Why do some entrepreneurs fail forward (while others do not?) A moderated mediation model of learning from failure and transformational leadership

Fang He, The George Washington University, Washington DC Charlotta Sirén, University of Vaasa, Finland Sheetal Singh, The George Washington University, Washington DC George Solomon, The George Washington University, Washington DC

ABSTRACT Due to the amount of uncertainty and risk involved in entrepreneurial endeavors, failure is a built-in component of entrepreneurship. We argue that entrepreneurs’ prior failure experience can contribute to their transformational leadership. The contribution of failure is mediated by entrepreneurial learning, which involves both internalization and transformation of failure experience. Further, entrepreneurs’ learning from failure is moderated by their emotional intelligence (EI) and goal orientation as well as the way in which failure is viewed in their society. We expect entrepreneurs with higher EI and stronger learning goal orientation to more effectively seize the learning opportunities presented by failure, whereas those with lower EI and stronger performance goal orientation to be less efficacious in learning from failure. We also expect a more normalized view of failure to better facilitate entrepreneurial learning from failure. Data collected from founders and managers of young SMEs in US and Finland are analyzed using hierarchical multiple regressio. Theoretical and practical implications are discussed.

KEYWORDS Entrepreneurial learning, failure experience, transformational leadership, emotional intelligence, goal orientation, failure normalization

INTRODUCTION For decades, entrepreneurial activities have been the catalyst for positive social change and a vital force in economic growth (Kirzner, 1973; Schumpeter, 1934, 1950). The World Development Report indicated that small and medium-size enterprises (SMEs) account for 65% to 75% of gross domestic product (GDP) for all countries (The World Bank Group, 2009). Based on these data, it is not unreasonable to claim that the future of the economy hangs on the informal sector and SMEs. In fact, SMEs have created 48% of employment opportunities and contributed to 46% of GDP in the United States (U.S. Small Business Administration, 2011). By generating 64% of net new jobs over the past two decades, SMEs have revitalized the United States following economic downturns in the 1990s and again in 2001 (Schramm, 2004; Small Business Committee, 2011). However, with increasingly fierce global competition and a widespread financial crisis, SMEs are faced with a challenging situation. According to the U.S. Small Business Administration, more than half of SMEs fail within the first 5 years (Aldrich, 1999). Young firms do not only dominate job creation, but their likelihood of failure is also disproportionately high (Haltiwanger, Jarmin, & Miranda, 2010). In other words, the critical role that SMEs play in job creation and economic growth is contingent upon their continuous presence. Understanding failure and the implications of failure is key to being able to leverage entrepreneurial activities in fostering economic growth (Harrison & Leitch, 2005; McGrath, 1999). Due to the amount of uncertainty and risk involved in entrepreneurial endeavors, failure is a built-in component of entrepreneurship (Lubatkin & Chatterjee, 1994). Entrepreneurs usually encounter numerous failures and mistakes before they succeed (Timmons, 1999). Even the greatest entrepreneurs of our era were not spared the agony of failure. For example, the early Macintosh computer was slow, bulky, and lacked color graphics, and its initial lackluster performance pushed Steve Jobs out of the management of Apple, Inc., the company he cofounded with Steve Wozniak in his own garage. When reflecting upon his experience of being ousted from Apple’s top management, Steve Jobs called it an “awful-tasting” but “much needed” medicine (Jobs, 2005). He even considered getting fired from Apple to be the most valuable experience in his entrepreneurial journey. “The heaviness of being successful was replaced by the lightness of being a beginner again,” as Jobs described it. “I was less sure about everything. It freed me to enter one of the most creative periods of my life” (Jobs, 2005). 1

