Invest in Success or Failure?How early-stage investors evaluate an investment opportunity based on the previous entrepreneurial failures or successes of the entrepreneur

Abstract

Investments are essential for new ventures to accelerate their growth and scale up. However, convincing and receiving investments can be challenging as early-stage investors base their decisions on multiple factors. One of these factors is prior entrepreneurial experience. The investor’s perception of the role of previous entrepreneurial success is clear. In contrast, researchers have shown conflicting views regarding the role of entrepreneurial failure and the final funding decisions. On the one hand, some support that failure results in valuable learnings that will be an asset for funding future ventures. On the other hand, some argue that investors perceive failure negatively. Although the learning outcomes of failure can be considered a positive effect, the research on how investors perceive it is still limited. This research sheds light on the interplay between prior success & failure and investigates how investors perceive it. A between-subjects experiment was performed on early-stage investors. The results present a clear relationship between prior entrepreneurial success and the funding decision and show that investors value more the variety of experiences (success and failure) compared to only success experiences. In addition, another finding is that experienced entrepreneurs are more likely to receive more funding those novice entrepreneurs. The findings contribute to the theories of investing decision & sense-making and have implications for the broader understanding of investor cognition. Finally, the domain of prior entrepreneurial experience is examined in light of the entrepreneurial learning field.