Entrepreneurial failure rate in
startup ventures is a phenomenon whose negative effects can be turned into positive
lessons on what should be done to ensure the failure rates are lowered over
time. This can only be done effectively by building a wealth of knowledge
through subsequent enquiries into the causes of the failures and an exploration
of possible solutions to these limiting factors. This research intends to
unravel this phenomenon by gathering valuable information from entrepreneurs
and industry stakeholders who have gained first hand experience with startup
ventures. The study shall make use of surveys and interviews to gather data
from various respondents while conducting various reviews and analysis on
already published information relevant to satisfying the objectives of the
research.
How to lower entrepreneurial
failure in startup ventures
The failure of start up ventures
affects both the entrepreneurs involved and the economy as a whole. This study
shall aim at exploring the causes of these failures with the aims of clearing
any outstanding doubts with respect to the cause effect relationship between
various factors and the rate of entrepreneurial failure in startup ventures.
The study shall also seek to explore ways in which the factors identified can
be dealt with in order to minimize the negative effects they may be having on
various startup ventures. This study shall also take note of outstanding issues
that are not solvable within the scope of this study with the aim of making
recommendations for subsequent research in order to ensure that the body of
knowledge built with subsequent studies shall be sufficient to guide
entrepreneurs along the path of success. The study shall be based on the
premise that: Comprehensive
enquiry ventures will eventually lead to lower entrepreneurial failure rate in
startup ventures.
This research shall therefore endeavor to answer the
following questions:
·
What external factors
contribute to venture failure?
·
What managerial and
operational factors contribute to venture failure?
·
How can these factors
be countered to lower the rate of venture failure?
Rationale
Venture startup has been the
starting point of most businesses in the private sector and is therefore a
crucial point of focus for any forward-looking society (Cardon, Stevens and
Potter, 2010). In most countries, the private sector is the engine that fuels
the economy and the United States is not an exception (Cardon, Stevens and
Potter, 2010). The failure of startup ventures is therefore potentially
detrimental to the economy and due attention must be given to the phenomenon
with the aim of building a strong knowledge base that can ensure that venture
capitalists are adequately informed to undertake ventures that are likely to
result in successful businesses. Although this subject has attracted
considerable interest among scholars, attention has mainly been focused on
determination and measurement of various performance dimensions in the
ventures. Moreover, the few studies focusing lowering entrepreneurial failure
have proved to be insufficient in the face of the rapidly changing market environments.
The information required by investors is prone to changes as the market forces
change. Issues that may have arisen in the past five years may no longer
warrant any meaningful attention whereas new issues may have arisen that
require thorough analysis and interpretation to ensure greater understanding.
This research shall therefore aim
at exploring factors in the domestic market as well as relevant global business
environmental factors that may influence the goings on in the domestic market
in relation to the subject of this study. The study is expected to produce a detailed evaluation of
factors that lead to entrepreneurial failure and how these factors can be dealt
with to reduce the rate of entrepreneurial failure. This information is
expected to provide invaluable information for entrepreneurs intending to start
up new businesses by providing general guidelines of the factors they would
need to look out for to avoid failure of the venture. This study shall also be
beneficial for scholars intending to interrogate the matter further, or for
those that may intend to conduct studies into other related fields since this
study will be keen to point out areas of weakness that require further research
as shall be identified in the course of the study. The study will enrich the
existing body of knowledge by highlighting recent occurrences in the market and
evaluate their contribution to entrepreneurial failure rates of startup
ventures. The guiding hypothesis for this study shall be: Comprehensive
enquiry into ventures and the reasons for their failure will eventually lead to
lower entrepreneurial failure rate in startup ventures.
