In Chapter 6, we discussed how specific individual characteristics (i.e., emotional intelligence) and organizational routines (i.e., emotional capabilities) can help mitigate the negative consequences of failure, thereby enhancing the processes of learning and sensemaking. While these characteristics and processes can prove to be beneficial in helping individuals and organizations cope internally with project failure, they do not address potential external sources that could be responsible for negative emotions arising as a result of failure. One specific threat from failure has to do with how others see the person whose business (or project) has failed. At the turn of the century, individuals who became bankrupt were treated with disdain; they were often humiliated in public, such as sitting in the public square with baskets on their heads, engaging in humiliating tasks, or wearing disgusting clothes (Efrat Reference Efrat2006). This stigma – “some attribute or characteristic that conveys a social identity that is devalued in a particular context” (Crocker, Major, and Steele Reference Crocker, Major, Steele, Fiske, Gilbert and Lindzey1998: 505) – in most places of the world seems to still exist. For example, in a study of executives of failing banks, Semadeni, Cannella, Fraser, and Lee (Reference Semadeni, Cannella, Fraser and Lee2008) found that those who “jumped ship” early were able to avoid some of the stigma of bankruptcy, but those who were stigmatized suffered negative labor market consequences (e.g., found it hard to find another job). Notably, not all environments stigmatize failure. For example, for Silicon Valley, it has been argued that a failed start-up can be seen as a badge of honor (Landier Reference Landier2005). However, as we will outline here, Silicon Valley is a rare exception, and more often than not, failed entrepreneurs face considerable stigmatization from various others.
Not surprisingly, the negative consequences of stigma from failure diminish individuals’ psychological well-being. Indeed, stigma from failure (e.g., business failure and perhaps also project failure) represents a threat to entrepreneurs’ social identity because their role expectation (held by stakeholders and the entrepreneurs themselves) is to create a business that adds value, and a minimum threshold for achieving this is business survival. Therefore, Chapter 11 bankruptcy (in the United States Bankruptcy Code) indicates that a business is failing, and other forms of bankruptcy (e.g., Chapter 7 in the United States Bankruptcy Code) mean that the business has failed. Bankruptcy represents a public signal that directly contradicts what is at the core of an entrepreneurial identity. Thus, failure can mark entrepreneurs, which in turn creates a number of difficulties for them. For example, failed entrepreneurs are likely to find it more difficult to raise capital and/or find it more costly to do so (with the possible exception of in Silicon Valley). Even when entrepreneurs did not cause the failure themselves (e.g., by misinterpreting market data or making faulty strategic decisions), they may well be stigmatized by others in the environment (Kulik, Bainbridge, and Cregan Reference Kulik, Bainbridge and Cregan2008; Neuberg, Smith, Hoffman, and Russell Reference Neuberg, Smith, Hoffman and Russell1994).
However, are all entrepreneurs and project team members likely to experience the same level of stigmatization from failure, and are all observers in the social environment likely to stigmatize failed entrepreneurs and project team members to a similar extent? How can regional and national differences explain the levels of stigmatization, and importantly, what can those who failed do to minimize the level of stigmatization and/or cope with the stigma experienced? This chapter addresses these questions by exploring the antecedents and consequences of stigmatization for failed entrepreneurs and project team members. Figure 7.1 summarizes the chapter's structure. First, we explore the conditions under which the failure of businesses or entrepreneurial projects leads to stigmatization (characteristics of those who failed and those who evaluate regional characteristics). Second, we explore stigma's negative consequences. Finally, we explore how entrepreneurs and managers use impression-management strategies to mitigate potential negative consequences from stigmatizing failure. We start this chapter by illustrating that stigma is indeed a problem for those whose businesses and entrepreneurial projects fail.
Figure 7.1: Antecedents and consequences of stigma from entrepreneurial failure
Business failure and the stigmatization of entrepreneurs
Acquiring the resources necessary to start and run a business requires that entrepreneurs build up and maintain legitimacy by adhering to expectations that prevail in business environments (DiMaggio and Powell Reference 227DiMaggio and Powell1983). Perhaps the strongest expectation is that entrepreneurs are successful in what they are doing – that is, that they are able to successfully run and grow their business. Not adhering to these expectations by failing with their business can create stigma, which can negatively impact future business foundations (Efrat Reference Efrat2006; Landier Reference Landier2005). There is ample anecdotal evidence that business failure leads to stigmatization of entrepreneurs and managers. For example, Landier (Reference Landier2005: 9) quoted a communication by the European Commission from 1998 as follows:
In Europe, a serious social stigma is attached to bankruptcy. In the USA bankruptcy laws THEY allow entrepreneurs who fail to start again relatively quickly and failure is considered part of a learning process. In Europe those who go bankrupt tend to be considered as “losers.” They face great difficulty to finance a new venture.
Two years later, Erkki Liikanen, the Commissioner for Enterprise and Information Society at the European Commission, was quoted as follows (Landier Reference Landier2005: 9):
An important factor underlying Europe's poor record on entrepreneurship is the stigma of failure. Many would-be entrepreneurs and good ideas are put-off by the fear that if you fail once, you will lose everything. This must change. Failure can be regarded as part of the learning curve. We must change mentalities. Failure is not accepted in Europe. An entrepreneur must have a second chance. Changing business cultures is the toughest challenge.
Similarly, Chong Lit Cheong, the Managing Director of Singapore's National Science and Technology Board, said the following in May 2000 (Landier Reference Landier2005: 9):
To embrace the spirit of risk-taking, we need to accept failure as a possible outcome of technopreneurship. A sustainable technopreneurial environment is not one that promises no failures to continue to pursue their dreams.
In addition to these quotes from politicians and political reports, entrepreneurs themselves often report about the stigma they associate with failure. For example, German entrepreneur Bent A. Jensen, the founder of the fashion label Herr von Eden, went bankrupt after fourteen years and was left with more than 500,000 euros debt. Reflecting on the time after the failure, he reported the following in a newspaper interview (Mühlauer and Radomski Reference Mühlauer and Radomski2005):
The first time [I had] negative press, this hurt me a lot. I had to fight to keep face and retain my composure—and nevertheless leave the house. This was often not easy, for example to continue visiting the Café Paris in Hamburg. There was no champagne anymore, just one or two beers. I did have to swallow and retain composure.
Another article published in a leading German newspaper (Zappe Reference Zappe2011) described that in nine German and one Austrian cities, self-help groups called Anonymous Bankruptcies have been founded. These self-help groups, which are organized under a nationwide association, were initiated in 2007 by Attila von Unruh, who had experienced the hardship of business failure himself. In the article, he described himself as having been “left alone” when he had filed for insolvency and explained that nobody would have understood that he had not acted carelessly but had just trusted the wrong people. Therefore, he had kept the failure a secret, not showing up at meetings with business partners anymore and facing the threat of social isolation. He was quoted as follows:
[If you have failed as an entrepreneur] you do not get a bank account, no new lease for offices, no credibility for loans, no contract with a telephone operating company. In this situation it is hard to get a foot on the ground again.
