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Why Do We Care About Entrepreneurial Exit?

Firms that don’t survive in perpetuity are not necessarily failures. There are many reasons entrepreneurs may exit their venture.

Exit sign

For many years researchers examined topics surrounding exit at two levels of analyses — the firm and, to a lesser extent, the individual. For example, researchers examined the factors that lead to firm survival, and conversely, firm failure. 

However, I believe this research suffers from a strategic management and organizational bias wherein exit is viewed as failure and survival is viewed as success. The theoretical foundation underlying these literatures suggest that the purpose of a firm is to survive into perpetuity and to do otherwise is failure. This research identifies the factors and conditions which make it possible for a firm to develop a competitive advantage and therefore survive indefinitely. 

According to the U.S. Bureau of Labor Statistics, in 2014, 8.48 million firms were created and 7.84 million firms left the market. And as Jim Collins (and many others) have noted, few firms remain successful over the long run. 

For example less than 12% of the original Fortune 500 companies remain on the list today. The Microsofts, Googles, and Verizons of today may well be the Bethleham Steels, Singers, and Eastman Kodaks of the past. Clearly, a simple failure/survival dichotomy is insufficient.       

Founder Volition

Furthermore, a failure/survival bias has led researchers to conclude that “80%”, “90%”, or “95%” of new start-ups fail. This certainly makes the entrepreneurial journey appear quite daunting! The problem with this, of course, is that it doesn’t take into account entrepreneur or founder volition. 

That is, entrepreneurs can (and do) regularly make decisions to exit a firm from the market and, for many, this decision has less to do with the current firm performance than with a multitude of other factors. 

For example, some entrepreneurs might identify a new opportunity such as a new venture idea, a return to employment, or to school. Others may have personal reasons such as illness, age, or family factors which push them toward exiting the firm from the market. 

The point is that simply because a firm is no longer in business does not mean it is a failure. I personally have been involved with several firms that would be viewed as “failures” since the firms no longer appear as an entity. 

However, one of the firms simply completed a name change to better represent a strategic direction, one changed its legal structure from a sole proprietorship to a corporation, and the other went through an acquisition.     

Motivation Behind An Exit

Notice I state above that entrepreneurs make decisions to exit a firm from the market; however, for many of the same reasons entrepreneurs may make a decision to leave the firm they created even though the firm continues. We see this in the example above where one of the firms I was involved with went through an acquisition. The firm was doing well, increasing market share and sales year after year; however, as founders, we were simply ready to do something different. This firm was not a failure; rather it went through an acquisition, was re-named, and is still in operation today. 

Some research exists which examines this topic — the succession of the founder; however, it has primarily examined succession in large, publicly traded firms and the effects (both positive and negative) of succession on firm outcomes. 

Very little of this research has used the individual lens to explore why and how the entrepreneur makes the exit decision, what the factors are that lead to a successful exit, how personality, passion, decision-making criteria, cognition, aging, gender, intentions, and learning contribute to entrepreneurial exit.  

Thus, it is important for researchers to be clear about the level of analyses, to be careful when suggesting exited firms are failures, and to return the entrepreneur to his or her rightful place—as a primary decision maker. 

In order to address some of these questions, we developed the Kauffman Closed Firm Survey (KCFS) which drew upon the Kauffman Firm Survey to identify and survey founders who had closed their businesses. Drawing from the literature, a focus group, and our own experiences, Alicia Robb and I identified 30 potential reasons entrepreneurs give for exiting their venture. Acknowledging the potential for attribution bias, we find seven different categories of exit motivations: (1) firm performance, (2) harvest, (3) competitor actions, (4) family reasons or to take advantage of another opportunity, (5) to start a different venture, (6) internal firm issues and, (7) retirement. 

Dawn R. DeTienne, Associate Professor, Colorado State University

If you are interested in any of the topics (or the KCFS), you are encouraged to attend a Professional Development Workshop (PDW) entitled “Studying Entrepreneurial Exits” at the 2015 Annual Meeting of the Academy of Management. The PDW is on Saturday, August 8th from 4:00-5:30 PM. Top scholars in this area including Karl Wennberg, Susan Marlow, Alexander McKelvie, Kelley Packalen, Anna Jenkins, and Jason Lortie will join Alicia Robb and Dawn DeTienne to “hash out” these and many other topics related to entrepreneurial exit. If you cannot attend, but are interested in this research, contact Dawn DeTienne.