Documentation from the "Fail Forward - is failure victory" seminar
The seminar in Brussels on November 9th was arranged by the Swedish Foundation for Small Business Research (FSF), the Swedish Agency for Econimic and Regional Growth (NUTEK) and the Swedish Institute for Growth Policy Studies (ITPS). The seminar was all about the art of failing. It started with the OECD's and European Commission's view upon failures. After that it was time for the academics' view and last we heard what representatives from two countries thought on the matter, the Netherlands and Sweden. Professor Pontus Braunerhjelm from Sweden was moderator.
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• Sonia Herrero Rada, DG Enterprise and Industry, European Commission
Herrero Rada explained what the Commission does to help those who fail their business. A need is perceived: the flash eurobarometer shows how people feel towards risk taking and towards giving failed entrepreneurs a second chance. This survey shows the most feared risks when setting up a business: 1 going bankrupt, 2 losing property, 3 uncertain income and as number 6 personal failure. For highly educated the most fearful thing was the uncertain income. The speaker compared the results with those of a recent youth survey by JA-YE (10,434 respondants in 25 countries: 18 EU member states and 7 in Eastern Europe and Balkans). JA-YE survey reads that 78% of young people think that entrepreneurship is "cool", 49% feel confident about their ability to start a business and 58% think they would be able to start again after failure. Herrero Rada said that in 2002 the Commission carried a study on bankruptcy and a fresh start, look at the legal concequences of insolvency, make an overview and a comparison across Europe. The study was done on many levels: the general public, the businesses and the financial communities. The study was discussed with national experts in order to establish indicators and benchmarks on issues such as early warning mechanisms, the legal system, fresh start and the stigma of failure. An ongoing project by the Commission intends to promote a better understanding of business failure, as well as encouraging prevention among entrepreneurs "in the danger zone". Germany is an example where they work with second chance in the good way. They have a handbook for restarters, a network of restarters under way and the START-Award.
5 of 6 speakers at the seminar: Sonia Herrero Rada, Marcus Stanley, Morten Larsen, Wilhelm von Seth and Jeannine de la Bursi-Franssen.
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• Morten Larsen, OECD -SME and Entrepreneurship Division
OECD is currently working on an entrepreneurship policy indicator questionnaire project. There are three main objects of the project, banruptcy, entrepreneurship education and taxation. The project is a commitment to get better data on entrepreneurship policy, especially on the national level. Larsen only showed the bancruptcy data on the seminar. The purpose is not to show whether the bancruptcy laws are good or bad. They just want to collect better data nationally. One way to work is to have early warning systems. The are some countries working with these systems like the Netherlands, Germany, UK and Greece. Types of early warning are self tests, accounting tools, training courses, information targeted at financially distressed companies and specialised advice. seven governments financially support specialised advise to financially distressed companies (Early Warning). How many countries know how many companies receive specialised advice? How many companies survive? 1 country knows and it's the Netherlands! More data is needed!! The preliminary findings show that bankruptcy systems and legislation vary greatly from country to country. Outcome also vary greatly from country to country. Support for saving financially distressed companies, possibilities for reorganising a company and chances of getting a fresh start vary from country to country. Very little is known about the exact relationship between elements of bankruptcy legislation and entrepreneurial activity (Effect of early warning systems? Reorganisations? Liquidation procedures?) The project will hopefully straighten those question marks.
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• Johan Wiklund, professor, Jönköping International Business School
Severity of punishment for entrepreneurs who fail is important
because
it influences the start-up rates and the possibilities for learning. The implicit assumptions are that people learn from failure. 36% of all Swedes that asks for debt restructuring are failed entrepreneurs. Only
4% of the Swedes are entrepreneurs, so their debt is larger. Personal bankruptcy in Sweden equals lifelong payback to pre-bancruptcy creditors (1 year discharge in the UK, 6 years in Germany). Wiklund said that a survey showed that the question "Would you do business with somebody that had failed?" 70% of the Swedes said NO. It's 12-15% higher than in other countries. The consequences of failure is higher in Sweden than in other countries and it fits poorly into the Swedish model. The consequence is the imbalance between risk and reward. In Sweden we don't compensate the downside risk of being self-employed. It's impossible to know before hand the outcome of entrepreneurial efforts. There is genuine uncertainty. The severe punishment for entrepreneurship failure reduces the willingness to try. There are large potential losses compared to other career alternatives. Studies show that entrepreneurs have strong emotional attachments to their business. Grief becomes an obstacle of learning from failures.Psychological theories on grief recovery can be used for understanding how and when entrepreneurs learn from failure. Handling failure should integral part of the entrepreneurship courses at the university. The Swedish stigma of failure reflects true economic punishment. Wiklund said there are several measures to reduce this. Like introducing two tiers of limited liability companies: less than 100.000 SEK min stock capital and no audited accounts. Today Swedes start sole propr. instead because the cost of a limited liability company is too high. Wiklund said at the end that we need more research on this subject both on the individual and the system level. He also wanted to see that failed firms should be included in entrepreneurship research to avoid bias.