The article goes on to describe Stephan Schramm, another failed entrepreneur, who had run a learning academy for health occupations for ten years. Schramm reported that after his business went bankrupt, “many friends disappeared. Well, those, of which I thought they would be friends.” Indeed, he had lost many social relationships and just like von Unruh, the stigma of failure drove him into social isolation. Even several months after the bankruptcy, Schramm had not yet found a salaried job. As the article quotes him,
“I have written 20 to 30 application letters to positions targeting my qualification profile. But if you are applying as a former entrepreneur and your CV shows an insolvency, you are not even invited for a job talk… This social isolation following stigma makes von Unruh's organization of self-help groups for anonymous failed entrepreneurs so valuable.”
Finally, the stigmatization of failed entrepreneurs can be found in all parts of the world, even in the United States, which is often lauded for its entrepreneurial spirit and culture of tolerating failures. For example, Sutton and Callahan (Reference Sutton and Callahan1987) quoted two executives of failed computer ventures as follows: “I feel as if I committed some kind of sin” and “I think that it is the equivalent of having accidently killed your spouse and then having to live with it the rest of your life.”
In sum, what the aforementioned examples show is that stigma seems to be a widespread consequence of business failure for entrepreneurs in most business and societal environments.
Project failure and the stigmatization of project team members
While entrepreneurs who failed with their businesses experience stigmatization from the external environment, failure of entrepreneurial projects can also lead to stigmatization within the organization. Indeed, some studies have explored stigmatization within organizations. For example, Kulik et al. (Reference Kulik, Bainbridge and Cregan2008) developed a model of stigma formation by association in the workplace. They proposed that co-workers’ initial impressions of an organizational member are formed when co-workers connect the member with a stigma source (e.g., mental illness, drug use, previous imprisonment, obesity, homosexuality, etc.) in their minds. The extent of stigmatization, however, depends on the characteristics of the co-workers and their relationship with the stigmatized person. Further, according to Kulik et al. (Reference Kulik, Bainbridge and Cregan2008), stigmatization is less likely if the organizational members’ association with the sources of stigma is voluntary and the stigmatizing attribute is not contagious. Clair, Beatty, and Maclean (Reference Clair, Beatty and Maclean2005) and Ragins (Reference 229Ragins2008) developed theoretical models on when employees decide to disclose or hide “invisible” stigmas (e.g., homosexuality). Both models emphasize the role of individual differences (e.g., risk-taking propensity, motives, self-verification processes) and contextual factors (e.g., organizational diversity climate, professional norms, supportive relationships) as important contingencies that determine the costs and benefits of revealing (potentially) stigmatizing characteristics in an organizational context. Although these studies did not (explicitly) focus on stigma emerging from project failures, the models are to some extent also applicable to this context. This is particularly important since in our interviews with managers and members of failed projects, some participants reported feeling stigmatized from both the environment within their firm and the external environment.
For example, in our study on project terminations within a large German technology company (Shepherd, Patzelt, Williams, and Warnecke Reference Shepherd, Patzelt, Williams and Warnecke2014), one manager described the reactions of his colleagues:
Probably the worst time was when you were basically talking to people within manufacturing or production because they obviously would not have heard about the failure. And then you had to explain to them and you just felt … you know, the way that they react: “You got it wrong, didn't you?”
One of his colleagues working on a different failed project feared that he might lose standing in and connection with the scientific community not only within but also outside the organization. He reported, “I mean, let's be clear about it: a year ago, we were the pioneers, and everyone in the community around the world knew it… . The fact is we have not gotten that far… . That hurt me personally.”
Similarly, in a newspaper interview, Joana Breidenbach, the founder of the Think-and-Do-Tank of the philanthropic donation platform betterplace.org, commented on the entrepreneurial climate in Germany, “And finally the societal climate is a hurdle to innovation. In the USA there is a completely different attitude towards risk. Failure is no flaw there. In Germany you are immediately stigmatized once a project has failed.”
It becomes apparent that the stigmatization associated with entrepreneurial failure is not only a consequence of business bankruptcy, but it can also appear in organizations where team members and leaders might be stigmatized once their project has failed.
Attributes of those who failed and stigmatization
While the earlier examples support the notion that there is considerable stigmatization of those who failed with both independent businesses and corporate entrepreneurial projects, there is also variance in the level of stigmatization across individuals. One example for which this variance becomes manifest is the labor market for failed entrepreneurs and managers. For example, Cannella, Fraser, and Lee (Reference Cannella, Fraser and Lee1995) explored the labor market consequences for managers of failed banks. Specifically, the study compared the 1993 employment status of 1,002 managers (whether they were employed or not) who were working for 417 Texas banks that became insolvent in the period from 1985 to 1990 to the employment status of a matched sample of 1,063 managers of non-bankrupt Texas banks. An interesting finding from the analysis was that only high-level executives (e.g., chairmen, CEOs, presidents) had a lower probability of employment when they came from bankrupt versus solvent banks, but this difference was insignificant for middle and lower-level managers, indicating that accountability plays a key role in stigmatization. However, in case of very prominent and extraordinary big failures, such as Enron, Wiesenfeld, Wurthmann, and Hambrick (Reference Wiesenfeld, Wurthmann and Hambrick2008) argued that stigmatization involves all levels of employees and that “merely having the name Enron on their resumes may stir up negative associations in potential employers, clients, and headhunters” (Reference Wiesenfeld, Wurthmann and Hambrick2008: 237). Finally, Hermalin and Weisbach (Reference 228Hermalin and Weisbach1998) found that CEOs of poorly performing firms are more likely to be fired when they are monitored by boards with high levels of independency.
The work by Wiesenfeld et al. (Reference Wiesenfeld, Wurthmann and Hambrick2008) offered further insights when managers and entrepreneurs might be stigmatized most for firm failures. First, the authors described the process of “singling out” – that is, the extent to which one specific person is held culpable and warranting denigration, leading to higher levels of stigmatization. The singling out effect is particularly strong when a failed manager “is indicted by a legal arbiter for an alleged misdeed, is accused by a large shareholder of ineptitude, or is highlighted by a journalist for general dereliction” (Reference Wiesenfeld, Wurthmann and Hambrick2008: 238). Typically, CEOs are most likely to be singled out from the management team as lead entrepreneurs might be in an entrepreneurial team setting because they symbolically represent the failed endeavor and had the most influence on its development. Further, singling out (and thus stigmatization) seems particularly likely when the individual has enjoyed “celebrity status,” has been attributed a willful misdirection of effort, and/or is perceived as selfish or greedy by the media and other observers (Wiesenfeld et al. Reference Wiesenfeld, Wurthmann and Hambrick2008).
In a study with 212 public observers of hypothetical failure scenarios of entrepreneurs (Shepherd and Patzelt, forthcoming), we found further explanations for why some entrepreneurs are more harshly evaluated for their business failures by the public than other entrepreneurs of failed businesses. In this study, we argued from an attribution theory perspective (Weiner Reference Weiner1985) to suggest that the extent to which observers attribute the cause of failure to the individual entrepreneur partly determines the harshness of evaluation. More specifically, we propose that the sexual orientation of the entrepreneurs of the failed businesses and the failed businesses’ use of environmentally friendly technology can bias observers’ evaluations.