Entrepreneurial failure and its
causes has been a subject of various academic enquiries with many of the studies
dedicated to determining the accuracy of the measurement methods used in
determining the rates of failure of startup ventures (Cardon, Stevens and
Potter, 2010). Considerable attention has also been given to the business
formation processes and the structural formation of startup ventures (Cardon,
Stevens and Potter, 2010). The importance of startup ventures is pegged to the
enormous contribution made by private businesses on the overall economy with an
estimated employment of about 10% of the working population (Evans and
Leighton, 1989). This emphasized Birch’s findings that stated that of about one
million businesses are started up in the United States annually (Carter,
Gartner, and Reynolds, 1996). This
underscored the potential contribution of these startups in the economy in the
event that the founders’ dreams are realized. In their research, Carter,
Gartner and Reynolds (1996) noted that about 4% of the working population in
the United States
has at some point been involved in the process of starting up a venture. This
indicates a society that is keen on exploring entrepreneurship as an avenue for
self actualization.
Enquiries into the behavior of
nascent entrepreneurs (entrepreneurs still seeking to establish a business)
revealed that lack of understanding of their potential and the demands of the
business as one of the leading causes for entrepreneurial failure (Carter,
Gartner, and Reynolds, 1996). Murphy, Trailer and Hill (1996) dedicated their
research to performance measurement aimed at creating understanding into the
success or failure of new ventures. They fronted the view that accurate
measurement was instrumental to theory development and subsequently form
valuable policy guidelines to investors intending to engage in new venture
startups. They further acknowledged the challenges faced by researchers citing
inadequacy of the required data as well as inadequate established measurement
parameters in entrepreneurship (Murphy, Trailer and Hill, 1996). The lack of
universal measurement parameters is prompted by the varying definitions and
objectives of entrepreneurship used by various scholars. The lack of
universality leads to the generation of varying and often conflicting
measurement parameters that further erode the reliability of information
gathered about entrepreneurship (Murphy, Trailer and Hill, 1996).
The most commonly used performance
measurement parameters are borrowed from the organization theory and strategic
management theory. The organization theory consists three measurement parameters
as follows: the goal based parameter which entails the use of the set goals in
evaluating the organization’s performance; the systems approach which is useful
in measuring the performance of several systems that run simultaneously and in
synergy; and the multiple constituency approach which emphasizes the
satisfaction of the various stakeholder interests in the organization (Murphy,
Trailer and Hill, 1996). The goal based approach proves difficult to use when
considering various goals that may seem contradictory. This approach as well as
the system approach also fails to recognize the varying views of different
stakeholders hence necessitating the formation of the multiple constituency
approach (Murphy, Trailer and Hill, 1996). The use of strategic management in
measuring the performance of organizations entails the ranking of various
functions in a hierarchical manner as outlined below. The central factor in the
organizations is considered to be financial performance. This factor is
considered the most important although it does not denote effectiveness in all
parameters of the organization (Murphy, Trailer and Hill, 1996).
The next factor comprises factors
that are believed to lead to the financial performance. These factors comprise
product quality and market share, both of which constitute operational
performance. The third factor focuses on stakeholder interests. In
their review of measurement methods embraced by researchers, Murphy, Trailer
and Hill (1996) found that the most frequently used performance dimension to be
efficiency which was used 30 times (comprising return on investment, equity,
assets, and net worth, as well as gross revenues per employee) as compared to
growth (29 times) which comprised changes in market share, employee, sales, labour
expense to revenue, and change in net income; Profitability (26 times)
including return on sales, gross profit margin, net profit margin, pretax
profit, net profit level, client’s estimate of incremental profits and net
profit from operations; size (15 times)and Liquidity (9 times) including cash
flow level, ability to fund growth, sales level, quick ratio, current ratio,
cash flow to investment and total asset turnover; Success/Failure (7 times)
including return on net worth, respondents’ assessment, researcher’s
assessment, and discontinued businesses; market share (5 times), and Leverage
(3 times) including times interest earned and debt to equity ratio (Murphy,
Trailer and Hill, 1996).
Further review reveals the
importance of taking into consideration the level of development in a market
when determining the scope and independence of a startup venture. Startup
ventures, like all other business are prone to changing market dimensions and
must be able to adapt to the changes swiftly in order to guarantee their
survival. The resource based view depicts organizations as bundles of resources
which can be used to ensure the performance of the set goals. These resources
need to be engaged in a manner that ensures synergy, hence resulting in
disproportionately high output for the organizations (Eisenhardt and
Schoonhoven, 1996). This resource-based view has also formed the bulk of
arguments in support for the formation of strategic alliances between
organizations within a given market. Through its perspective of envisioning
firms’ as a combination of resources, it advocates for organizations to
evaluate their strategic position in a bid to identify the sets of resources
that they may be in need of, then identify firms in possession of the lacking
resources with a view to forming strategic alliances that would ensure superior
performance for the organizations involved (Eisenhardt and Schoonhoven, 1996). According
to Eisenhardt and Schoonhoven (1996), the level of benefit derived from a
strategic alliance is largely influenced by the level of vulnerability of the
organizations in question.
