurial decisions, and (4) individual differences in extrinsic motivation (DeTienne et al. Reference DeTienne, Shepherd and De Castro2008).
Expectations of (or hopes for) firm performance turnaround
An entrepreneur's expectation about the future performance of his or her firm (including a turnaround in current poor performance) is heavily influenced by the nature of the external environment. The nature of the external environment can be captured by the dimensions of complexity, dynamism, and munificence (Aldrich Reference Aldrich1979; Dess and Beard Reference 110Dess and Beard1984). When the environment is highly complex, there is considerable heterogeneity in the environment, and there are many factors for decision makers to consider (Wiersema and Bantel Reference Wiersema and Bantel1993). This greater complexity increases entrepreneurs’ uncertainty over the environment and increases their cognitive load for collecting and processing information (Dess and Beard Reference 110Dess and Beard1984; Rauch, Wiklund, Lumpkin, and Frese Reference Rauch, Wiklund, Lumpkin and Frese2009). Both higher uncertainty and the cognitive load of collecting and processing information increases doubt over the accuracy of information suggesting that current performance is poor. Furthermore, opportunities are more prevalent in complex environments (Brown and Eisenhardt Reference Brown and Eisenhardt1997). Given that prior knowledge in the industry may facilitate the identification of these opportunities (Shepherd and DeTienne Reference Shepherd and DeTienne2005) and that entrepreneurs are typically overconfident (Busenitz and Barney Reference Busenitz and Barney1997; Forbes Reference Forbes2005; Hayward, Shepherd, and Griffin Reference 111Hayward, Shepherd and Griffin2005), entrepreneurs may delay failure decisions because they believe they are well positioned to take advantage of the complex environment to exploit new opportunities and thereby turnaround firm performance.
Environmental dynamism refers to the level of instability in the environment and involves frequent changes that are difficult to predict in advance (Beard and Dess Reference Beard and Dess1979; Bluedorn Reference Bluedorn1993). From a management perspective, environmental dynamism has been shown to influence a number of important processes and outcomes ranging from decision making (Priem, Rasheed, and Kotulic Reference Priem, Rasheed and Kotulic1995) to innovation (Baron and Tang Reference Baron and Tang2011) to overall firm performance (Simerly and Li Reference Simerly and Li2000). Additionally, environmental dynamism can moderate the relationship between leadership behaviors and new venture performance (Ensley, Pearce, and Hmieleski Reference Ensley, Pearce and Hmieleski2006) as well as influence the relationship between entrepreneurial orientation and venture performance (Wiklund and Shepherd Reference Wiklund and Shepherd2005). Interestingly, although dynamic environments are characterized by instability and change, they have also been shown to be fertile breeding grounds for entrepreneurial opportunity and success. Because dynamic environments are ever changing, they are continuously presenting new potential opportunities for individuals who have the vision and motivation to exploit them. Indeed, evidence has shown that new ventures led by individuals with a promotion focus (e.g., those who actively seek to achieve positive results) perform much better in highly dynamic environments than those led by individuals with a prevention focus (e.g., those who actively seek to avoid negative results) (Hmieleski and Baron Reference Hmieleski and Baron2008). Again, although environmental dynamism places greater cognitive strain on the entrepreneur (Li and Simerly Reference 112Li and Simerly1998; Waldman, Ramirez, House, and Puranam Reference Waldman, Ramirez, House and Puranam2001), opportunities are created in environments that are rapidly changing (Brown and Eisenhardt Reference Brown and Eisenhardt1997), and given their prior knowledge of this particular market, these entrepreneurs likely feel well positioned to quickly identify and act on these opportunities (Shepherd, McMullen, and Jennings Reference Shepherd, McMullen and Jennings2007). This belief, whether based on overconfidence (Forbes Reference Forbes2005; Hayward, Forster, Sarasvathy, and Fredrickson Reference Hayward, Forster, Sarasvathy and Fredrickson2009) or not, encourages the entrepreneur to delay the failure decision in the hopes of being able to eventually succeed when environmental conditions shift.
As an example of how environmental dynamism might delay the decision to terminate a venture, consider the following scenario. Entrepreneur A is the founder of a new venture in a rapidly developing technology-based industry, whereas Entrepreneur B is the founder of a more traditional manufacturing-based industry. It is likely that both Entrepreneur A and Entrepreneur B will experience issues with initial performance as well as continued viability. If, upon evaluation, Entrepreneur B determines that his or her performance does not meet acceptable thresholds, it is likely that the decision to “cut one's losses” and terminate the venture will occur after a relatively short period of time. This choice is in no small part influenced by Entrepreneur B's perception that the conditions within the environment are relatively stable, so if the firm is unable to compete under the current conditions, it is unlikely that the competitive landscape will be altered substantially enough in the future to allow for higher levels of competitiveness. However, this might not be the case with Entrepreneur A. Because the environment in this situation is highly dynamic, it is possible that rapid shifts and alterations could occur in the competitive landscape, essentially changing the environment so as to place Entrepreneur A's firm in a much more competitive position. The knowledge that such an environmental shift is possible could motivate Entrepreneur A to prolong the decision to terminate the venture in the hopes of being able to eventually achieve a successful, sustainable competitive position.