First, we argued that a negative evaluation bias can emerge from failed entrepreneurs’ sexual orientation. Attribution theory suggests that negative biases are formed when observers attribute the reasons for failure more to causes internal to the entrepreneur rather to causes outside the entrepreneur's control. Sexual prejudice (i.e., negative attitudes toward an individual because of his or her sexual orientation [Herek Reference Herek2000: 19]) against homosexuals represents a general negative belief observers might hold against those who are homosexual, and this belief can lead them to interpret information related to the failed entrepreneur in an overly negative belief-reinforcing way. That is, our theory predicts that due to prevailing sexual prejudice in the public, observers are likely to evaluate failed entrepreneurs more harshly when they are homosexual than when they are heterosexual. In addition, our theorizing suggests that to the extent observers perceive homosexuality as not being based on genetic predisposition but rather as a choice, defect, or immoral behavior (Herek Reference Herek, Greene and Herek1994, Reference Herek2000; Herman Reference Herman1997), observers may attribute a lack of self-control and discipline to failed entrepreneurs.
In contrast, we argued that a positive bias emerges if entrepreneurs have good intentions when founding and running their business as indicated by the use of environmentally friendly technology (Shepherd and Patzelt Reference Shepherd and Patzelt2015). In this case, we suggest that in attributing the causes of failure, observers will acknowledge entrepreneurs’ good intentions and thus give them credit in their evaluations. For example, “observers might consider the general difficulty of developing new technologies, the lack of governmental support for environmental initiatives, and/or the general complexity of nature and ecosystems as external causes of failure, thus evaluating the entrepreneur less harshly” (Shepherd and Patzelt Reference Shepherd and Patzelt2015: 260). For failed entrepreneurs of ventures without environmentally friendly technologies, evaluators are more likely to attribute the causes of failure to entrepreneurs’ lack of effort, errors they made, or a lack of entrepreneurial ability, leading to harsher evaluations than for those who were developing environmentally friendly technologies.
Our data were supportive of these two hypotheses. Specifically, when testing the hypotheses with a scenario-based conjoint approach on a sample of 212 public observers from two German cities (Munich and Leipzig), we found that failed entrepreneurs who were homosexual were evaluated more harshly by observers than those who were heterosexual, while entrepreneurs whose ventures used environmentally friendly technologies were evaluated less harshly than those who did not use such technologies (coefficient = –0.686, p < 0.001). While we also expected that both effects might interact because observers’ prejudices about homosexuals might diminish the amount of credit given for the use of environmentally friendly technologies and thus reduce the positive bias from using such technologies, we did not find evidence of such an effect in our data.
To conclude, existing work indicates considerable variance in the stigmatization of failed entrepreneurs. The level of stigmatization appears to partly depend on the characteristics of the failed entrepreneur (e.g., sexual orientation, position within the firm/entrepreneurial team, media prominence) and his or her firm (e.g., use of environmentally friendly technology).
Attributes of those who evaluate failures and stigmatization
Existing studies suggest that the characteristics of those who evaluate entrepreneurs who recently experienced a failure help explain the extent of stigmatization. For example, Wiesenfeld et al. (Reference Wiesenfeld, Wurthmann and Hambrick2008) proposed that members of failed organizations (including those which went bankrupt) are observed by social, legal, and economic arbiters. Social arbiters “possess prominent and legitimate platforms for rendering assessments of firms and the individuals associated with them. These include members of the press (Chen and Meindl Reference Chen and Meindl1991; Hayward, Rindova, and Pollock Reference Hayward, Rindova and Pollock2004), governance watchdog groups, and academics” (Wiesenfeld et al. 224). In contrast, legal arbiters include state attorneys general, regulatory officials, stock exchange officials, judges, and juries – namely, individuals who contribute to making legal violations public. Finally, economic arbiters impact the extent to which others make economic transactions (e.g., hiring and payment decisions) with the entrepreneur. This group of evaluators includes members of the business elite, board members, members of professional networks, executive and personnel search firms, and so on. As Wiesenfeld et al. (Reference Wiesenfeld, Wurthmann and Hambrick2008) noted, arbiters’ evaluations can be based on rational analyses, but they are also influenced by idiosyncratic biases. For example, the evaluators may be biased toward using more recent information but neglect older information (Tversky and Kahneman Reference Tversky and Kahneman1974), or emotions may bias their judgment (Slovic, Finucane, Peters, and MacGregor Reference Slovic, Finucane, Peters and MacGregor2007). Specifically, Wiesenfeld et al. (Reference Wiesenfeld, Wurthmann and Hambrick2008) suggested that attribution errors may lead observers to “look for simple, stable, internal attributions for outcomes that may have complex causes, thus raising the likelihood that corporate failure will lead to negative judgments about the firm's leaders” (Reference Wiesenfeld, Wurthmann and Hambrick2008: 236).
In addition to biases, the study also suggests that observers’ social context, including norms specific for the arbiters’ profession (Chen and Meindl Reference Chen and Meindl1991), impact the level of stigmatization. As examples, Wiesenfeld et al. (Reference Wiesenfeld, Wurthmann and Hambrick2008) mentioned speed as a social norm for journalists when reporting about a failure and reporters’ and prosecutors’ role in serving and protecting the public might lead to the harsh punishment of those who violated social norms before or during the failure process. For example, the authors suggest that when journalists’ “audience is ‘out for blood,’ they may render particularly negative evaluations, but when they expect the audience to resist negative judgments, perhaps because of the goodwill they harbor for elites with high social capital (Adler and Kwon Reference Adler and Kwon2002), their evaluations may be less negative” (Reference Adler and Kwon2002: 236).