Startup ventures in mature markets
tend to face great challenges due to the low capacity to differentiate owing to
the high technological advancement that has seen product development reach
unprecedented levels (Eisenhardt and Schoonhoven, 1996). Moreover, the level of
rivalry in such markets is often so high that startup ventures find it
difficult to make headway into the market (Eisenhardt and Schoonhoven, 1996).
The difficulty to ensure product differentiation coupled with lack of an
already established market share puts new ventures in volatile positions making
it necessary for them to explore ways of ensuring strategic strength at
affordable costs through entering into strategic alliances with already
existing firms or with other startups (Eisenhardt and Schoonhoven, 1996). However,
it is important to note that only those startups started with moderate or
little resources at their disposal may need such alliances. Some startups
happen to be well funded and in possession of the resources they need to
penetrate a market and thrive in it. Such ventures would certainly not need to
engage in any alliances. Research shows that a majority of startup ventures
often need to get into strategic alliances of one form or another in order to
ensure its survival and growth in the more developed markets (Eisenhardt and
Schoonhoven, 1996). According to Eisenhardt and Schoonhoven (1996), firms that
start and run in isolation tend to be in higher danger of failure than those
that form strategic alliances with other players in the market. They further
stated that the level of necessity for strategic alliances is directly
proportional to the number of competitors in the market, market development,
and the innovativeness of their strategies (Eisenhardt and Schoonhoven, 1996).
Focus on the rationale for the
formation of strategic alliances is crucial since the focus of this study is
the lowering of failure of startup ventures and the use of strategic alliances
has been identified as one of the ways that can ensure businesses survive and
thrive in the market. In their publication, Eisenhardt and Schoonhoven (1996)
sought to expound on the ways of identifying the market stages in order to
determine the necessity of entering into strategic alliances by businesses. They
classified markets into emerging markets, growth markets, and mature markets.
Emerging markets are generally new markets and are on average below seven years
old and normally small in size with sales lower than $ 100 million annually
(Eisenhardt and Schoonhoven, 1996). Growth markets are characterized by high
rates of growth, normally higher than 20% per annum and with sales much higher
than those of the emerging markets. Mature markets experience modest growth
rates (lower than 20%) and normally follow the growth market stage. Mature
markets are further characterized by high concentration of industries that
offer products that are similar or which can easily serve as substitutes for
each other. They are also characterized by high technological development. This
significantly reduces the product life cycle hence lowering the prospects of
recouping investment made in product development before other market players
can develop similar products or close substitutes. The heightened risk
discourages attempts at product differentiation hence firms tend to focus on
competition using price and brand awareness (Eisenhardt and Schoonhoven, 1996).
This poses potential danger to startup ventures that aim to establish
themselves and operate independently with the aim of establishing their own
brand identity.
According to Eisenhardt and
Schoonhoven (1996), the need for strategic alliances increases with progress
from emergent markets, through growth stages and to mature markets. The United States
can be categorized as a mature market and therefore bears a higher need for
strategic alliances than many markets around the world. This special
characteristic is expected to be of great significance when tackling the
objectives of this study. In their study, Cardon, Stevens and Potter (2011)
focused not only on the causes of failure of startup ventures, but also on the
perceptions of the society towards such eventualities. They justified their
focus on societal perceptions arguing that these perceptions play a crucial
role in the promotion and development of an entrepreneurial culture that is
bound to ensure higher levels of startups and the success of these ventures (Cardon,
Stevens, and Potter, 2011). For instance, societies that perceive
entrepreneurial failure negatively encourage the proliferation of some measure
of stigmatization of the entrepreneurs hence discouraging them from going into
ventures that can be perceived as high risk. On the other hand, where a society
embraces entrepreneurial failure as a normal occurrence, and possibly a source
of valuable lessons for all, entrepreneurs tend to be more willing to undertake
risky projects without fear of stigmatization (Cardon, Stevens and Potter
(2011). This often translates into the growth of high performing industries
that make invaluable contributions to the societies and the economies
concerned.
