The Failure Guy

A quarter of U.S. entrepreneurial ventures fail after a year. More than half don’t make it past year five. Given that, how do entrepreneurs react to a downturn in their financial situations? Do they cut their losses and close up shop, or do they hang in there? That may depend on the makeup and the closeness of the team involved in decision-making, particularly if they are friends. A new report from Wharton and City University of London finds that “hope trumps fear” when it comes to entrepreneurs dealing with potential failure. “Which Matters More? Group Fear Versus Hope in Entrepreneurial Escalation of Commitment,” was authored by Wharton management professor Sigal Barsade, entrepreneurship and organizational behavior scholar Tori Huang, and Vangelis Souitaris, entrepreneurship professor at the Cass Business School at City University of London.

The researchers analyzed data from a startup simulation using 66 entrepreneurial teams across 569 decision‐making rounds to study the role of feelings in entrepreneurship. They joined the Knowledge@Wharton radio show on SiriusXM to talk about their study and how it offers hope in uncertain times. (Listen to the podcast at the top of this page.)

An edited transcript of the conversation follows.

Knowledge@Wharton: Why did you choose this particular area for research?

Sigal Barsade: Entrepreneurship obviously is an incredibly exciting area, and much of the work in entrepreneurship has focused on things like how to get funding. But what has only started to recently get focus is such an inherent part of entrepreneurship, which are the emotions involved in it. Entrepreneurship is incredibly emotional; there’s so much uncertainty. As a team, we were really interested in, “Well, wait a minute. How do the emotions of the entrepreneurial team influence things?”

Knowledge@Wharton: Why are behavior and emotions so important to study?

Vangelis Souitaris: I’m an entrepreneurship professor, and emotions within entrepreneurship is a new area, especially in the context of eventual termination. Many firms fail. It’s part of the game in entrepreneurship. We know a little bit about post-failure emotions, especially grief, but we don’t know anything about pre-termination emotions. Is there anything that you feel and makes you stop or makes you keep going? This is why we focused on emotions — in particular hope and fear — because they are uncertainty-related emotions, and entrepreneurship is uncertain. That’s why we picked them.

“Entrepreneurship is incredibly emotional; there’s so much uncertainty.”–Sigal Barsade

Knowledge@Wharton: I would think the group friendship dynamic would play a significant role in decision-making from day one.

Tori Huang: That is true. We know a lot of entrepreneurial teams that are friends, and that’s how people started becoming a team. But there actually isn’t much research on that. What we’ve found is that, first of all, teams that are friends in general are more likely to escalate their commitment to something that is currently failing.

We also found a moderating effect of friendship in the relationship between group fear and de-escalation of commitment, which is basically quitting the venture that seems to be failing. So, friendship plays a role in that relationship, but not so much in the other relationship we examined, which is the relationship between group hope and escalation of commitment.

Knowledge@Wharton: Do you find cases where one of the entrepreneurs may think it’s time to end the venture but stay because of the friendship?

Barsade: Yes, so this main effect of friendship that we found is that they stay in longer. You’re friends. Also, it could be on the positive side. You just enjoy being together, and that makes you want to continue more, so that is what leads to that.

The other result that Tori mentioned was that there was a differential. If you were friends and the group felt fearful, you were more powerfully going to end the venture. In that case, what that signals is that friends might be paying more attention to each other’s emotions than acquaintances are. They’re like, “OK, I get it. You’re upset. Fine. Let’s just stop.” But I think that what was really interesting here is, again, the relationship between people. People don’t come into work tabula rasa, not caring about who they’re working with. They care about who they’re working with, particularly in an entrepreneurial startup type of situation.

Knowledge@Wharton: Can you determine through your research or other research whether there is potentially a higher level of entrepreneurial success when the team is a group of friends, compared with a business relationship where you don’t have that emotion as much involved?

Souitaris: Yes, friendship is important. That’s why people actually work together. There are a lot of friend teams, and also there are a lot of family business teams. People trust each other when they are friends and when they work with their family. On the other hand, complementary strangers are also very useful for entrepreneurship. Sometimes our best friends are very similar to us, and we need complementary skills.

“Friendship is important. That’s why people actually work together.” –Vangelis Souitaris

The literature is in balance there. To be honest, I believe that complementary strangers are thought to be more important. So, we advise people to get out there and get out of their (group of) friends. Not ignore their friends, but search harder in order to find complementary people in order to create entrepreneurial teams.

Huang: I think being friends in a team also brings other downsides, particularly when it comes to the kind of situation that we examine in this study where things are not really going well. If people stick together just because they’re friends, then that doesn’t necessarily always lead to the best results in terms of business performance. I think being friends in a team is kind of a double-edged sword. It works in some ways and brings merits in some ways, but also disadvantages in other ways.

Barsade: To round that out, there was a study that showed that working with friends, doing a startup with friends was not necessarily the best idea unless you had worked with them before. If you’re just hanging out with your buddies and know them from a social way, that may not translate at all to a business, and it actually could be worse.