The final dimension of the external environment is environmental munificence (Starbuck Reference Starbuck and Dunnette1976), which represents the extent to which the environment is capable of supporting prolonged growth (Dess and Beard Reference 110Dess and Beard1984). A munificent environment has been described as a tide that raises all boats (Wasserman Reference Wasserman2003). Munificence not only expedites an entrepreneur's ability to acquire resources but also assists in opportunity identification (Hitt, Ireland, Sirmon, and Trahms Reference Hitt, Ireland, Sirmon and Trahms2011). Having relatively easy access to resources also helps free up cognitive load, which can in turn be utilized for dealing with other important decision-making tasks that must be completed in day-to-day firm operation. Indeed, environmental munificence has been found to moderate the relationship between rational decision making and new venture performance, with rational decision making having a more positive influence on venture performance under conditions of high munificence (Goll and Rasheed Reference Goll and Rasheed2005). Therefore, it is possible that entrepreneurs operating in munificent environments could prolong the decision to terminate their venture in the hopes that the abundance of resources and opportunities present within the environment will eventually enhance their firm's performance.
Consider the following hypothetical situations faced by entrepreneurs in various levels of environmental munificence. For those with ventures operating in environments that are relatively low in munificence, when firm performance falters, it is unlikely that they will have access to the necessary resources required to keep the firm afloat until performance improves. Additionally, in environments low in munificence, it is unlikely that alternative opportunities are available in abundance, essentially reducing or eliminating any option the entrepreneur might have of switching focus to a more desirable opportunity.
However, this is not likely the case in highly munificent environments. In munificent environments, even when firm performance is below the desired threshold, additional resources are available to supplement the firm's operations, thereby enabling the entrepreneur to delay the decision to terminate the venture. Furthermore, because munificent environments are characterized by more opportunities, it is possible that faltering ventures within such environments could decide to abandon their original business model in lieu of focusing on a newly discovered alternative opportunity within the environment. In summary, it is likely that entrepreneurs will delay failure decisions in environments they believe may eventually lift firm performance.
For example, in a metric conjoint study of 2,848 decisions nested within 89 entrepreneurs, DeTienne and colleagues (Reference DeTienne, Shepherd and De Castro2008) found that entrepreneurs are more likely to persist with their poorly performing firms in munificent environments. They also found an effect for environmental complexity and dynamism, but this effect depended on the extrinsic motivation of the entrepreneur (which we discuss later). Thus, it is not just the attributes of the external environment that impact persistence; entrepreneurs (as all people) (Staw and Fox Reference Staw and Fox1977; Staw Reference Staw1981) are often motivated to justify previous positions, and this motivation can also lead to delaying the failure decision, to which we now turn.
Motivation to justify previous entrepreneurial decisions
In addition to external factors that can contribute to prolonging the failure decision, internal factors also likely motivate individuals in this decision. In other words, individuals could be intrinsically motivated to delay the failure decision for reasons that may not provide financial benefits but could result in important emotional and psychological rewards.
First, such motivation can come from the entrepreneur's personal investment in the business (e.g., sunk costs [Northcraft et al. Reference Northcraft and Wolf1984 ]). Personal investments of time, money, and energy lead to the formation of a strong psychological bond between an entrepreneur and his or her business (Pierce, Kostova, and Dirks Reference Pierce, Kostova and Dirks2001; Wagner, Parker, and Christiansen Reference Wagner, Parker and Christiansen2003). This personal investment may be so great that the entrepreneur perceives the business as an extension (or reflection) of his or her individual identity (Dobrev and Barnett Reference Dobrev and Barnett2005; Phillips Reference Phillips2002). For example, entrepreneurs have been known to refer to their business as “their baby” or “their child” (Cardon, Zietsma, Saparito, Matherne, and Davis Reference Cardon, Zietsma, Saparito, Matherne and Davis2005; Dodd Reference Dodd2002). The decision to terminate the business (i.e., institute the failure event) would break this valuable (psychological) bond; the greater the personal investment of an entrepreneur into his or her business, the greater the likely persistence despite poor performance (DeTienne et al. Reference DeTienne, Shepherd and De Castro2008; Gimeno et al. Reference Gimeno, Folta, Cooper and Woo1997).
Second, the motivation to justify previous decisions and thereby delay business termination is enhanced by the scarcity of other personal career opportunities. That is, an entrepreneur's decision to terminate a business is likely considered alongside his or her other career-related options. (e.g., for employee turnover, see [Jackofsky and Peters Reference Jackofsky and Peters1983; March and Simon Reference March and Simon1958]). If there are many attractive alternatives, the entrepreneur is less likely to persist with the current underperforming firm and terminate it, but if there are few (if any) other alternatives, the entrepreneur will decide to persist with the current firm (DeTienne et al. Reference DeTienne, Shepherd and De Castro2008; Gimeno et al. Reference Gimeno, Folta, Cooper and Woo1997). These findings are further supported by evidence regarding the factors that individuals consider prior to starting their own ventures. Studies have shown that opportunity costs are an important factor influencing the decision to switch from a wage-earning employment position to being a self-employed business owner/operator (Campbell Reference Campbell1995; O'Brien, Folta, and Johnson Reference 113O'Brien, Folta and Johnson2003). Therefore, it would stand to reason that similar considerations are made when deciding to transition back from being self-employed to again working a more traditional salaried/wage-earning position.
Take for example Entrepreneur A, who for our purposes we will name “Joe.” Joe decided to forego completing his college degree in order to pursue his dream of starting his own landscaping and lawn-maintenance company. Although his venture had substantial initial success, the recent downturn in the economy coupled with rising fuel and labor prices have placed Joe's firm in danger of dissolution. Now consider Entrepreneur B, who we will refer to as “Jane.” Jane has an advanced degree in electrical engineering and left a lucrative position as a senior systems engineer with a Fortune 500 company to start her own venture based on a new product technology she had conceived during her graduate studies. While Jane's idea held promise, she has reached a point where further business operations will require substantial external funding, and she has exhausted almost all avenues available for her to acquire the necessary funds to keep her business operating. Essentially, both Joe and Jane are at a crossroads in their ventures and must decide whether to terminate their ventures and move on to more traditional employment or to delay the termination decision in hopes that their fortunes might change dramatically and allow for them to continue operating their respective businesses. However, while the decision is technically the same for each, the relative likelihood of the decision that will be made by either is dramatically different in no small part due to the potential alternatives each has regarding their other employment options.