Venture failure results in the loss
of more than merely the amount invested in the venture. It also translates to
loss of social capital, devaluation of the leading entrepreneurs in the
affected ventures, and possible stigmatization by the society (Cardon, Stevens
and Potter, 2011). When evaluating the causes of startup venture failure, it is
important to focus on the management practices of the venture entrepreneurs in
a bid to establish whether the major causes of failure stemmed from them or
were as a result of various environmental factors beyond their control (Cardon,
Stevens and Potter, 2011). Further emphasis needs to be on in-depth analysis
into the failure of startup ventures with the aim of building a useful
knowledge base that would be of help to upcoming entrepreneurs to help them
avoid past mistakes and be successful in their ventures (Cardon, Stevens and Potter,
2011). Analysis of failure of ventures, according to some scholars is also
instrumental in establishing cause-effect relationships between the performance
of business and various policies that governments effect from time to time
(Cardon, Stevens and Potter, 2011). Some of the common policies known to affect
the success or failure of startup ventures include the effecting of various
monetary policies and fiscal policies that affect the ability of ventures to
raise the finances required for their operations (Cardon, Stevens and Potter,
2011). These policies affect the ability of the businesses to access credit
from financial institutions or from investors. The requirement to ensure
sustainable environmental management around the world has also seen many
governments introduce measures that require safe disposal of waste with a bias
towards encouraging recycling of wastes (Cardon, Stevens and Potter, 2011).
Where such policy recommendations prove radical, it may mean the demise of some
ventures.
The research shall be conducted
using both primary and secondary data sources. The primary data shall be
collected using surveys and interviews. The primary data shall mainly provide
perspectives of the respondents and shall mainly involve a qualitative view of
the subject matter, taking into account the unique experiences of the
respondents identified to take part in the survey. The surveys and
questionnaires shall be administered to individuals who have either overseen
successful startup ventures, have been part of failed ventures, or are involved
in influencing the various policies that impact on the market forces and on the
businesses operating in the economy. Such policy makers will mainly be found in
the relevant government agencies. The use of both interviews and surveys is
crucial due to the fact that interviews tend to be more detailed and are able
to ensure the respondents offer more insight. However, since interviews tend to
be time consuming, surveys shall be used to ensure as many respondents are
practically possible (in the scope of this research) can participate. This will
help ensure that the views to be contained in the final report reflect on a
broad consensus in the society. The secondary data shall mainly be obtained from
industry publications by the government and other players, bureau of statistics
and other relevant sources whose integrity shall be found to be trustworthy.
Knowledge of prevailing research
philosophies is instrumental in ensuring the integrity and objectivity of the
recommendations of any research (Research Philosophies, 2009). It ensures the
appreciation of the biases as shaped by the respondents past experiences as
well as cultural settings hence enabling the researcher to remain objective
despite the biases. It also enables the researcher to focus on their own biases
in order to take precautionary measures to ensure that their personal biases do
not adversely affect the objectivity of their findings and recommendations
(Research Philosophies, 2009). The philosophies also ensure that the researcher
maintains a certain level of coherence in their presentation, data analysis and
report presentation. This research shall assume the realist perspective. This
is because the subject data shall constitute the quantities and numbers as
shall be deemed fit to satisfy the objectives of the study as well as a fair
amount of subjective interpretation as shall be gathered from the respondents
concerning the questions posed to them.