Our own work provides further evidence on the impact of observer characteristics on failure evaluations for entrepreneurs. Specifically, our study on how harshly 212 observers from the public judged failed entrepreneurs (Shepherd and Patzelt, forthcoming) provided a number of insights. As outlined earlier, an important finding of this study is that the harshness of business failure evaluations is higher for those failed entrepreneurs who are homosexual and lower for those failed entrepreneurs who adopted environmentally friendly technologies potentially because they are “given credit for good intentions.” However, as we argued, these effects are likely to be influenced by observers’ perspective taking – that is, “actively contemplating others’ psychological experiences” (Todd, Galinsky, and Bodenhausen Reference Todd, Galinsky and Bodenhausen2012: 95). Research has found that individuals who are better able to take others’ perspective are better at resolving conflict (Sessa Reference Sessa1996) and cooperating with others (Johnson Reference Johnson1975), while those who lack the ability to take others’ perspectives tend to be more aggressive and arrogant (Richardson, Hammock, Smith, Gardner, and Signo Reference Richardson, Hammock, Smith, Gardner and Signo1994) and suffer from social dysfunction more often than those high in perspective taking (Baron-Cohen Reference Baron-Cohen1995). Importantly, research has also explored the role of perspective taking in stigmatizing others and has shown that it can actually reduce negative evaluation biases (Galinsky and Ku Reference Galinsky and Ku2004; Todd, Bodenhausen, Richeson, and Galinsky Reference Todd, Bodenhausen, Richeson and Galinsky2011) and prejudice (Bodenhausen and Wyer Reference Bodenhausen and Wyer1985; Galinsky and Ku Reference Galinsky and Ku2004; Todd et al. Reference Todd, Bodenhausen, Richeson and Galinsky2011). Based on these previous studies, in our article, we argued that observers high in perspective taking interpret information about entrepreneurs of failed businesses more favorably than those low in perspective taking, including information about the sexual orientation of these entrepreneurs and the environmental friendliness of the technology they used for their businesses. More specifically, this more favorable interpretation reduced how harshly individuals evaluated failed entrepreneurs who were homosexual as well as failed entrepreneurs who had used environmentally friendly technology. While our data did not show the proposed effect for failed entrepreneurs’ sexual orientation, we found that evaluators high in perspective taking gave failed entrepreneurs who had used environmentally friendly technologies more credit for their good intentions and thus evaluated them less harshly than observers who were low in perspective taking. These findings suggest that perspective taking is an important characteristic of those who evaluate failure when it comes to the harshness of their evaluation and thus stigmatization.
Regional determinants of stigmatization
Since stigma is a social phenomenon that occurs when individuals violate normative expectations prevailing in the environment in which they operate, much work on the stigmatization of failed entrepreneurs has focused on explaining regional differences. At the regional level, research has explored the different forms and extent to which people are stigmatized when their entrepreneurial endeavors fail. First, bankruptcy laws specify the extent to which entrepreneurs are legally punished for failure. These institutional norms can be seen as a reflection of the societal attitude toward failed entrepreneurs, with more punishing laws reflecting higher levels of stigmatization in the society (Simmons, Wiklund, and Levie Reference Simmons, Wiklund and Levie2014). Second, there is variance in the visibility of failure based on regional/national regulations for disclosure, which impact to what extent stigmatization can lead to barriers to re-entry for entrepreneurs who have previously experienced business failure. Third, regions differ in their cultural sensemaking of failure which is, for example, reflected in the description of failed entrepreneurs in the media. Finally, the entrepreneurial ability of individuals differs across failure, which can lead to the stigmatization of those who failed when they try to raise capital for re-entry. We will now describe each of these regional differences in more detail.
Bankruptcy laws
An important topic in entrepreneurship research has been to understand how bankruptcy laws can stigmatize entrepreneurs for failure and, in doing so, prevent future entrepreneurial entry. Bankruptcy laws create stigma when entrepreneurs are extensively punished for business failure, for example, when there is no (or only far delayed) possibility of discharge from personal liabilities or when these entrepreneurs suffer civic or economic disabilities (Armour and Cumming Reference Armour and Cumming2008). Indeed, the stigmatizing effect of strict bankruptcy laws has been recognized by policymakers in various countries, and legal changes have been made to provide a more forgiving personal bankruptcy law that makes it easier for entrepreneurs who have gone bankrupt to obtain a discharge from indebtedness. With easier discharge, individuals are expected to more readily become first-time entrepreneurs because the anticipated consequences of failure have been reduced, and after failure, there is a greater chance of being able to start anew. For example, at the beginning of the century, the European Commission (European Commission 2003) urged its member states to revise personal bankruptcy laws to facilitate new entry for entrepreneurs of failed businesses. These changes have subsequently been introduced by several European governments (e.g., those in the Netherlands, Germany, and the United Kingdom [Armour and Cumming Reference Armour and Cumming2008]).
In a study on the stigmatizing effects of bankruptcy laws, Armour and Cumming (Reference Armour and Cumming2008) focused on self-employment data over sixteen years in North America and in fifteen European states. This study operationalized the extent to which bankrupt and indebted entrepreneurs are punished in different ways, including discharge from indebtedness (i.e., general availability and time to discharge), the level of personal items these entrepreneurs can retain from debtors, disabilities (i.e., loss of civic and economic rights for the period of bankruptcy), and composition (i.e., the difficulty a failed or indebted entrepreneur faces in reaching a discharge agreement with his or her creditors). The study found that the more stigmatizing (i.e., punishing) the national bankruptcy laws were for individual entrepreneurs, the lower the entry rates were in the respective country. These effects were both statistically significant and economically meaningful. The study also found that minimum capital requirements to found a limited liability company (a legal form of business that provides a shield for individual entrepreneurs’ personal bankruptcy consequences) negatively impact entrepreneurial activity. Interestingly, the study also found an interaction effect: highly stigmatizing (i.e., punishing) bankruptcy laws had a less severe effect on entrepreneurship when there were less minimum capital requirement for founding a limited liability company. It appears that the availability of limited liability somewhat counteracts the negative consequences of stigma over personal bankruptcy. Armour and Cumming's (Reference Armour and Cumming2008) results are consistent with other studies also finding that the nature of national bankruptcy laws explains a significant amount of variance in a region's entrepreneurial activity (Djankov, McLiesh, and Shleifer Reference Djankov, McLiesh and Shleifer2007; Fan and White Reference Fan and White2003).
While institutional norms, such as bankruptcy laws, can reflect the stigmatization of entrepreneurs who fail in a region (or nation), some authors have emphasized that there is variance in the extent to which these norms indeed translate into stigma. For example, Lee, Peng, and Barney (Reference Lee, Peng and Barney2007) applied real-options logic to the societal level in order to theorize about when more or less punishing bankruptcy laws impact entrepreneurial activity. More specifically, their model suggests that bankruptcy laws are more “entrepreneur friendly” (i.e., less punishing) when (1) there is the option for reorganization bankruptcy, (2) the bankruptcy procedure is quicker, (3), there is an opportunity for a “fresh start” in bankruptcy, (4) assets can automatically stay within the bankrupt business, and (5) managers of the failed business are provided the opportunity to continue working on their job during bankruptcy. However, as the authors argued, bankruptcy laws that provide these options have a less negative impact on entrepreneurial activity in societies with high uncertainty-avoidance cultures – that is, cultures in which people fear the risk of business failure because it is associated with high levels of shame or is even considered a criminal act. Lee et al. (Reference Lee, Peng and Barney2007) referred to the example of Japan, where the stigma of failure is so substantial that some managers of failed businesses commit suicide, suggesting that stigma from cultural norms is so strong that the impact of an entrepreneur-friendly bankruptcy law would only have a minor effect on entrepreneurial activity. In contrast, in low uncertainty-avoidance cultures like the United States, people are more likely to base their decision to take the risk of entrepreneurial action based on institutional norms because cultural norms already entail a high tolerance for failure. As an example, the authors quote managers of West Airlines, who, after their firm had filed for reorganization bankruptcy, motivated employees by emphasizing that business failure is “nothing to be ashamed of.”