The story of Steve Jobs and many other successful entrepreneurs has presented intriguing questions for entrepreneurship researchers: What lessons does failure provide? How do entrepreneurs develop leadership skills in the process of making mistakes, failing, and learning from their mistakes and failure? Why do some entrepreneurs learn from this experience and become better leaders, while others do not? However, perhaps because of the bitter nature of failure, the quest for such a transformational process has been scarce (Edmondson, 2011). While entrepreneurship scholars have investigated the causes of failure and ways to avoid failure (e.g., Gaskill, Van Auken, & Manning, 1993), the fundamentally negative view of failure has led to a pervasive bias in the field of entrepreneurship (McGrath, 1999). As a result, the precious learning opportunities the experience of failure affords have been long understudied (see McGrath, 1999, for an exception), even though for more than a decade, scholars have been urging entrepreneurship research to move from a preoccupation with achieving success and avoiding failure to an integrated view that links these two phenomena (Aldrich & Fiol, 1994). It is almost incontrovertible wisdom that failure is the fire that tempers the steel of an entrepreneur’s learning and street savvy (Timmons, 1999). It is paradoxical that the implication of failure has not been given sufficient scholarly attention within the entrepreneurship tradition (McGrath, 1999). While the intriguing process of transforming failure into success remains obscure (Cannon & Edmondson, 2001), it is becoming increasing clear that there is a need to steer research away from picking winners to identifying key issues in the learning and developmental process of entrepreneurs (Sullivan, 2000). Entrepreneurship is a process (Baron, 2007), and learning is at the very core of that process (Harrison & Leitch, 2005; Minniti & Bygrave, 2001). The assertive, forward-moving, and proactive nature of experiential learning (Kolb, 1984) captures the essence of entrepreneurship and further provides valuable insight for the question of why some entrepreneurs become better leaders after experiencing failure. The entrepreneurial process is more than the mere creation of a business (Kuratko, 2007; Shane & Venkataraman, 2000; Swiercz & Lydon, 2002); just as entrepreneurial leaders found their ventures to adapt and flourish, they also accumulate relevant know-how and develop themselves as leaders. In order to become effective leaders, entrepreneurs need to continuously build their competency through learning. However, because most existing research regarding learning from failure has relied on historical data, the mechanisms involved in achieving this advantage have

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not yet been specified (Edmondson & Moingeon, 1996). Within the entrepreneurial context, in particular, many aspects of the learning process remain poorly understood (Cope, 2005). “Learning from failure is not automatic or instantaneous” (Shepherd, 2003:319); rather, it is complicated by a myriad of interpersonal and intrapersonal factors. Since entrepreneurs are deeply attached to their ventures, business failure is likely to trigger negative emotions such as grief. Negative emotions inhibit deep reflection (Cannon & Edmondson, 2001), hinder cognitive processes (Baron, 2008), and limit the number of alternatives considered. According to cognitive resource theory (Fiedler & Garcia, 1987), when faced with failure, individuals divert their cognitive resources to negative emotions, rather than focusing on problem solving and learningrelated processes. If negative emotions such as anxiety or grief consume most cognitive resources, individuals will exhibit a lack of perspective and an inability to select relevant information, both of which interfere with learning (Sutcliffe & Weick, 2008). Given the impact of emotions, it is important to understand why some entrepreneurs are able to conquer negative emotions associated with failure and seize learning opportunities where others find only despair. In addition, entrepreneurs possess different personal goals and varied emotional abilities. These personal dispositions individually and collectively determine the extent an individual can exploit a learning opportunity. No existing research in entrepreneurship, to our knowledge, has incorporated goal orientation or emotional intelligence as potentially important “boundary conditions” for learning from failure. Another limitation in the literature relates to the making of entrepreneurial leaders. In the entrepreneurial process, entrepreneurs must perform different activities and accomplish various tasks. To successfully meet the demands imposed by all three phases of a venture (i.e., prelaunch, launch, and postlaunch), the entrepreneur not only needs to paint a vision that is convincing and resonating for various stakeholders but also use this vision to inspire internal and external followers (Baron, 2007). In other words, effective leadership is critical to venture success. Transformational leadership, a particular form of effective leadership that focuses on motivating followers by appealing to their ideals and intrinsic motives (Ensley, Pearce, & Hmieleski, 2006), has been linked to a number of organizational and individual-level outcomes pertinent to entrepreneurship. For instance, transformational leadership has been shown to relate positively to employee creativity and innovation (Mumford, Scott, Gaddis, & Strange, 2002), R&D project performance (Keller, 1992), and overall innovation at the organizational level

