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Study Shows Business is Better the Second Time Around

By | 08.01.14

Study Shows Business is Better the Second Time Around

While a failed first attempt at starting and running a business can be an expensive and deflating lesson learned, a new study suggests entrepreneurs should give business ownership a second try.

Allison Schrager, in a July 28 story for Bloomberg Businessweek, reported on a study by University of Michigan and Stanford economists that showed business owners who try a second time to start a business after failing with their first go-around were more likely to succeed on the second attempt.

Schrager noted that the attrition rate for new businesses is high nationwide: one-third survive two years or less, and half keep their doors open for five years. After 15 years, only 25 percent are still in business. So there is no shortage of potential study subjects. As for the study itself, researchers Francine Lafontaine and Kathryn Shaw looked at retail business in Texas from 1990 to 2011. Why retail? Because while tech startups are sexy, they aren’t the norm. Most new small businesses are retail ventures.

And in Texas over that 21-year period, 2.4 million retail businesses opened their doors, while 2.2 million boarded them up. Of all the startups and shutdowns, 75 percent belonged to first-time owners.

According to Schrager, the failure rate in Texas was higher than the national average for small business, as half of the new starts in Texas closed within two years. However, Lafontaine and Shaw found that what happened to 29 percent of the owners after they shuttered their first business should give hope to any failed, but determined, first-timer. While 71 percent walked away from self-employment after giving it one shot, the study showed that the 29 percent who tried again were more likely to be successful the second time around. Further, the likelihood of success increased with each successive attempt from the second through the tenth, and beyond.

Schrager wrote that the findings led the researchers to the conclusion that the lessons learned from business failure are invaluable, and can be crucial to the success of subsequent statup attempts.

“They even found that serial entrepreneurs are successful in new types of businesses,” Schrager wrote. “Experience owning a hair salon translates into more success at running a clothing store. (There’s one important exception: First-time-restaurant owners, no matter their business background, tend to fail; serial restaurateurs are more successful.)”

The conclusion of this study also stands contrary to research published in the April edition of the Harvard Business review showing that failed first-time entrepreneurs are just as likely to fail in subsequent attempts to start a business. That study, of 576 startups in the U.K., concluded that those who started and failed at consecutive businesses had a greater inability to learn from past mistakes than those entrepreneurs who took on multiple business opportunities at the same time.

As Schrager observed: “Looking at a different population, over a different time period, in a country with different regulatory structures, the Texas research concluded that serial entrepreneurs were in fact quite able to learn from past mistakes. Among people who are willing to try again, the odds of success rise.”

Reference:

Schrager, Allison. Failed Entrepreneurs Find More Success the Second Time; Bloomberg Businessweek. July 28, 2014.

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