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• Marcus Stanley, professor, Weatherhead School of Management
"An important factor underlying Europe's poor record on entrepreneurship is the stigma of failure. Many would-be entrepreneurs are put off by the fear that if you fail once,
you will lose everything.This must change.... an entrepreneur
must have a second chance"
E.A. Likanen, June 2000
This was the start of professor Stanleys lecture about stigma. What price are one paying? The emotional price is just one thing, difficulty finding a new job is another. One aspect of entrepreneurial stigma is the wage penalty experienced on reintegration into wage and salary. The literature on stigma is small but growing. It's mostly US based and rooted in labor economics "self-employment" literature. European data is coming. The basic questions in the literature is whether one would have higher wages today if the person hadn't been self-employed and is self-employed "better" than unemployed. Another questions is if pay-off to self-employment experience compared to wage and salary experience. Papers show that it may be so that self-employment affects future earnings, but unemployment affects it even more. The research Stanley is doing uses Swedish registry data to determine difficulty Swedish entrepreneurs have in re-entry to wage and salary work. The research is ongoing so results are not solid. Some preliminary data for native Swedish males born 1945-75 showed that 1 year of self-employment gives -1% in future earnings. This implies that on average "failed" entrepreneurs earn about 2-3% less than comparable non-entrepreneurs if they return to wage and salary work. One should remember that movement in and out of entrepreneurship seems unusually rare in Sweden. Future research includes looking at subgroups like key industries and skilled workers, and also comparisons between Sweden and the US. Is entrepreneurship in Sweden "more stigmatized"?
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• Jeannine de la Bursi-Franssen, Dr, Ministry of Economic Affairs
Powerpoint: delabursi.ppt
De la Bursi-Franssen is from the Netherlands, a country that seems to have taken a lead in working with failure. The development started with the Noordwijk project in 2001 (harch treatment of bancrupts deters starters) and went on with the MDW project on bancruptcy laws (focus on corporate rescue and early warning). Now de la Bursi said they are developing a new insolvency law. She stresses that not all ideas are good ideas and that failure is to be dealt with rationally. It's part of the market economy. The question is why they are not coming back into business after the failure. There are three dimensions to this. First is the legal dimension, banruptcy is punitive. Second is the financial, the residual dept, the lack of collateral and the credit ratings. Third is the social, the stigma and self doubt. There has been a change in knowledge. For example isn't failure equal to fraud. Questions and answers are easy. The hard part is to actually DO something. There have to be change of actions on different levels. On the institutional level there is the government. It has to work with fraud, clean slate and market access. On this level is also the banks. They need to deal with the credit part. On the individual level there are peers and public that has to deal with the business and social part (accept that someone fails and give a second chance). There is also the entrepreneurs that has to work with the responsibility aspect. The conclusions were that legislation is going in the right direction and that the financial issues are being addressed and finally that stigma still is a problem but the awareness is growing.
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• Wilhelm von Seth, Head of Unit, Swedish Agency for Econimic and Regional Growth (NUTEK)
Powerpoint: vonseth .ppt
Von Seth started by saying that failure isn't something to be ashamed of. As an example he said that Bill Gates had failed before starting Microsoft. Microsoft is his second attempt, and it is quite good. Is failure victory?
Bancruptcy figures from Sweden 2004: 5908 limited companies, 1741 private businesses and private persons 402. Experiences from entrepreneurs in bankrupt businesses shows that the main reason for the bankruptcy was due to external factors, such as tough market. Also lack of cash and a bad relation with the bank. The main part didn´t make any major changes in their business. Those who did cut down their staff. The court procedures were relativly smooth. 75% were satisfied with the recievers work and the main part had at least fair cooperation with their creditors. The major negative experience was the social consequences. Most of the entrepreneurs would have preferred a resturcturing procedure. The majority were thinking of a restart, a lot have done it, but many prefer a business without employees.
