Organization Strategy and Leadership
Faculty of Business Studies
University of Dhaka
SUBMITTED BY
Munzir Rahee
Roll: ZR-134-074
OSL-7th Batch, BBA-1st Year
Course: OSL-101 (Understanding Business)
SUBMITTED TO
Rashedur Rahman
Associate Professor
Department of Organization Strategy & Leadership
Faculty of Business Studies
University of Dhaka
Understanding Entrepreneurial Failures
An entrepreneur is an individual who takes on the initiative to start and manage a business,
typically with the goal of achieving financial success and fulfilling a specific vision or goal.
Entrepreneurs are known for their ability to identify opportunities, innovate, take risks, and
organize resources effectively to create and grow a business. Entrepreneurship is the ability
and readiness to develop, organize and run a business enterprise, along with any of its
uncertainties in order to make a profit. The most prominent example of entrepreneurship is
the starting of new businesses.
The past twenty years have witnessed an explosion of research investigating entrepreneurs
and their actions with considerable focus on finding out what leads to success in
entrepreneurial ventures. However, some academics have argued that entrepreneurial
failure has not been given adequate attention and that, in order to understand the subject of
entrepreneurship it is important to adopt a more holistic approach. In other words, instead
of studying only the various factors that lead to entrepreneurial success, it would be beneficial
to also focus on entrepreneurial failures. Failure is fundamental to understanding
entrepreneurship as it can be a rich source of learning and a crucial step towards developing
entrepreneurial expertise. Studies on failure can assist policy makers, educational institutions,
and venture funding organizations to better understand and meet the requirements and
demands of existing and budding entrepreneurs. Such arguments have sparked an interest,
especially in the past decade, in examining failure in entrepreneurship. Studies have used a
variety of theoretical approaches to examine failure. These include, for example, behavioral,
psychological, leadership competency, financial, pedagogical, cultural, social, strategic
management, and policy approaches. Even though theoretical approaches to studying failure
in entrepreneurship are diverse, research on failure is fairly recent and has focused much on
what causes failure, so that the odds of firm failure can be minimized. The remainder of this
section clarifies the definition for entrepreneurial failure used in the study. This clarification
section is followed by a review of the existing literature on causes of failure, and it, in turn, is
followed by a discussion on why research on failure in entrepreneurship is limited.
Cause of failure
Identifying causes is important because high business failures negatively impact the national
economy, rate of employment, and can also lead to negative consequences for individual
entrepreneurs. These studies highlight that the failure of firms can happen for a variety of
reasons. Causes of entrepreneurial failure are examined in this literature review because
identifying reasons behind failure may form a part of entrepreneurial learning from failure. In
this subsection, the earlier work on key causes of failure is organized into six categories.
First come the financial problems that include inadequate firm start-up capital, liquidity
constraints, and debt management issues as key financial issues leading to firm failure.
Inadequate start-up capital is a result of an entrepreneur’s lack of knowledge and difficulty in
getting loans from banks and other financial institutions because she or he does not have a
prior business, profit and/or bank transaction record. This situation means that the
entrepreneur often relies on informal finance such as help from family and friends, personal
savings and/or ongoing employment generated income. Ample personal financial resources
such as inheritance money can significantly increase the chances of firm survival. Further,
availability of adequate funds prevents the entrepreneur being distracted from developing
the business as a result of cash flow pressures, and of adequately meeting the requirements
of fixed and working capital. The demands to give customer credit, bad debts and assuming a
debt instrument too early, along with insufficient funds in the firm due to low profit, also
make up the financial reasons that lead to venture failure. Moreover, underestimating the
financial requirements, not having specific financial goals, plans and bookkeeping in place,
not having a contingency plan to implement in financial difficulty, and poor relations with
venture capitalists are also cited as financial causes of firm failure.
Second cause of failure is problems with employees and customers that lead to venture
failure. Employees lacking experience and skill, having negative attitude, being dishonest and
lacking discipline are reasons cited behind venture failure. Additionally, the entrepreneur’s
tendency of “quick to hire slow to fire”, not being able to dismiss employees that create
problems for the firm, also contributes to failure. Inability to manage large numbers of
employees and failure to hire competent people are also reasons cited for failure. Customerrelated problems include lack of trust and confidence in the firm or its products and services,
delay in payments to the firm, failure of a firm to focus on its customers, and a lack of
customers.
Third cause of failure relates to issues with planning that include lack of or inadequate
business planning, insufficient research, and not having specific business goals. Firms that
take a more proactive stance towards planning and strategy formulation can diminish the
odds of venture failure. In terms of research, not spending effort and time on determining
the market demand for product or service, not identifying the strategic location of the
business, and not carrying out adequate investigations before making an investment are cited
as research related reasons which cause failure.
Fourth cause of failure relates to the leadership, abilities and role of the owner-manager.
Owner-manager lack of expertise and experience, for example, inadequate knowledge, not
having enough training, and not having management abilities and experience, lead to venture
failure. Having functional skills in areas of marketing, operations, finance, human resource,
and/or personal skills such as the ability to identify one’s own weaknesses and strengths,
ability to progress the firm rather than personal goals, ability to use external help and advice
when required, and ability to create a sustainable firm help in reducing the chances of firm
failure. Moreover, an owner-manager’s egoistic approach involving abuse of trust and power,
overconfidence about the firm’s prospects, inability to create clarity and balance within a
team, inability to fight competition, inability to adjust in crisis, inaccurate judgements,
inability to maintain good relationships with stakeholders and giving into the trappings of
success are also cited as owner–manager related causes of entrepreneurial failure.
Fifth cause of failure centers around issues related to the product or service offered by the
firm. Problems with product or service quality can push a business out of the market.
Additionally, issues with product/service design, timing of launching the product/service,
unsuitable distribution or selling techniques, too much reliance on certain types of customers,
as well as failing to locate the right market niche for the product or service, can all lead to
entrepreneurial failure.
Finally, unfavorable environmental factors external to the firm can also lead to
entrepreneurial failure. Poor market conditions such as slow growth and size, position of the
overall economy, the state of the industry, negative societal attitude, government policies,
late government payments, poor sharing of information by government, bureaucracy,
unethical tactics used by competitors, presence of bigger and foreign competitors with scale
advantages, and disastrous events are all aspects of the external environment challenge that
have been cited as reasons for entrepreneurial failure.
Overall, these six causal categories for failure collectively point to those factors that can
trigger of entrepreneurial failure.