This research shall assume a
multifaceted approach. It shall seek to incorporate the views of various
stakeholders in the economy with the entrepreneurs as the focal point. The
population for consideration shall therefore be split as follows: entrepreneurs
that have pioneered successful ventures, entrepreneurs whose ventures failed,
and other stakeholders. Out of the thousands of entrepreneurs whose views will
be crucial for this research, the research shall narrow down on conducting a
survey on 200 entrepreneurs where 100 will be from the former category and 100
from the latter category of entrepreneurs. Interviews shall be conducted on a
selected few entrepreneurs (about 10 from each category) in order to capture
their sentiments in depth and to better appreciate the written surveys whose
answers may not be able to provide the benefit of emphasis. 30 stakeholders
shall be interviewed with 70 placed on survey. These stakeholders shall mainly
be sourced from various industry coordinating bodies and government agencies.
The survey questionnaires shall be drafted separately for each of the three
populations. The total sample size shall therefore be 300 persons only. This
will enable drafting of comprehensive questionnaires without giving unnecessary
baggage to the respondents by providing question sections that they may not be
interested in.
The mode of conducting the
interview shall be modified to reflect the language and unique communication
requirements of the respondents. The researcher shall take due care to ensure
that the schedules arrived at suit both respondents and the study’s tight
schedule. There shall be use of tape recorders to enable smooth interviews
without the strain of taking notes and interfering with the flow of the interview.
However, consent to use the recorders shall be sought from the respondents
beforehand. The disadvantage of using surveys is that it does not provide ample
opportunity for clarification of questions and answers. The survey questions
shall be put forth in the simplest language possible to minimize on
misinterpretation or any lack of understanding. Surveys often prove convenient
to the respondents since they can answer them at their own time and pace. It
also gives them an ample opportunity to synthesize their views before writing
them down. However, surveys can be disadvantageous in that there is no
opportunity to provide clarifications where the questions asked are not
understood. The respondents are equally not given a chance to clarify their
answers where the researcher finds them to be vague. The responses also tend to
be low due to the lack of personal contact in cases where the surveys are
administered through email. On the other
hand, interviews offer the advantage of ensuring that the researcher and the
respondents understand each other perfectly, hence making the data collected
more reliable. The constant follow-ups also help reduce the chances of default
by the target respondents. However, it if often time consuming and extremely
limited on the amount of data that can be collected with the same amount of
resources.
Analysis shall be both qualitative
and quantitative. Quantitative analysis shall provide insight into various
trends in failure rates in the market in the recent years. These shall be
compared and contrasted with the changing trends in various factors that may
have had an effect on the changes observed. Qualitative analysis shall be the
thrust of this study. It shall provide an insight from first hand information
from those who have presided over successful and failed ventures and their
input into the reasons for such eventualities will be invaluable for this
research. These views shall be codified in order to ensure the research can
capture the frequency with which given factors are cited. This will enable
reliable observation based on the personal feelings of the respondents. The
presentation shall be done using various visual aids such as graphs and charts
in order to ensure higher levels of clarity on the information presented.
One of the key challenges that
could alter the course of the study is the unavailability of the information
sought in relation to changing trends in entrepreneurial failure in recent
years. Where such a situation arises, the research shall extrapolate the trends
based on available data bearing in mind the changing trends in the prevailing
market forces and environmental factors. Other challenges may involve lack of
responses from those being surveyed. To cater for this challenge, more survey
questionnaires shall be sent to cater for the ones whose responses shall fail.
The main resources required will be
the telephone expenses necessary to schedule interviews and correspond with
some of the survey correspondents, finances to move up and down to conduct
interviews and to gather secondary data from various offices; and the Internet
to gather more secondary data and for correspondence with the survey
correspondents.
Research
Philosophies, (2009). Research
Philosophies- Importance and Relevance. Retrieved April 15, 2011 from: http://www.networkedcranfield.com/cell/Assigment%20Submissions/research%20philosophy%20-%20issue%201%20-%20final.pdf
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M.S., Stevens, C.E., & Potter, D.R. (2011). Misfortunes or Mistakes?
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Evans,
D.S., & Leighton, L.S. (1989). Some empirical aspects of entrepreneurship. The American Economic Review. 79(3), 519-535
Murphy,
G.B., Trailer, J.W., & Hill, R.C. (1996). Measuring Performance in
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Business Research. 36, 15-23
Carter,
N.M., Gartner, W.B., & Reynolds, P.D. (1996). Exploring Startup Event
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Eisenhardt,
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