For Jane, these options are substantial. She is likely to obtain a similar position to the one she left offering a six-figure salary plus the benefits and security associated with employment in a large, stable company. These options are likely to provide ample temptations to persuade Jane to dissolve her business quickly so as to lessen the opportunity costs associated with not only continuing her failing business but also in not collecting compensation from her new position as quickly as possible. This is not the case for Joe. Without a college degree or advanced technical training and with little to no applicable experience in a more traditional employment role, Joe's alternatives for employment upon the termination of his business are decidedly less appealing. When considering both examples, it becomes evident that Jane is likely to make the decision to terminate her venture quickly as a result of her other employment options, whereas Joe – because his alternatives to self-employment are limited at best – is more apt to prolong the failure decision in the hopes that the situation will improve, thereby allowing him to remain in business.
Norms for consistency
The decision to persist with a poorly performing firm is also influenced by individuals’ need to be perceived (by others and themselves) as consistent. Even in the presence of disconfirming evidence, people may see consistency as the best course of action (Caldini Reference Caldini1993; Staw and Ross Reference Staw and Ross1980). Caldini (Reference Caldini1993: 53) described the norm for consistency in the following way: “Because it is a preprogrammed and mindless method of responding, automatic consistency can supply a safe hiding place from troubling realizations.” In this way, entrepreneurs may look for evidence that confirms consistency through persistence and ignore or discount information that points to the opposite. For example, consistency (i.e., persistence) may be encouraged by previous organizational success (Audia, Locke, and Smith Reference Audia, Locke and Smith2000) – it worked out in the past, so if I persist it will eventually be successful in the future (Levinthal and March Reference Levinthal and March1993).
In a similar way, perceived collective efficacy can promote consistency in decisions, which is persisting with a poorly performing firm in this case. We know that self-efficacy is associated with persistence at a task (for a meta-analysis, see [Multon, Brown, and Lent Reference Multon, Brown and Lent1991]), and it appears that collective efficacy is also related to persistence (Hodges and Carron Reference Hodges and Carron1992; Little and Madigan Reference Little and Madigan1997). Perceived self-efficacy can be conceptualized as the “judgments of how well one can execute courses of action required to deal with prospective situations” (Bandura Reference Bandura1982) and as an extension of this logic, entrepreneurial self-efficacy “refers to the strength of a person's belief that he or she is capable of successfully performing the various roles and tasks of entrepreneurship” (Chen, Greene, and Crick Reference Chen, Greene and Crick1998). Individual self-efficacy has been linked to increased levels of persistence in a number of categories, including academic achievement (Lent, Brown, and Larkin Reference Lent, Brown and Larkin1984), work performance (Gist Reference Gist1987), and entrepreneurial endeavors (McCarthy, Schoorman, and Cooper Reference McCarthy, Schoorman and Cooper1993).
Building off this concept of individual self-efficacy, researchers have applied beliefs concerning the ability to perform specific tasks to the group level, creating the concept of collective self-efficacy. Unlike individual self-efficacy, collective self-efficacy is defined as “the group's beliefs in their collective power to produce desired results” (Bandura Reference Bandura2000). It is important to note that collective self-efficacy “is not merely the sum of the efficacy beliefs of the individual (group) members… . rather, it is an emergent group-level property” (Bandura Reference Bandura2000). This collective self-efficacy has also been shown to have a positive relationship with persistence (Goddard, Hoy, and Hoy Reference Goddard, Hoy and Hoy2004; Little and Madigan Reference Little and Madigan1997), demonstrating how group-level factors can influence individual behaviors and actions. To the extent that an individual is influenced by the collective belief within his or her organization, high collective efficacy is also likely to encourage persistence. High levels of collective efficacy can translate the belief that the group is capable of performing specific tasks irrespective of whether or not individuals within that group have adequate levels of individual self-efficacy regarding their abilities to achieve the desired outcomes. Therefore, it is possible that high levels of collective self-efficacy can supersede individual perceptions of self-efficacy, thereby motivating individuals to persist with the group's chosen course of action. Indeed, DeTienne and colleagues (Reference DeTienne, Shepherd and De Castro2008) found that entrepreneurs are more likely to decide to persist with their poorly performing firms when they have previously experienced high organizational success and are embedded in a group with high collective efficacy than when they have experienced low previous organizational success and low collective efficacy.
Entrepreneurs’ extrinsic motivation
Not all entrepreneurs are subject to the aforementioned forces that promote persistence. Entrepreneurs are likely heterogeneous in extrinsic motivation. Extrinsic motivation is “a cognitive state reflecting the extent to which an individual factors the force of his or her task behaviors to some extrinsic outcome” (Brief and Aldag Reference Brief and Aldag1977). In entrepreneurship, we often think of extrinsic rewards in terms of financial outcomes (Campbell Reference Campbell1992; Kuratko, Hornsby, and Naffziger Reference Kuratko, Hornsby and Naffziger1997; Shepherd and DeTienne Reference Shepherd and DeTienne2005), which include (but are not necessarily limited to) monetary rewards, acquisition of personal wealth, and individual entrepreneurial income (Kuratko et al. Reference Kuratko, Hornsby and Naffziger1997). It has been well established that the potential for financial reward can provide an important motivational influence on entrepreneurial behavior (Campbell Reference Campbell1992; Kuratko et al. Reference Kuratko, Hornsby and Naffziger1997; Schumpeter Reference 114Schumpeter1961). Scholars as far back as Schumpeter (Reference 114Schumpeter1961) have proposed that the construction of a business empire in the hopes of achieving financial gains represents an important motivation to engage in entrepreneurial activities. Similarly, Campbell postulated that individuals decide to become entrepreneurs if the value of rewards achieved from entrepreneurship exceeds the expected value of rewards obtained from being an employee (Campbell Reference Campbell1992). Additionally, recent research has found that potential financial rewards provide an important motivation for both recognizing opportunities (Shepherd and DeTienne Reference Shepherd and DeTienne2005) and sustaining entrepreneurial activities (Kuratko et al. Reference Kuratko, Hornsby and Naffziger1997).
