Learning from Feedback: Evidence from New Ventures
Sabrina T Howell
Review of Finance, Volume 25, Issue 3, May 2021, Pages 595–627, https://doi.org/10.1093/rof/rfab006
Why do individuals persist in entrepreneurship? One important dimension of this question – which goes back at least to Knight (1921) – is the degree to which entrepreneurs learn in the sense of type revelation about whether to continue or abandon the venture. It is not obvious that this type of learning is a prevalent or useful entrepreneurial trait. Indeed, examples like Jeff Bezos, who reportedly was turned down by many VCs when first launching Amazon, might encourage entrepreneurial entry among individuals who are relatively impervious to negative signals about whether their venture is overall a good idea or not. This paper shows that entrepreneurs are on average quite responsive to feedback about the quality of their ventures. We use data from new venture competitions, some of which privately inform founders of their relative rank. The empirical strategy compares lower and higher ranked losers across competitions in which they did and did not observe their standing. Receiving negative feedback increases average venture abandonment by 13 percent. Differences in responsiveness – for example, in venture risk, venture maturity, and signal precision – are consistent with particular theories about entrepreneurship, including the importance of experimentation.