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(Jung, Chow, & Wu, 2003). Understanding the genesis of transformational leadership will greatly improve our knowledge regarding how to better prepare entrepreneurs for future challenges and develop them as effective leaders. Whereas existing management research has uncovered a great range of positive organizational outcomes of transformational leadership, relatively little is known about its antecedents (Bommer, Rubin, & Baldwin, 2004), especially in the entrepreneurial context. In light of these gaps, this study integrates three important streams of literature – entrepreneurship, leadership, and management learning to address the following research questions: 1) does failure experience predict an entrepreneur’s transformational leadership? 2) to what extent does learning mediate the relationships between failure experience and transformational leadership? and 3) does the relationship between failure experience and entrepreneurial learning vary in strength depending on the level of emotional intelligence, goal orientation, and failure normalization? By answering these questions the present research contributes to the existing literature in four aspects. First, in delineating the entrepreneurs’ learning mechanism triggered by failure, this research puts forward a conceptual model depicting how entrepreneurs develop effective leadership that is instrumental for entrepreneurial activities. By empirically testing the relationships between failure experience, learning, and leadership, our study contributes to the understanding of the evolutionary nature of entrepreneurship (Deakins & Freel, 1998). Second, in introducing the individual-level moderators of goal orientation and emotional intelligence, the study examines individual differences among entrepreneurs that influence the relationship between failure experience and learning. Our exploration of a cultural moderator, failure normalization, sheds light on the cultural or societal contexts that facilitate or inhibit the learning of individuals following business failure. Collectively, our investigation of these moderation effects seeks to answer why some individuals learn from failure and become effective leaders while others do not. Third, we conceptualize learning as an emotionally charged process and employ Affective Event Theory (Weiss & Cropanzano, 1996), to understand entrepreneurs’ sense-making of failure and its associated emotional response. By explicating the critical role emotions play in the learning process, this study constitutes a valuable addition to existing rationality-focused management theories. Finally, in exploring the relationship between learning and transformational leadership, the present study addresses a key concern for entrepreneurship

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scholars who have called for greater understanding of and evidence on how learning translates into effective leadership that fosters competitive advantages (Edmondson & Moingeon, 1996). The following section presents the theoretical foundation for the relationships specified in the proposed research model (Figure 1). The Methods section summarizes the research design, measurements, and analytical approach. The article concludes with a discussion of the implications of the present study and future research directions.

Emotional Intelligence

Goal Orientation

Failure Experience

Entrepreneurial

Transformational

Learning

Leadership

Failure Normalization

Figure 1. Theoretical model of learning from failure and transformational leadership THEORETICAL FRAMEWORK Entrepreneurs’ Failure Experience and Transformational Leadership Entrepreneurial process consists of three major phases: prelaunch, encompassing activities preparing for the start of a new venture; launch, when actual startup activities take place; and postlaunch, including all activities occurring after the startup (Baron, 2007). Entrepreneurs must perform different activities at different points of this process (Gartner, 1989). While identifying and evaluating opportunities comprise the major tasks in the prelaunch phase, once entrepreneurs move into the postlaunch stage, their focus shifts to performing all the functions of a business leader. For the later stages of a venture, entrepreneurs need to not only paint a vision that is uplifting, convincing, and resonating for various stakeholders, but also use this vision to inspire internal and external followers, promote innovation, and steer paradigm shifts (Winslow & Solomon, 1993). To run a functioning company, entrepreneurs must deal with