While relatively little research has examined the role extrinsic motivation plays in regard to persistence, a parallel stream of research can be found in the job-pay satisfaction and turnover literatures. Substantial amounts of research has supported the notion that there is a negative relationship between job-pay satisfaction and employee turnover (Cotton and Tuttle Reference Cotton and Tuttle1986) as well as a positive relationship between job-pay satisfaction and employee commitment to the organization (Johnston, Parasuraman, Futrell, and Black Reference Johnston, Parasuraman, Futrell and Black1990). This evidence implies that lower levels of satisfaction with monetary compensation from work translates to lower levels of organizational commitment, thereby increasing the likelihood that individuals experiencing such dissatisfaction will ultimately leave the organization. Mapping these findings onto the field of entrepreneurship, we propose that it is possible that entrepreneurs who are more extrinsically motivated will be less likely to be swayed by factors that influence persistence. Therefore, to the extent that entrepreneurs are extrinsically motivated, they are less likely to be influenced by the other factors (e.g., the environment, motivation to justify, and norms for consistency) to delay terminating poorly performing firms, a proposition largely supported by DeTienne and colleagues’ (Reference DeTienne, Shepherd and De Castro2008) study of entrepreneurs’ decision policies.Footnote 1 Entrepreneurs not only differ in their extrinsic motivation but also in their values, and these values can influence the decision to persist – that is, the decision to delay the voluntary termination of poorly performing firms (e.g., failure event).
Entrepreneurs’ values
Values are “enduring perspectives of what is fundamentally right or wrong … can be thought of as preference or need for a particular outcome” (Judge and Bretz Reference Judge and Bretz1992: 264), and are central to decision making (Judge and Bretz Reference Judge and Bretz1992) because they inform assessments of outcomes as more or less desirable (Feather Reference Feather1995; Rohan Reference Rohan2000). Building on Schwartz's (Reference Schwartz and Zanna1992) universal types, Holland and Shepherd (Reference Holland and Shepherd2013) found that these higher-order values – self-enhancement and openness to change – influence entrepreneurs’ decision making on whether to persist with underperforming ventures in a number of ways.
First, in their study of 3,200 decisions nested within 100 entrepreneurs, Holland and Shepherd (Reference Holland and Shepherd2013) found that the greater the expectations of future financial returns, the more likely the entrepreneur is to delay failure, but the strength of this relationship depends on the entrepreneur's self-enhancement values. Self-enhancement values “focus on the development of personal interests, even at the expense of others if necessary” (Holland and Shepherd Reference Holland and Shepherd2013). These personal interests are typically satisfied by the prominence gained through the firm's financial success and subsequent wealth for the entrepreneur. In regard to the nature of how self-enhancement values influence the decision to persist, Holland and Shepherd's (Reference Holland and Shepherd2013) results suggest that future financial returns have a greater influence on the decision making of entrepreneurs who place high value on self-enhancement as a prominent attribute in their life than they do for entrepreneurs who place less value on self-enhancement. Essentially, entrepreneurs with high levels of self-enhancement values will be more motivated by the potential for future financial returns to persist in their underperforming ventures than entrepreneurs with low levels of self-enhancement values.
Second, Holland and Shepherd (Reference Holland and Shepherd2013) also found that the value of openness to change impacts persistence decisions, but this time through its impact on the anticipation of non-financial benefits. Openness to change includes the values of stimulation, self-directing, and hedonism such that individuals high in openness to change “appreciate through action and thrive on the excitement and challenge of life” (Holland and Shepherd Reference Holland and Shepherd2013: 339); they seek out experiences that are novel (Bardi, Calogero, and Mullen Reference Bardi, Calogero and Mullen2008) and give them freedom and autonomy (Amit, MacCrimmon, Zietsma, and Oesch Reference Amit, MacCrimmon, Zietsma and Oesch2001; Carter, Gartner, Shaver, and Gatewood Reference Carter, Gartner, Shaver and Gatewood2003). Therefore, they are likely to focus on these attributes of the business when deciding to persist (despite poor performance). Evidence provided by Holland and Shepherd (Reference Holland and Shepherd2013) support the relationship between valuing openness to change and the influence of non-financial rewards on entrepreneurs’ decisions to persist. Specifically, entrepreneurs who place higher value on openness to change as an important facet of their lives are more likely to place greater weight on non-financial returns when determining their decisions to persist with an underperforming venture. Therefore, even if the venture is underperforming from a financial perspective, as long as it still provides them with acceptable levels of non-financial benefits, entrepreneurs with higher values of openness to change will be more likely to persist rather than dissolve the venture.
Consequences of persisting with a poorly performing firm
Financial costs
Under the traditional economic model of persistence (Ansic and Pugh Reference Ansic and Pugh1999), entrepreneurs should “persist only until the point of time when the current losses exceed the present value of expected profits” (Shepherd et al. Reference Shepherd, Wiklund and Haynie2009: 136). The notion here is that if the business is performing this poorly, then investing additional resources is like “throwing good money after bad.” It increases the amount of the loss when failure eventually occurs. Because entrepreneurs also often put their own personal funds at risk (Thorne Reference Thorne1989) – including personal guarantees for debt – the greater the loss, the deeper the financial hole the entrepreneur must climb out of to recover from the failure. The longer the entrepreneur persists with a poorly performing firm, the longer it will take him or her to recover from the failure when it eventually occurs (Shepherd et al. Reference Shepherd, Wiklund and Haynie2009).