Visibility context of business failures
In contrast to Lee and colleagues’ (Reference Lee, Peng and Barney2007) focus on explaining how national bankruptcy and stigma from cultural norms interact in explaining regional entrepreneurial activity, the study by Simmons et al. (Reference Simmons, Wiklund and Levie2014) proposed that the visibility of bankruptcy impacts how stigmatization influences entrepreneurship. In their view, the visibility of failure is reflected by the information repositories and information conveyed by the regulatory environment of a country. The authors argued that in a context in which societies strongly stigmatize entrepreneurs for business failure and information about these failures is easily available, there will be particularly low re-entry rates among these entrepreneurs. The authors also argued that when stigma is high but there is little visibility of information about their prior failures, entrepreneurs can regulate their stigma by delaying re-entry. In the same context, the authors suggested that re-entering as part of a founding team allows entrepreneurs to conceal part of the stigma from their prior failure, thus discouraging solo ownership entries. Further, describing a scenario in which entrepreneurs of a failed business face little stigma in society but operate in a high-visibility context for failure, Simmons et al. (Reference Simmons, Wiklund and Levie2014) suggested that these entrepreneurs of failed businesses are particularly encouraged to engage in corporate entrepreneurship. On the one hand, this form of re-entry allows such entrepreneurs to continue their entrepreneurial activity. On the other hand, the re-entry enables entrepreneurs to escape the negative consequences of information availability of prior failures, such as a lower chance to obtain a bank loan for an independent start-up (because banks will rely on the available information about prior failure in their lending decision). Finally, the authors argued that a low-stigma and low-visibility context provides the best setting for re-entry after failure.
Cultural sensemaking of entrepreneurial failure
Taking a cultural sensemaking perspective on business failure, Cardon, Stevens, and Potter (Reference 226Cardon, Stevens and Potter2011) analyzed regional variation in stigmatizing business failure based on reports in US newspapers. When making sense of an event, individuals seek relevant information in the environment, try to understand and interpret it, and then choose to act in a particular way based on this understanding and interpretation (Gioia and Chittipeddi Reference Gioia and Chittipeddi1991). Typically, sensemaking is contingent on the social context because understanding an event takes place while individuals interact with others in their environment (Weick Reference Weick1979). Therefore, from a cultural sensemaking perspective, “communities of people may scan the environment for instances of business failures and then interpret those failures, ascribing meaning to them, allowing others in the culture to act upon those interpretations” (Cardon et al. Reference 226Cardon, Stevens and Potter2011: 82). However, as Cardon et al. (Reference 226Cardon, Stevens and Potter2011) argued, there is likely heterogeneity across regions in terms of cultural sensemaking of business failure because formal and informal rules (e.g., laws and cultural values) vary. Specifically, the authors suggest that the population size of a region, its economic development, the general level of entrepreneurship, and the number of business bankruptcies might impact the cultural sensemaking of failures. Due to these differences in cultural sensemaking, media descriptions will differ across regions in their attributions of business failures as being either due to misfortune (i.e., reasons outside the control of the entrepreneur, including natural disasters or economic decline) or due to mistakes (i.e., reasons under the control of the entrepreneur, including errors, insufficient competency or motivation, or an unsuccessful business model). To test these propositions, Cardon et al. (Reference 226Cardon, Stevens and Potter2011) analyzed 281 articles that appeared in regional newspapers of six major US cities and reported on 389 business failures. Interestingly, the study found that in three regions (Chicago, New York, and Washington, DC), newspaper articles attributed failures substantially more to entrepreneurs’ mistakes, whereas in the other three regions (Atlanta, Austin, and San Francisco) substantially more of the failures were attributed to misfortunes. Further, the authors found that the regions where newspapers most often attributed failures to mistakes were the same regions where entrepreneurs described themselves as being stigmatized. Cardon et al. (Reference 226Cardon, Stevens and Potter2011) concluded that regions vary in both their attributions of business failures and the impact these failures have on the entrepreneurs involved. These results suggest that cultural sensemaking can explain regional variance in the stigmatization of those individuals whose entrepreneurial endeavors fail.
Indeed, our own work (Shepherd and Patzelt, forthcoming) is consistent with a cultural sensemaking perspective of entrepreneurs being stigmatized for their failed ventures. As we outlined earlier, in that article, we argued that entrepreneurs who were homosexual were more harshly evaluated for their failures by others compared to those who were heterosexual because observers who stigmatized those who were homosexual were more likely to attribute the failure to causes under the entrepreneurs’ control (as opposed to, for example, bad luck). However, in the statistical analysis, interesting regional differences emerged. While hierarchical linear modeling analysis showed a clearly statistically significant effect for the whole sample, the results became less clear once we split the sample by geographic region. Specifically, our data were collected from two major German cities – one in the state of Bavaria (Munich) and one in the state of Saxony (Leipzig) – and we found a significant effect only for the Munich subsample but not for the Leipzig subsample. While the cities are comparable in a number of characteristics (e.g., inhabitants, residence of universities), one major difference is that Munich is located in Western Germany, while Leipzig is located in Eastern Germany. Leipzig thus looks back to a forty-year history of communism after World War II when Germany was divided, and Leipzig was part of the German Democratic Republic (GDR). During GDR times, the communist regime counteracted religious tendencies in the population, which still today results in the diminished influence of the church and religion in general (Pollack Reference Pollack2002). Therefore, religious tendencies to stigmatize failed entrepreneurs who are homosexual are likely lower in Leipzig than in many parts of Western Germany, where religion plays a more dominant role in public life. Indeed, being the capital of the state of Bavaria, Munich's history is characterized by a strong Roman Catholic tradition, and religious influences are widely embedded in the local society. Given the Catholic Church's critical view on homosexuality (Gerhards Reference Gerhards2010), it is not surprising that observers from Munich evaluate entrepreneurs more harshly for their failures when they are homosexual than when they are heterosexual. Thus, our findings indicate that religious cultures may explain regional differences in the level of stigmatization failed entrepreneurs face.
Entrepreneurial ability
While most studies explaining the stigma of failure have focused on factors exogenous to entrepreneurial activity, such as cultural values and institutional norms, Landier (Reference Landier2005) developed a theoretical model that views stigma as an endogenous factor. The model assumes that first, entrepreneurs need to raise money to finance new ventures, and second, venture success depends on entrepreneurial ability and luck. Based on private information, entrepreneurs decide to continue the current venture or quit and start anew. This decision is influenced by the costs of capital for the new venture (i.e., after failure), which can be interpreted as a form of failure stigmatization. Landier's model reveals two types of equilibria. First, in regions with high levels of stigmatization (i.e., high costs of capital to start anew), entrepreneurs quit only ventures performing badly but persist with ventures performing moderately well even if the entrepreneurs possess high entrepreneurial ability. Since only the worst ventures are ended, the pool of failed entrepreneurs is of relatively low quality, which justifies the high costs of capital (i.e., higher stigmatization) for failed entrepreneurs. In this “conservative” equilibrium situation, there is an overall low level of high-quality entrepreneurial activity since ventures with moderate performance are continued. In contrast, in regions with low levels of stigma (i.e., low costs of capital), starting new ventures is relatively easy, leading entrepreneurs to more readily quit ventures with moderate performance in favor of starting more promising businesses. In this situation, the pool of entrepreneurs after failure has higher entrepreneurial abilities, thus justifying the low costs of capital. In this “experimental” equilibrium situation, there are more high-quality new ventures since those with moderate performance are abandoned. An important implication of Landier's model is that in regions where entrepreneurship operates at the technological frontier (e.g., Silicon Valley), the experimental equilibrium is socially more efficient, while in regions where entrepreneurship is more imitative (e.g., many European regions), the conservative equilibrium is more efficient. The model also outlines potential pitfalls when policymakers try to shift from one equilibrium to the other, as exemplified by the European Union's attempts to foster high-technology entrepreneurship. To illustrate these regional differences between Europe and the United States, Landier (Reference Landier2005: 27) quoted Eric Behamon, a French Silicon Valley entrepreneur:
Twenty years ago, as a student at Stanford, I realized how naïve I had been to believe I could start a business in France… . In France, you keep all your life the stigma of failure. Here [in Silicon Valley] it is the mark of your entrepreneurial spirit… . In France, it is common practice to give up on growth in order to limit risk. Here, when you start a venture, your goal is to become number one of your sector.
