Newbie Entrepreneurs: Not Too Cocky to Learn

Entrepreneurs are often regarded as extremely confident and optimistic, predisposed to forge ahead even when conditions turn sour. At the same time, learning from feedback may be important for first-time entrepreneurs as they test out their new identity and fitness as founders. Just how sensitive are they to the informed opinions of others?

Specifically, asks researcher Sabrina Howell, are poor performing entrepreneurs who are informed about how badly they did more likely to abandon their ventures than poor performers who are not informed?

“While learning in the sense of improvement is fairly straightforward, learning in the sense of type revelation is not, particularly in the context of high-growth entrepreneurship,” says Howell, a researcher at New York University Stern and National Bureau of Economic Research.

Management learning is a challenging area to study empirically. Howell turned to a novel setting to explore first-time founders’ sensitivity to feedback: new venture competitions. Sponsored by local governments, universities, corporations, foundations, or investor groups, these competitions have become an important part of the start-up ecosystem. They give entrepreneurs seeking external financing the chance to pitch their business plans to a panel of volunteer judges.

Howell gathered data on 4,328 new ventures participating in 96 competitions in 17 states between 1999 and 2015. In 61 of the competitions, ventures were informed only that they had won or lost, and otherwise did not learn where they stood relative to their peers. In 35 of the competitions, ventures were privately informed of their ranking. She then linked the ventures and founders to external data on financing events and career history.

Howell discussed her research project at the Economics of Entrepreneurship conference at Smith School of Business.

Willingness to Abandon

Her main finding is that inexperienced founders are, in fact, sensitive to low-stakes feedback. Howell found that negative feedback from judges increased abandonment by male entrepreneurs by 12 percent.

Female entrepreneurs, who tend to less confident and optimistic than their male counterparts, were even more responsive to feedback. Within women-led ventures (21 percent of the sample), negative feedback increased abandonment by about 24 percent.

Other findings:

• Ventures that were not yet incorporated, were based on software rather than hardware, or had not yet received external private financing were all more responsive to negative feedback.
• Founders were less responsive when there were fewer judges or when they had solid private information on criteria for which they received negative feedback.
• Entrepreneurs with riskier technologies seemed less responsive to feedback than those with what Howell calls “incremental ideas.”

Howell says her research has policy implications. Governments have two levers to support entrepreneurship: money via grants or tax credits, and information. With this study, Howell shows the value in helping inexperienced entrepreneurs receive credible feedback on the viability of their ideas. “My result implies that among the 1,603 unique below-median losers in the no-feedback competitions,” she says, “an additional 192 should have been abandoned, beyond the 1,186 that were in fact abandoned.”

In those cases, the inexperienced founders could have made the well-informed choice between regrouping to fight another day or giving up the entrepreneurial dream for a corporate life.

— Alan Morantz