Therefore, all the factors we discussed earlier that encourage procrastination and a lower performance threshold for “acceptable” performance are largely categorized (in the literature) as negative factors because they make financial recovery more difficult. However, there is more to recovery than solely the financial. Throughout the book, we have highlighted how grief can be generated by the death of a business and that this grief can obstruct learning from the experience and also decrease one's motivation to try again by starting a subsequent business. Recovery can be enhanced by emotion regulation that reduces grief. Interestingly, this process of reducing grief over the loss of a business can occur before the business is terminated. To understand this process, we return to the psychology literature on loss to explore the notion of anticipatory grief and the role it may play in promoting recovery from business failure (Shepherd et al. Reference Shepherd, Wiklund and Haynie2009).
Emotional costs
Anticipatory grief occurs before the loss event and will influence the level of grief one experiences after a loss actually occurs (Lindemann Reference Lindemann1944; Parkes and Weiss Reference Parkes and Weiss1983; Rando Reference Rando1986). That is, the processes of mourning, coping, and psychosocial reorganization can be stimulated by the realization that a loss will occur despite the fact that it has not yet occurred (Rando Reference Rando1986). These processes allow the individual to emotionally prepare for a loss by beginning to withdraw from the soon-to-be loss as a safeguard for the eventuality (Lindemann Reference Lindemann1944; Parkes and Weiss Reference Parkes and Weiss1983). The individual can start to make sense of the loss because it is seen as a predictable outcome (Parkes and Weiss Reference Parkes and Weiss1983), which helps him or her further break emotional bonds to what is being lost and make emotional investments elsewhere (Shepherd et al. Reference Shepherd, Wiklund and Haynie2009). For the entrepreneur, this may set up conflicting pulls. On one side, the entrepreneur must begin to withdraw from the business, such as by disentangling his or her personal identity from that of the business (Major and Schmader Reference Major, Schmader, Swim and Stangor1998; Major, Spencer, Schmader, Wolfe, and Crocker Reference Major, Spencer, Schmader, Wolfe and Crocker1998). However, the business situation is one that draws the entrepreneur in to “put out the many fires” that arise in a failing business (Shepherd et al. Reference Shepherd, Wiklund and Haynie2009: 140).
Despite these conflicting pulls, evidence from the psychology literature suggests that some delay in termination gives the individual a chance to prepare for the loss, but interestingly, too much time appears to lead to poor psychological outcomes. For example, in a study of parents whose children died of cancer, those whose children experienced a moderate time of illness fared better than parents whose children had a short or long illness (Rando Reference Rando1986). Presumably, the parents whose children only had a short illness did not have sufficient time to prepare for the loss. While those whose children had a long illness had time to prepare; yet, this extended period was emotionally exhausting, and the resulting resource depletion made post-death recovery difficult. Again, it is worth noting that we are in no way saying that the death of a child is the same as a business failure; we are simply saying that our knowledge of the psychological processes of one likely provide insight into the other.
Although entrepreneurs can be in denial that their business will fail right up until the event (and therefore have no anticipatory grieving), many appear to know that failure will eventually occur. Indeed, there are bankruptcy-prediction models based on standard accounting ratings. The breaching of these ratings thresholds signal that business failure will occur (at least with a very high probability) (Altman Reference Altman1968; Ohlson Reference Ohlson1980; Zmijewski Reference Zmijewski1984). Realizing that their business will eventually fail, entrepreneurs can grieve over things that have been lost now – for example, the dream of handing the business on to the next generation of the family – and can gain some insight into what that future will look like. This period of anticipation gives entrepreneurs the ability to prepare emotionally for the upcoming loss (Parkes and Weiss Reference Parkes and Weiss1983), thereby allowing them to gradually extract their emotional energy from the failing venture. By providing the entrepreneur the opportunity to prepare to cope with the impending failure, this period of anticipatory grief can help mitigate the overall emotional costs eventually associated with the decision to terminate a failed venture. Therefore, this time between the realization that failure will occur and the time the business actually dies can be valuable in preparing for the loss.
Preparation involves some grief work – starting the processing of the loss experience (Bonanno and Keltner Reference Bonanno and Keltner1997; Prigerson et al. Reference Prigerson, Shear, Newsom, Frank, Maciejewski, Houck, Bierhals and Kupfer1996; Wortman and Silver Reference Wortman and Silver1989, Reference Wortman, Silver, Montada, Filipp and Lerner1992) – but can also involve periods of a restoration orientation to gain the benefits of oscillation (Shepherd Reference Shepherd2003; Stroebe and Schut Reference Stroebe and Schut1999). Preparation helps reduce the level of grief once the loss occurs and therefore likely helps with the emotional recovery from business failure. This emotional recovery is important to remove obstacles to learning from the experience. To a large extent, this learning will be lost if the individual is unwilling to pursue a subsequent entrepreneurial business. To the extent that an individual experiences grief and/or can quickly eliminate that grief, he or she will be more motivated to try again. Therefore, although under the traditional economic model of termination, any persistence beyond a “rational” financial threshold is detrimental to recovery and decisions to persist are so-called “biased,” overall recovery likely involves both financial and emotional recovery, to which we now turn.