Landier (Reference Landier2005) also noted, however, that even within the United States there are considerable regional differences in the stigmatization of failed entrepreneurs. While in Silicon Valley entrepreneurial ability is high and failure is almost seen as a badge of honor, the opposite is true for other states. For example, he quoted W. Donaldson, President of Strategic Venture Planning, as follows: “The culture in Southeastern Virginia is that there is still a lot of stigma attached to failure. Business people in this area are very conservative.”(Landier, Reference Landier2005: 9)
In sum, existing studies have shown that regional differences explain considerable variance in the stigmatization from business failure. Explanations for these differences include national bankruptcy laws, the visibility of failures, cultural sensemaking, and the entrepreneurial ability of those living in a region.
Impression management of those who failed and stigmatization
Given the negative consequences of failure, research has investigated how to manage the situation in a way that minimizes damage. For example, Sutton and Callahan (Reference Sutton and Callahan1987) investigated four cases of bankrupt computer firms in Silicon Valley and explored how executives used impression-management strategies in an attempt to minimize stigma. In the best times, these companies had between 175 and 525 employees, and their unsecured debt ranged from $1.2 to $11.5 million at the time of bankruptcy. At that time, the firms were between 3.5 and 12 years old. Sutton and Callahan interviewed between four and seven people from each firm, including the CEOs, other former executives, creditors, and lawyers involved in the insolvencies. The study found that managers tried five different strategies to manage stigma: concealing the problem, defining the failure situation in a positive light, denying responsibility for the failure, accepting responsibility for the failure, and trying to withdraw from the situation. For example, Sutton and Callahan quoted the president and former president of a failed firm, both of whom refused to take responsibility (Reference Sutton and Callahan1987: 423–424):
The marketplace went away and the Japanese competition came on board.
The negative financial situation was completely because of external reasons.
The [former] president was unable or unwilling [to] do anything about it.
In contrast, as an example of those who accepted responsibility, Sutton and Callahan quoted the president and former president of another venture (Reference Sutton and Callahan1987: 424):
If I had been a little more experience, perhaps I may have been able to cope with it better.
Well, I guess I hold the board responsible of whom I was a member… . Yes, I admit that I was responsible for the problems we had with the [product]… . I am really sorry that it had happened. It didn't need to happen.”
While Sutton and Callahan's study is important because it clearly highlights different ways failed executives cope with stigma, it was not the purpose of the study to understand how effective the five impression-management strategies were.
In another study on how executives cope with the stigma of failure, Semadeni et al. (Reference Semadeni, Cannella, Fraser and Lee2008) explored the consequences of “jumping ship” as a stigma-management strategy. According to the authors, jumping ship referred to executives distancing themselves before the failure event either by leaving the firm before the failure, which enabled them to deny responsibility, or by relocating to a geographically distant area, which allowed them to hide their association with the failure because information flow diminishes over large geographical distances. Specifically, the authors proposed that because “stigma cannot be assigned until after the event and so exit prior to the event should loosen or sever the individual's link to the stigmatizing event” (Reference Semadeni, Cannella, Fraser and Lee2008: 559), those who jump ship experience less stigma and thus suffer fewer employment consequences than those who remain with a firm until it files for bankruptcy. Further, the authors argued that because jumping ship might be an effective stigma-management strategy, more executives will leave declining firms prior to failure than non-failing firms. Drawing on a sample of 437 failing Texas banks and a matched sample of non-failing banks (a total of 1,155 executives from failed banks and 1,171 executives from matching banks), the authors found support for both hypotheses. Thus, jumping ship not only seems to be an effective stigma-management strategy, but also one that is frequently applied.
Self-verification of those who failed and stigmatization
While Semadeni et al. (Reference Semadeni, Cannella, Fraser and Lee2008) explored how stigma and impression management impacts failed entrepreneurs in terms of labor market consequences, in Shepherd and Haynie (Reference Shepherd and Haynie2011), we built on self-verification theory to understand how people with different self-views after failure engage in very different impression-management strategies and how these strategies can contribute to maintaining psychological well-being after failure. Although entrepreneurs are well known for holding a positive self-view (e.g., being overconfident in their abilities to perform the tasks necessary for success [Hayward, Shepherd, and Griffin Reference Hayward, Shepherd and Griffin2006]), failure can certainly lead to a change in view. For example, in our article, we cited a journalist who interviewed a failed entrepreneur stating the following:
As anyone who has suffered through a business failure can tell you, the aftermath isn't pretty. You're wallowing in debt (often money that you've mooched from friends and relatives), your self-esteem has nose-dived into the depths, your future is in grave doubt and everyone around you is giving you that Elephant Man look—equal parts pity, revulsion, and fear.
In developing our theoretical model, we (Shepherd and Haynie, Reference Shepherd and Haynie2011) focused on self-view in terms of self-esteem – the belief that “one is an object of primary value in a world of meaningful action” (Becker, Reference Becker1971: 71). This self-esteem is most vulnerable to “failures in domains in which their self-worth is contingent” (Niiya, Crocker, and Bartmess Reference Niiya, Crocker and Bartmess2004: 801). This is often the case at work, where people's self-worth is highly dependent on how they perform at their work tasks (Kreiner and Ashforth Reference Kreiner and Ashforth2004; Pierce, Gardner, Cummings, and Dunham Reference Pierce, Gardner, Cummings and Dunham1989). For example, if the entrepreneur's identity is highly intertwined with that of the failing firm, his or her self-esteem is likely to take a bigger hit (Chreim Reference Chreim2002; Corley and Gioia Reference Corley and Gioia2004; Shepherd and Haynie Reference Shepherd and Haynie2011).
