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Although failure in entrepreneurship is pervasive, theory often reflects an equally pervasive antifailure bias. Here, I use real options reasoning to develop a more balanced perspective on the role of entrepreneurial failure in wealth creation, which emphasizes managing uncertainty by pursuing high-variance outcomes but investing only if conditions are favorable. This can increase profit potential while containing costs. I also offer propositions that suggest how gains from entrepreneurship may be maximized and losses mitigated.
Schumpeter linked wealth creation directly to the entrepreneurial process, through which "new combinations" of factors of production are introduced into an economic system (1950: 83). Entrepreneurship creates new processes, puts underutilized resources to new uses, initiates the formation of new industries, and otherwise unleashes "gales of creative destruction" (Schumpeter, 1950: 83). It has been linked to creation of employment, increases in productivity, and improvement of living standards, and to economic growth in general (Baumol, 1993; Birch, 1979). Consequently, scholars often regard entrepreneurship as quite a good thing (see Birley, 1986, and Lumpkin & Dess, 1996). Embracing entrepreneurship, however, implies accepting all that goes with it, particularly the recognition of a priori irreducible uncertainty (Venkataraman, 1997). One manifestation of uncertainty is highly variable-or risky-returns (Lubatkin & Chatterjee, 1994:110). Risk can become manifest in failure (Miller & Reuer, 1996). The popular (and sometimes the scholarly) enthusiasm for risk taking in the entrepreneurial process wanes considerably at the prospect of failure (Baker, Aldrich, Langton, & Cliff, 1997). Researchers mourn the cost of new business failure, attempt to root out its causes, and seek to determine how it can be avoided (e.g., Kets de Vries, 1985; Reynolds, 1987, Romanelli, 1989; Statistics Canada, 1997). Social norms can render "losing" shameful (Tezuka, 1997), and expensive public policies help new firms avoid failing by providing them with resources. In short, a tendency to view failure negatively introduces a pervasive bias in entrepreneurship theory and research. As March and Shapira observe, "Society values risk taking, but not gambling, and what is meant by gambling is risk taking that turns out badly" (1987: 1413).
My objective is to offer ideas that might help redirect the theoretical focus in entrepreneurship from a preoccupation with achieving success and avoiding failure to a more integrated view of how the two phenomena are...