Optimizing recovery from firm failure
The proposed anticipatory grief model for prolonging the decision to terminate a failed venture centers on the need to balance the entrepreneur's financial and emotional expenditures with the hope of speeding the recovery from the failure experience. It is important to note that striking this balance is likely a heterogeneous experience both between individual entrepreneurs as well as within failures experienced by a single individual. From a financial wealth perspective, while it is possible that some entrepreneurs might have their personal wealth reduced substantially as a result of the failed venture, other entrepreneurs may have a large portion of their individual net worth protected from the failure event. For example, they might find that failure is a somewhat necessary “badge of honor” required in the eyes of venture capitalists in a certain industry, they might not have secured debt financing with personal guarantees throughout the course of developing their business, or they might simply operate a large diversified portfolio of business investments. All these factors would reduce the costs associated with failure assuming it happened without any attempts to prolong the termination decision. Nevertheless, despite minimization of the financial costs of business failure, if there is no delay in the decision to terminate, there is likely variance in the rate financial costs accumulate as a result of ever-longer delays in termination. Simply put, the financial costs of prolonging the failure decision are likely greater for some entrepreneurs than for others. For example, ventures with higher capital burn rates will require more substantial financial resources to prolong business failure than those with lower capital burn rates. Additionally, some industry-specific assets might depreciate more rapidly, translating to a faster depletion of the entrepreneur's residual claim on those business assets.
While the financial costs associated with prolonging failure are an important component to our anticipatory grief model, we have also argued that the grief entrepreneurs experience as a result of failure also influences their decisions to delay failure. Just as it is likely that the financial costs associated with failure are not uniform across all entrepreneurs, so too are the emotional costs related to failure; that is, entrepreneurs are heterogeneous in the emotional costs they experience from failure (for examples, see Chapter 2). Research has indicated that individuals experience higher levels of grief when they lose objects they perceive they have made considerable emotional investments to attain. This association between higher levels of grief and the loss of objects perceived to have higher emotional investments has most often been studied with regard to the loss of loved ones (e.g., significant others, parents, children, etc.) (Jacobs, Mazure, and Prigerson Reference Jacobs, Mazure and Prigerson2000; Robinson, Baker, and Nackerud Reference Robinson, Baker and Nackerud1999). These studies have revealed that individuals with strong emotional connections to objects of loss are more likely to experience more intense feelings of grief regarding the loss. Building off of this, it is likely that entrepreneurs will experience greater levels of grief regarding the failure of ventures they have owned and operated for a long period of time (consistent with the endowment effect [Van Boven, Dunning, and Loewenstein Reference Van Boven, Dunning and Loewenstein2000]). Additionally, it is possible that experiencing numerous losses in rapid succession could result in an accumulation of grief for those involved in the losses (Nord Reference Nord1996). Therefore, entrepreneurs of ventures that fail after several other similar failures will likely experience greater grief. Finally, evidence has shown that the greater the level of importance assigned to the failure, the higher the emotional response resulting from that event (Archer Reference Archer1999). When entrepreneurs perceive that their businesses constitute an important component of their own self-identity, the failure of that business will often produce higher levels of grief. Consequently, it is possible that while some entrepreneurs will experience considerable grief as a result of their failed businesses, for others, this grief could be substantially less.
While our model proposes that a certain amount of delay in the decision to terminate a firm might result in reducing the levels of grief entrepreneurs experience as a result of business failure, it is possible that variance exists in both the extent to which entrepreneurs leverage this time period to actively engage in anticipatory grieving as well as the overall effectiveness of their efforts at accomplishing this task. For some entrepreneurs, this period of delay might be spent in denial about the overwhelming evidence suggesting that the business is destined to fail. These entrepreneurs engage in little or no anticipatory grieving, and so the delay does not provide the proposed benefits in terms of lessening subsequent grief. Additionally, some entrepreneurs might utilize this period to engage in anticipatory grieving, but they might not have the necessary skills required to accomplish this activity successfully.
Recent research has suggested that recovering from grief is optimized when individuals oscillate between periods focusing on the loss and working through the events leading up to the experience and periods of distraction, whereby individuals cease thinking about the loss and instead take time to address other sources of stress (Archer Reference Archer1999; Shepherd, Patzelt, and Wolfe Reference Shepherd, Patzelt and Wolfe2011). Therefore, while it is likely that a certain amount of persistence can enhance an entrepreneur's eventual recovery from business failure, the duration of this time period must be carefully considered to strike a balance between the emotional benefits and financial costs associated with such a delay in making the failure decision.
A graphical depiction of the financial, emotional, and total costs associated with the delay of business failure can be seen in Figure 4.3.
Figure 4.3: Costs associated with termination delay
Discussion
Scholarly implications
What causes entrepreneurs to postpone the decision to terminate a business venture, knowing that such a delay will be financially costly? The most common rationale presented in the existing literature suggests that such a delay is merely the result of biased decision making and that engaging in such procrastination represents a simple error in entrepreneurial judgment. We offered an alternative perspective, suggesting that some amount of procrastination can actually be beneficial in assisting entrepreneurs in the recovery process. We recognized that venture failure is undoubtedly costly from a financial perspective and that higher financial losses equate to more challenging financial recoveries. However, we supplemented this purely financial rationale by discussing the role negative emotions regarding venture failure play as well as the significance of emotional recovery. It is to be expected that entrepreneurs might suffer grief over venture failure, which can in turn impede recovery. In detailing the concept of anticipatory grief, we theorized that a certain period of procrastination with regard to the termination of a failing business could in fact reduce the amount of grief experienced as a result of the failure event. Therefore, if overall recovery is conceptualized as a combination of both financial and emotional costs that occur as a result of business failure, our model of anticipatory grief offers a plausible explanation for the benefits of prolonging business failure – one based on considering the financial and emotional costs of failure in an attempt to optimize subsequent recovery. It is our belief that this anticipatory grief perspective regarding business failure provides several important implications for researchers.