Although others might largely blame the entrepreneur for the failure, it is the amount of self-blame that impacts the drop in self-esteem. Indeed, some entrepreneurs are effective at using ego-protective strategies after failure, which can help them maintain (or at least reduce the impact on) self-esteem (Baumeister Reference Baumeister1993; Blaine and Crocker Reference Blaine and Crocker1993; Greenberg and Pyszczynski Reference Greenberg and Pyszczynski1985). For example, by attributing blame for the failure to external causes, the entrepreneur can protect his or her self-esteem from the failure event (at least in his or her own mind). However, not all entrepreneurs deny responsibility, and to the extent that they accept responsibility for this negative outcome, their self-esteem will be lowered (Brewin and Furnham Reference Brewin and Furnham1986; Crocker and Major Reference Crocker and Park1994; Tennen and Herzberger Reference Tennen and Herzberger1987). Entrepreneurs are likely to accept greater responsibility for the failure when the environment for business is perceived to be favorable (e.g., infrequent failures, low uncertainty, low dynamism, low hostility) and when the firm is new and/or small (Shepherd and Haynie Reference Shepherd and Haynie2011). This discussion of self-esteem and self-view is important because the entrepreneur's self-view – ones strongly held beliefs and feelings about oneself (Swann Reference 230Swann, Suls and Greenwald1983) – impacts the strategies he or she uses to maintain high psychological well-being. The impression-management strategies individuals use can impact their psychological well-being. However, as we will see, those entrepreneurs with low self-esteem pursue a completely different path to psychological well-being than those with high self-esteem (Shepherd and Haynie Reference Shepherd and Haynie2011).
Specifically, entrepreneurs of failed businesses who maintain high self-esteem are likely to pursue the strategies detailed by Sutton and Callahan (Reference Sutton and Callahan1987), which we described earlier, in order to maintain psychological well-being. Nevertheless, there is nothing really surprising about these impression-management strategies: they work to make sure people maintain a positive impression of themselves (or, if this does not work, they avoid people altogether). Although we may assume that people want others to have a high impression of them, there is ample evidence that this is not the case, at least for those who hold a negative view of themselves. We have already established that business failure can create a negative self-view, and these entrepreneurs are likely to use impression-management strategies in a different way to maintain or enhance their psychological well-being.
The basic tenets of self-verification theory is that “people are motivated and take actions that confirm their own feelings and beliefs with regards to self, and they also seek out and interact with others who share their self-view” (Shepherd and Haynie Reference Shepherd and Haynie2011; Swann Reference 230Swann, Suls and Greenwald1983). That is, people take actions to stabilize their view that they hold of themselves (Secord and Backman Reference Secord and Backman1964; Swann Jr Reference Swann2005). As we argued in Haynie and Shepherd (Reference Haynie and Shepherd2011), this includes taking actions (and having interactions with others) to confirm rather than change a negative self-view. This is opposite the view that individuals always use impression management to make themselves seem more positive in others’ eyes; rather, they want to be authentic in that they want people to see them as they really are. Therefore, those who hold a negative self-view after business failure are likely to enhance psychological well-being using impression management to have others verify this negative self-view in a number of important ways.
First, people who hold a negative self-view often seek out and choose to interact with those who also have a negative impression of them. In one study of 84 university students, Swann (Reference Swann1992) found that those who had a negative self-view preferred to interact with evaluators who provided an unfavorable impression of them than evaluators who offered a more favorable impression. One individual in the study indicated that “I think #1 [the unfavorable evaluator as compared to a favorable evaluator] is a better choice because …he sums up basically how I feel” (Swann Reference Swann1992: 395). This demonstrates that in seeking feedback about the self, individuals tend to seek self-confirming social evaluations (McCall and Simmons Reference McCall and Simmons1966).
Second, when faced with those who hold an opposing positive view, individuals tend to actively try to change others’ view to one that is consistent with their self-view (Swann and Ely Reference Swann and Ely1984). They do this to try and correct the others’ mistaken views of them to eventually gain self-confirming feedback (Curtis and Miller Reference Curtis and Miller1986). Therefore, they may avoid family and friends that hold an overly positive view of them and seek out those that recognize the seriousness of the consequences of their failure and their role in the failure. Alternatively, they may attempt to change the view of those who hold a positive view of them (including family) by using impression management to communicate the negative consequences of the failure and to take responsibility for the failure, which might require disavowing the notion that the failure was someone else's fault and/or that it was beyond their personal control.
Finally, when facing a disconfirming view (in this case, someone else holding a positive view of them), entrepreneurs might flee the situation. For example, in a study of college students, Swann Jr. and Pelham (Reference Swann and Pelham2002) found that those with a negative self-view were more likely to terminate relationships with roommates who held a favorable impression of them. This indicated the use of withdrawal as a strategy to maintain a stable self-view (even when that self-view was negative). There is also anecdotal evidence that entrepreneurs become withdrawn, particularly with family, after a business failure. A possible explanation for this withdrawal, at least in part, is that they are avoiding non-self-confirming evidence. Although self-verification explains why entrepreneurs may use impression-management strategies to change or avoid others’ favorable impressions of them, the question then becomes to what effect? What is the impact on the individual of successfully confirming one's negative self-view?
To address these questions, Shepherd and Haynie (Reference Shepherd and Haynie2011) drew on the notion of psychological well-being and its associated needs for correspondence, relatedness, and autonomy. It appears that in the aftermath of failure, entrepreneurs with a negative self-view can enhance their psychological well-being through several impression-management strategies. First, although individuals have a need for competence, for those who hold a negative self-view, impression-management strategies aimed at enhancing others’ view obstructs the process of learning from the experience and thus gaining mastery over the task (Covington Reference Covington1984; Deci and Ryan Reference Deci and Ryan2000; Dweck Reference Dweck2000). Rather, the individual seeks “real” and “honest” feedback to enhance competence, and given a negative self-view, this is most likely to come from others who also hold an unfavorable impression. As long as this negative feedback is perceived as building competence (Deci and Ryan Reference Deci and Ryan1985), it can help build psychological well-being.
Second, although individuals often think they can satisfy the psychological need for relatedness by being liked by others, it is often more than simply being liked. The need for relatedness is satisfied by relationships that are “close, mutually caring, and supportive” (Crocker and Park Reference Crocker and Park2004). Such relationships involve give-and-take interactions (Baumeister and Leary Reference Baumeister and Leary1995; Collins and Feeney Reference Collins and Feeney2000; Deci and Ryan Reference Deci and Ryan2000), and these relationships develop at a deep level such that the individuals truly “see the person for who they are” – an authentic relationship. The problem of a positive impression-management strategy used by someone who holds a negative self-view is that it hides the authentic and therefore obstructs the opportunity to form deeper relationships that help satisfy the need for relatedness. Indeed, in such instances, positive impression-management strategies can lead to isolation (Deci and Ryan Reference Deci, Ryan and Kemis1995; Pyszczynski, Greenberg, Solomon, Arndt, and Schimel Reference Pyszczynski, Greenberg, Solomon, Arndt and Schimel2004), thereby thwarting the need for relatedness and hindering (or delaying) a “bounce back” in psychological well-being. For entrepreneurs of a failed business who hold a negative self-view, psychological well-being is likely enhanced by interacting with those who also hold an unfavorable impression of them because these individuals see them as they really are, which is the basis for an authentic relationship.