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an increasingly diverse range of people inside and outside the company, handle conflicts, conduct negotiations, and influence others. Growing the business also requires entrepreneurs to be able to recruit, motivate, and retain talent (Baron, 2007). Finally, entrepreneurs need to lead the process of organizational emergence in such a way as to create an effective organization (Antonakis & Autio, 2007). All of these tasks are highly challenging and require more than certain personality traits or cognitive styles. Rather, they entail substantial leadership competencies from articulating vision to influencing people. Perhaps Antonakis and Autio (2007) said it best: “These objectives cannot easily be attained by relying solely on the force of one’s own personality traits, one’s desire for achievement, or one’s tendency to overestimate one’s own strengths and underestimate risks, or low vulnerability. Something more is required—qualities that are projected through behaviors in daily encounters: leadership.” (p. 189) Transformational leadership, an influence process in which the leader elevates followers beyond self-interests through idealized influence or charisma, inspiration, individualized consideration, or intellectual stimulation (Bass, 1999), is of particular relevance to entrepreneurship. A substantial amount of empirical work has demonstrated that transformational leadership is positively associated with individual followers’ and work group performance (Dvir, Eden, Avolio, & Shamir, 2002), followers’ job satisfaction (Kirkpatrick & Locke, 1996), and various leadership effectiveness measures (Judge & Piccolo, 2004). The underlying mechanism supporting these empirical findings is that transformational leadership enhances the development of followers, inspires them to think in unconventional ways, and inspires them to accomplish challenging tasks (Jung, 2001). This mechanism also makes transformational leadership beneficial to entrepreneurial activities. Scholars have found that transformational leadership relates positively to employee creativity and innovation (Mumford et al., 2002), R&D project performance (Keller, 1992), and overall innovation at the organizational level (Jung et al., 2003). As Yukl (2010, p. 279) predicted, “transformational leadership is likely to be more important in a dynamic, unstable environment,” such as an entrepreneurial context. While transformational leadership has been linked to a wide range of positive individual and organizational outcomes, relatively little is known regarding its genesis (Bommer et al., 2004). Existing empirical literature has focused on personal characteristics that are relatively stable, such as personality (Atwater & Yammarinol, 1993; Judge & Bono, 2000; Rubin, Munz, &

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Bommer, 2005) and achievement needs (Pillai, Williams, Lowe, & Jung, 2003). An exception was the study of Bommer and colleagues (2004), who investigated the interaction between social context and an attitudinal construct, cynicism about organizational change, as an antecedent to transformational leadership. Although Bommer and colleagues (2004) pointed to a promising future research direction of examining individual variables that could be developed or are more malleable, cynicism about organizational change predicts behavioral intent, rather than specific leadership behaviors. An emerging stream of research has found that experiences (Atwater & Yammarinol, 1993; Bass & Avolio, 1994; McCall, 2004), especially developmental experiences (DeRue & Wellman, 2009; McCauley, Ruderman, Ohlott, & Morrow, 1994), can challenge individuals in a way that enables the development of effective leadership. Developmentally challenging work experiences facilitate the development of individuals’ cognitive and strategic leadership skills as well as their interpersonal leadership skills (DeRue & Wellman, 2009). These experiences prompt individuals to collect and process new information, think critically about the situation, and identify the underlying causes and consequences of problems (Cox & Cooper, 1998). Further, they enhance cognitive and strategic leadership by urging individuals to identify critical drivers of and barriers to organizational adaptation and to consider better ways for allocating organizational resources to create competitive advantages (Barney, 1991). At the same time, these experiences enhance interpersonal leadership effectiveness by enabling individuals to experiment with new ways of influencing people with diverse interests, as well as encouraging individuals to exercise “power-with” rather than “power-over” approach (DeRue & Wellman, 2009). Since both strategic and interpersonal perspectives are inherent in transformational leadership, developmentally challenging experiences should be conductive to transformational leadership. Developmental experiences take many forms, and business failure is one of the most traumatic and challenging. Yet, for some individuals, an experience with failure could serve as an incubator for transformational leadership. While there have been no systematic studies of entrepreneurs’ failure experience and transformational leadership, similar concepts, such as hardship, adversity, and resilience, have been discussed by leadership scholars and practitioners (Bennis & Thomas, 2002; Kayes & Kayes, 2011; Reid, 2008). This line of research provides several reasons why business failure could relate positively to transformational leadership. First,