First, this model provides an important counterpoint to both the economic and escalation research, which account for persistence in terms of biases and errors in judgment. We proposed that under certain conditions, some persistence prior to business failure can prove to be beneficial to entrepreneurs. This perspective could possibly reveal new areas of research regarding escalation of commitment. For instance, it alludes to the potential importance of extending the span of such studies beyond the scope of an individual project. It is possible that what is interpreted as a bias for one project could well prove beneficial to the individual over the course of a number of projects. Extending past the outcomes of a single project emphasizes the need to investigate dependent variables other than basic financial costs associated with persistence. We chose to focus on the potential emotional costs associated with business failure as well as the ramifications such costs might have on future emotional investments.
Second, although emotion is recognized as a potential cause of persistence throughout the procrastination literature, this persistence is almost uniformly viewed in the long run as a detriment to the individual. We proposed that given the roles emotion and emotional processing (e.g., anticipatory grief and grief) play in eventual recovery from failure, persistence could actually provide some long-term benefits. As a result, while certain entrepreneurs’ persistence could be classified as procrastination, in other instances, this might be an improper characterization that is more appropriately rationalized by our anticipatory grief model. Specifically, prolonging business failure could provide a better balance between the financial and emotional costs associated with that failure, thereby optimizing eventual recovery. In order to distinguish between procrastination and anticipatory grief as the underlying cause of entrepreneurial persistence, it is necessary to consider the emotional inputs and outputs associated with the process. Our efforts along this front represent a small step in addressing the relative paucity of research on how the desire to reduce negative emotions can influence entrepreneurial activities.
Third, while it is not astonishing that business scholars have traditionally fixated on the financial costs of delaying business failure whereas scholars interested in grief have concentrated on the emotional aspects of loss, neither of these divergent streams of research has made much of an attempt to combine both aspects to provide a more comprehensive perspective of the consequences of business failure. Our anticipatory grief model highlights the importance of taking both into consideration in order to better understand how entrepreneurs recover after business failure. While the concepts of anticipatory grief and grief have been applied to situations of loss rather than just the loss of a loved one (Christopherson Reference Christopherson1976; Roach and Kitson Reference Roach, Kitson and Lund1989), the emphasis of such research has remained almost exclusively on the emotional outcomes of such loss. With substantial care, we argued that perhaps there is an important financial element to consider in some loss situations. For instance, what factors do individuals consider when deciding to delay divorce? Does this decision have consequences on both their financial and their emotional recovery from such an occurrence? Research has suggested that some individuals do grieve in anticipation of divorce (Roach and Kitson Reference Roach, Kitson and Lund1989), and it is possible that some benefits can be gained by persisting for a certain period prior to divorce, essentially allowing for emotional preparation for when the actual event occurs. Regardless, we recognized there is a substantial amount of work to be done investigating the financial and emotional consequences of undergoing an important loss.
Fourth, our anticipatory grief model provides an important complement to the existing literature regarding grief experienced as a result of business failure. The seminal model proposed by Shepherd (Reference Shepherd2003) starts with the failure event and details how this event can elicit negative emotional responses. Our model introduces the idea that grief can occur in anticipation of venture failure, and this anticipatory grief can in turn impact the amount of grief experienced as a result of the business failure event. Moreover, Shepherd (Reference Shepherd2003) emphasized the importance of improving the grief-recovery process as a crucial component to maximizing the amount of learning that could be accomplished as a result of the failure event. Our model concentrates on how anticipatory grieving can serve to balance the financial and emotional costs of failure in order to optimize entrepreneurs’ subsequent recovery.
Finally, recent research has called attention to the importance of the emotional bonds entrepreneurs form with their businesses. Evidence suggests that entrepreneurs make substantial emotional investments in their ventures (Cardon et al. Reference Cardon, Zietsma, Saparito, Matherne and Davis2005) and that entrepreneurs consider their businesses to be an important component of their individual identities (Downing Reference Downing2005). For example, Cardon and colleagues (Reference Cardon, Zietsma, Saparito, Matherne and Davis2005) invoked a renewed interest in the study of entrepreneurial passion and the role it plays in the entrepreneurial process. Although our research investigates the converse of passion (i.e., grief), it is our desire that future research continues to delve into the influence that both positive emotions (e.g., passion) and negative emotions (e.g., grief) can have on the entire entrepreneurial process.
Managerial implications
There are a number of important managerial implications that can be drawn from this chapter and offer critical insight into the entrepreneurial process of deciding to complete or delay the termination of an underperforming or failing business. First, it is important to note that the decision-making process involved in coming to the termination conclusion is non-uniform for both different entrepreneurs and for the same entrepreneur facing different situational contexts. Whereas failure and the decision to cease a failing business have most often been classified as simply a question of financial or economic losses, we provided a more nuanced representation of the various facets involved with this particular decision. There are in fact numerous factors that influence the decision to delay the termination of an underperforming venture, and while continued financial losses naturally factor into this equation, they are by no means the only – or in many cases the most significant – inputs that entrepreneurs must consider when making their ultimate failure decision.
Second, and building off of the previous notion that decisions to terminate businesses involve heterogeneous contexts, variations in terms of environmental landscapes are important factors to consider when facing the decision to delay business termination. Aspects of the external environment, such as complexity, dynamism, and munificence, can all substantially influence individuals’ understanding of why they might consider delaying terminating a failed venture. Because the certainty of eventual outcomes is lower in complex environments, it is possible that individuals might forego the immediate termination of a failing business operating in such an environment in the hopes that their assessment of the eventual outcome was incorrect. Additionally, complex environments might offer greater levels of potential opportunities, which could in turn encourage entrepreneurs to delay business termination in the hopes of capitalizing on one of these alternative opportunities.