Finally, and related to the previous point, needs for autonomy can be satisfied by the creation and maintenance of authentic relationships with others (Crocker and Park Reference Crocker and Park2004; Hodgins, Koestner, and Duncan Reference Hodgins, Koestner and Duncan1996). Furthermore, feeling obligated to implement positive impression-management strategies to maintain relationships with other people has the effect of thwarting the need for autonomy. That is, individuals may feel forced to engage in behaviors that they would otherwise choose not to engage in (Deci, Eghrari, Patrick, and Leone Reference Deci, Eghrari, Patrick and Leone1994). In contrast, for those with a negative self-view, by interacting with those who really see them as they are, entrepreneurs can take ownership of the failure and thereby maintain (or take back) control of their lives going forward (Haynie and Shepherd Reference Haynie and Shepherd2011). Therefore, recovering psychological well-being after a business failure may involve impression management, but rather than impression management always being used to create and maintain a favorable impression of the self among others, it appears to be more about using impression management to achieve a fit between the entrepreneur's self-view and others’ view of the entrepreneur (consistent with Swann Reference Swann1992). In the case of a negative self-view after business failure, impression-management strategies may be used to bring others’ view of the entrepreneur into alignment (or to avoid interaction). Although changing others’ impressions so they are less favorable may seem counterintuitive (and even destructive), it appears to help entrepreneurs enhance their psychological well-being.
Finally, as we argued in Haynie and Shepherd (Reference Haynie and Shepherd2011), not only does impression management as self-verification enhance recovery by building psychological well-being, it can also help with learning from the failure. First, in forming a negative self-view after failure, the entrepreneur is accepting responsibility for the failure. Accepting responsibility indicates that the entrepreneur's actions have influence (i.e., he or she has control over his or her future) and that there is an opportunity to learn from the failure and exact that learning to achieve a different outcome next time. This learning can begin the process of reversing the effect of the failure event on the entrepreneur's self-view. In addition, in seeking others that blame the entrepreneur for the failure and avoiding those who do not, the entrepreneur is in a better position to form authentic relationships with people who are open and honest. When it comes to analyzing the events leading up to the failure, these relationships can be a source of valuable information to facilitate learning. That is, through his or her interactions with these authentic others, the entrepreneur is able to form and further develop a plausible account of the failure.
Discussion
Implications for entrepreneurs and managers
Our review of the literature on stigma from entrepreneurial failure and its consequences entails a number of important implications for practicing entrepreneurs and managers of failing firms.
First, in order to avoid stigmatization from failure, it is insightful for entrepreneurs and managers to know how their personal characteristics and the characteristics of their firm impact others’ evaluations of failure. To some extent, entrepreneurial failure is an “invisible” stigma (Clair et al. Reference Clair, Beatty and Maclean2005; Ragins Reference 229Ragins2008) – that is, it is not visible for all observers immediately (unless they seek information on the person). Therefore, in many situations, entrepreneurs can decide whether their failure should be revealed or hidden to observers. It appears that those who hold higher positions in their failed firms, are more representative of their firm, enjoy “celebrity status,” or are homosexual, are better off to hide their past failures when trying to avoid stigmatization. In contrast, those whose failed ventures signaled good intentions (e.g., pursued environmentally friendly technologies) seem to be given credit by observers and suffer less stigmatization when deciding to reveal their failure to others. In this case, it seems advisable to jointly communicate both the failure and the good intentions to observers.
Second, in addition to understanding whether to reveal a failure to others at all, it is insightful for entrepreneurs and managers to know that observers will react differently. It seems that revealing a failure to individuals who tend to simplify complex situations, who are subject to social norms that foster such simplification (e.g., speed for journalists or protecting the public for reporters and persecutors [Wiesenfeld et al. Reference Wiesenfeld, Wurthmann and Hambrick2008]), and who have difficulties taking others’ perspectives are particularly likely to come up with harsh failure evaluations. Failed entrepreneurs and managers might carefully consider revealing a failure openly to these groups of people.
Third, it is also insightful for practicing entrepreneurs and managers to know that different regional environments react differently to failures. Some entrepreneurs can choose where to start their ventures. In particular, when the business model includes high failure risk (e.g., in high-technology sectors), they might either consider starting their firms in regions where stigmatization is relatively low (e.g., those with “forgiving” bankruptcy laws and low public disclosure of failure, cultures that accept failure), or they might consider moving to such regions when moving on with their careers after failure.
Fourth, a particularly important factor for entrepreneurs and managers to consider across regions is entrepreneurial ability because in regions with higher entrepreneurial ability, stigmatization for failure seems considerably less (Landier Reference Landier2005). Indeed, in regions like Silicon Valley, firm failure is seen as a normal part of trial-and-error learning. This finding highlights that moving to such regions is only advisable for those whose personality and attitude accept failure as something normal. Partly due to missing stigma, failure can occur frequently to even the same individual. As Max Levchin, cofounder of PayPal, noted (www.npr.org):
The very first company I started failed with a great bang. The second one failed a little bit less, but still failed. The third one, you know, proper failed, but it was kind of okay. I recovered quickly. Number four almost didn't fail. It still didn't really feel great, but it did okay. Number five was PayPal.
Fifth, once failure becomes unavoidable or has already occurred, entrepreneurs and managers have a number of impression-management strategies they can use to minimize stigmatization. These strategies include concealing the problem, defining the failure situation in a positive light, denying responsibility for the failure, accepting responsibility for the failure, and trying to withdraw from the situation. However, it is important to note that a systematic study of how these strategies are effective in mitigating negative stigma consequences is still lacking. For example, Sutton and Callahan (Reference Sutton and Callahan1987) illustrated that withdrawing from the situation for too long may worsen it because it can sustainably damage relationships with stakeholders and thus harm one's future career. Thus, entrepreneurs and managers might be careful in using the impression-management strategies described earlier to escape stigmatization.
Sixth, one stigma-management strategy that seems to be both frequently applied and effective within the labor market is jumping ship – that is, leaving the firm once the failure seems unavoidable (Semadeni et al. Reference Semadeni, Cannella, Fraser and Lee2008). Entrepreneurs and managers, however, should again be careful to apply this strategy because it remains unclear what other consequences it may entail, for example, for the psychological well-being of those who jumped ship (e.g., feelings of guilt) or for their personal relationships (e.g., with those who remained in the failed firm or supported it).
Finally, an important implication for entrepreneurs and managers is that the effectiveness of impression-management strategies for escaping stigma from failure depends on their self-view. While most work on impression-management strategies and their effectiveness have implicitly assumed a positive self-view, there is also the possibility that failing or failed entrepreneurs and managers hold a negative view of themselves. It seems helpful to be aware of one's own self-view when selecting the right strategies. Further, entrepreneurs and managers should also be aware of potential conflicts that can arise between using impression management to enhance personal well-being and moving a bankrupt firm forward (e.g., when restructuring after bankruptcy). If their negative self-views suggests impression-management strategies that conflict with the future recovery of a failed firm, exiting this firm might be the best option.