Knowledge@Wharton: Were you able to find out whether the stress of the business situation had an impact on the stress of the friendship at times?

Huang: I don’t think we will be able to say that from this study. But I was running all the lab sessions, so I observed all these teams face to face. Some teams, particularly at the end of the study, had to discuss whether they were going to quit. Sometimes some people want to, some people don’t. That could be a very difficult conversation. I am not sure if that actually has an impact on their friendship after they left the lab. But from what I saw, it could become very difficult.

Souitaris: In general, when things go wrong, friendship goes wrong as well. That’s one of the downsides of working with friends. You can lose your friends, apart from losing the business at the end.

Barsade: We had people come into the lab in groups of three, and they did a very elaborate simulation of an entrepreneurial startup. But what was so exciting about this study is that most of the work that has been done to date on escalation of commitment to a losing course of action has been sort of in your head like, “Oh, if you were doing this, what would you do?” And it was only one shot. In this case, we could watch them through multiple rounds — up to 21 rounds for some of the teams. After every single round, they got feedback saying how they were doing, and they recorded how much hope and fear they felt at that point.

What that allowed us to do is kind of capture the wild, in the lab, how did fear rise and fall? How did these effects occur over time? We also videotaped everything, so it allowed us to then measure engagement, which we found out ultimately explained our results.

Knowledge@Wharton: Even the understanding through each one of those rounds did not realistically change the dynamic of staying in, having that commitment?

Barsade: It did, and it didn’t. Because people did leave. What we were looking at is to see how fast they left, why they left. By the way, there was one team that did succeed in the sim because the reason for them to stay in was that they could win up to about $450. We set it up similar to entrepreneurships, which is that it’s hard to get it, but it’s a big win at the end. One of the most exciting things, though, was that what we found with group hope and fear went above and beyond how much money they had put in the sim. And that was because they were putting in their own money.

“In the current state of affairs of the world, it is good to have hope and not to let fear drive us more than hope.” –Tori Huang

Huang: This is a slightly different point, but I also wanted to say that we were also very much inspired by the escalation of a commitment literature, which is a very rich literature that examined the phenomenon of escalation of commitment. In the past, what we knew about this phenomenon is that people actually stay in, they persist in failing courses of action. The people stay in because they feel trapped and they feel hopeless. It’s a very different type of situation from the one we examined.

Particularly in entrepreneurship, I would like to think that people persist hopefully, and because of that, they are engaged with the task. They keep going. They strive. And that’s why some of them eventually enjoy success, and not that people feel stuck in that situation and just stay in hopelessly. That would not be something we would like to see. It turns out that what we found with this study is that people do persist hopefully, not hopelessly. For entrepreneurship, I think that is a good finding.

Knowledge@Wharton: How does this research affect entrepreneurial ventures, especially among friends, moving forward?

Souitaris: The main point is that hope trumps fear. When you’re afraid, you are going to stop. When you are hopeful, you’re going to try harder. In the end, hope dies last. As long as there’s hope, people will just go on and invest more.

In our scenario, there was a study of escalation of commitments while the business was going down, and you were observing when they were going to stop. The problem with this is that we can never tell that ex ante so often. So, the difference between the escalation of commitment and persistence is really hard to tell before the actual outcome. What we found is that if you’re hopeful, you escalate and you might lose more. But in one out of 66 cases we had, they actually escalated and persisted more, and they won the jackpot in the end. So, it can go both ways. What we tell the entrepreneurs is that, yes, if you are hopeful, you are going to escalate more, and hope dies last. Most of the time, you have to stop yourself because you are wrongly hopeful, and you’re going to invest more and more, and you’re going to expose yourself financially. But there are some times that hope can actually bring you where it can be interpreted as persistence to overcome obstacles, and you can win big time in the end.

Barsade: You know, it’s funny. We looked at this and looked at fear, we said, “OK, fear should matter because when we’re afraid, we move away from things. Hope should matter because we move towards it.” Both mattered, as my colleagues noted, but the fact that ultimately hope trumped fear is such a powerful result and, I think, such a powerful, practical view for not only entrepreneurs, but any business people and in our time. I think that right now there’s so much fear in our environment. We’re focused so much on what could go wrong and hiding. The fact that what we found was that hope mattered more in this context and ultimately did lead to success for some people — it’s relevant across the board.

Knowledge@Wharton: Tori, do you agree with Sigal that there is an element of this that can play outside of the entrepreneurial world?

Huang: Yes, I would like to think that. As I said, I view this study and its result to be very positive, in such a way that I’m a strong believer in hope and not fear. In the current state of affairs of the world, it is good to have hope and not to let fear drive us more than hope. That is, I think, beyond what we found in the study. I guess I’m saying a bit more than I should or I could with the results of the study, but that is my belief and my personal feeling about this study. And I hope that it will give people some positive thoughts about hope and not fear.