Environmental dynamism might also factor into the decision-making process when one is determining whether to end or delay terminating an entrepreneurial venture. Because dynamic environments are ever changing, it is possible that if an entrepreneur was to delay terminating a poorly performing venture, rapid future environmental shifts might result in a competitive landscape that is much more amenable for the struggling business. Therefore, it is possible that entrepreneurs operating firms in highly dynamic environments might be more apt to delay failure decisions. Similarly, highly munificent environments could also cause entrepreneurs to delay their decisions to terminate. Because munificent environments are rich in resources, it is possible that individuals operating ventures within such environments could be able to supplement their venture's poor performance with external resources, allowing them to delay the decision to terminate the venture.
Third, although environmental factors are important to consider when deciding whether or not to delay business termination, there are other intrinsic motivations that influence this process that can vary between individuals. Specifically, the need to justify previous decisions, the need to conform to norms for consistency, and perceptions of collective self-efficacy are all factors that affect this decision-making process. Because entrepreneurs invest substantial amounts of time, energy, and resources when establishing a new venture, it is likely that they form strong emotional and psychological connections between their personal identities and the new venture. As a result of these connections, it is possible that they view a failing business as a manifestation of their own failure that resulted from prior decisions they made while beginning and running the business. Therefore, in an attempt to justify their previous efforts and investments, entrepreneurs may delay making failure decisions, and the duration of this delay is likely enhanced with greater levels of personal investments (e.g., time, energy, money, etc.).
Likewise, the decision to delay terminating a failing business can also be affected by individuals’ need to be perceived (by both themselves and by others) as being consistent. This need for consistency might lead entrepreneurs to place greater weight on information that reinforces the validity of continuing with their previous actions and activities while simultaneously discounting information suggesting that consistency might not lead to desired results. The results of this desire for consistency can produce bias, leading entrepreneurs to believe that if consistency produced the desired results in the past, then continued persistence will eventually result in similar outcomes. This overly optimistic perspective can also be influenced by the perceived collective self-efficacy that the entrepreneur has regarding the organization as a whole. If the entrepreneur senses that the organization's overall collective self-efficacy is relatively high, this might lead her or him to continue to operate the business in the face of counterfactual evidence. In other words, the prevailing logic that the business will eventually turn around simply because “the organizational team is good” can also result in an entrepreneur delaying the decision to terminate the venture in the hopes that future performance results will be different than historical evidence might suggest.
Fourth, the levels of specific types of extrinsic motivation can also affect the decision to delay the termination of a failing business. Perhaps the most obvious form of extrinsic motivation associated with entrepreneurial ventures is satisfaction with monetary compensation. The level of motivation provided by monetary compensation varies across individuals. However, individuals who are more highly motivated by monetary compensation are more likely to place greater weight on this factor above other environmental and intrinsic motivations when determining whether to persist with a failing venture. Specifically, individuals with higher levels of motivation for monetary compensation are less likely to persist with ventures that do not provide them with sufficient returns in this area regardless of the other environmental (e.g., complexity, dynamism, and munificence) or intrinsic (e.g., need to justify previous decisions, norms for consistency, and collective self-efficacy) motivations present within the decision-making context.
Extrinsic motivation is also related to individuals’ values regarding what they perceive as “right or wrong” as well as their preference for a particular outcome. Because the value of self-enhancement focuses on the accumulation and development of personal rewards, it is likely that entrepreneurs with higher levels of this value will persist with endeavors that they perceive have greater potential to provide them with future financial rewards. In other words, if an entrepreneur highly values self-enhancement and perceives that his or her business could provide substantial future financial rewards, he or she will likely delay the decision to terminate the business even if it is currently failing to meet the desired performance threshold. In a similar manner, individuals who value openness to change are motivated by non-financial rewards and are likely to persist with ventures they perceive as granting them higher levels of these non-financial benefits regardless of the ventures’ current or future financial performance.
Fifth, although research has recognized that there are potential emotional consequences associated with persistence, the prevailing logic is that such persistence is ultimately detrimental to individuals in the long run. We took a slightly different perspective and proposed that persistence could in fact afford individuals some long-term benefits as a result of the role it plays in emotional coping and the processing of grief (both anticipatory and experiential). As a result, while some entrepreneurs’ persistence might fall into the category of procrastination, thereby ultimately proving to be detrimental, others might utilize this delay in a more beneficial manner through anticipatory grief. This utilization of persistence could result in a better balance between the emotional and the financial costs associated with failure, allowing for better recovery from failure. In order to differentiate between procrastination and anticipatory grief, it is important to understand both the emotional inputs and outcomes associated with the entrepreneurial process.
Sixth, while business scholars have primarily focused on the financial consequences of failure and bereavement scholars tend to emphasize the emotional consequences that failure can produce, in this chapter, we hoped to stress the importance of considering and balancing both in order to maximize recovery from business failure. How much financial loss can be realized as a result of persisting with a failing venture? What are the emotional benefits reaped as a result of delaying termination, thereby allowing individuals to engage in anticipatory grieving, which reduces the overall emotional consequences associated with such failures? These are important questions to consider, and the attempt entrepreneurs make to strike a balance between these two factors is important to consider as it influences the decision-making process.
Finally, although the majority of the research regarding entrepreneurial failure centers on coping with the emotional consequences experienced after a failure event, this chapter offers a complementary perspective – looking at how emotions can be influenced by processes entrepreneurs engaged in prior to the actual failure event. By persisting in a failing venture, it is possible that entrepreneurs gain time to engage in anticipatory grieving. This process of anticipatory grief can be a vital component in mitigating the overall emotional consequences associated with failure and can therefore be crucial in optimizing entrepreneurs’ ability to eventually cope with and recover from failure experiences.