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business failure is a dramatic event that calls into question basic assumptions of the future of one’s business and how to move towards that future (Janoff-Bulman, 1992). Second, business failure provides stimuli for individuals to try new behaviors or reframe old ways of thinking and acting (Sitkin, 1992). Third, like other challenging work experiences, business failure provides motivation for learning and development by highlighting the gap between individuals’ current skill set and the requirements of the leadership role (McCauley, 2001). Although failure experience is not the only input of transformational leadership, we argue that failure is an important source of developmentally challenging experiences that contributes to effective leadership. Accordingly, we advance the following hypothesis: H1. The entrepreneur’s failure experience is positively associated with his or her transformational leadership. Entrepreneurial Learning and Transformational Leadership Most experience-based perspectives of leadership development have tapped into the essential process of learning from experience and transforming learning into leadership (Cox & Cooper, 1998; DeRue & Wellman, 2009; Kayes & Kayes, 2011; McCauley, 2001; McCauley et al., 1994). However, no research to date has explicitly established or empirically tested the mediating role of learning. What remains unclear is how and to what extent learning functions in the process of transforming experience into leadership competence. And even more fundamentally, one important question remains: “Can one learn to be a transformational leader?” (Vandenberghe, 1999). Furthermore, although the potential learning effect of various types of experience (e.g., industry experience, management experience) has been well documented (see, for example, Shepherd, Douglas, & Shanley, 2000), the distinction between experience and the knowledge produced as a result of experience is unclear (Politis, 2005). Also, the concept of experience and that of experiential learning are often tangled. Experience itself does not suffice for learning; experience only provides the raw material for knowledge. Learning is the crucible that transforms experience into knowledge. Due to confusion among concepts of experience, experiential learning, and knowledge, the critical process of how entrepreneurs transform experience into entrepreneurial knowledge that subsequently contributes to entrepreneurial success remains obscure (Politis, 2005). To address these gaps we venture to define

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entrepreneurial learning and examine the relationship between learning and leadership within the entrepreneurial context. Our objective is to elucidate this learning process in an entrepreneurial context by applying different experience-based learning theories such as experiential learning theory (ELT; Kayes, 2002; Kolb, 1984), social learning theory (Bandura, 1997), and transformative learning theory (Mezirow, 1991). Rooted in the work of pragmatist philosophers (i.e., John Dewey and Kurt Lewin), who deemed the integration of theory and practice vital (Kolb, 1984), ELT is a practical theory that describes how people learn in real contexts. Successful entrepreneurs learn as they progress in an extremely hands-on entrepreneurial journey. There is a consensus among scholars and practitioners alike that “learning by doing” constitutes a distinguishing feature of entrepreneurs (Cope & Watts, 2000; Minniti & Bygrave, 2001). As McCall (2004) pointed out, “The primary source of learning to lead, to the extent that leadership can be learned, is experience” (p. 127). On-the-job work experience, specifically, is the most effective way for individuals to develop leadership (DeRue & Wellman, 2009). Consequently, ELT is not only consistent with understanding the relationship between learning and leadership in an entrepreneurial context, but it also precisely captures the entrepreneurial spirit of “trial and error.” Building on experience-based learning theories, we define entrepreneurial learning as a dynamic process in which entrepreneurs acquire experience and further transform that experience into entrepreneurial knowledge, skills, and competences (Cope, 2003). ELT delineates two basic dimensions of learning: the acquisition of experience and the transformation of acquired experience into knowledge. According to ELT, learning involves the interplay between the two. The first dimension requires individuals to resolve the tension between apprehension (concrete experience) and comprehension (abstract conceptualization). When individuals make sense of the environment through tangible, felt qualities of immediate experience, apprehension occurs. In contrast, when individuals grasp experience by interpreting it as meaningful symbols and place them within an abstract structure, comprehension occurs. The second dimension, where experience is then turned into knowledge, involves tension between intention (reflective observation) and extension (active experimentation). In the course of intention, individuals look inward to reflect upon their experiences, whereas in the process of extension individuals look outward to execute their ideas and interact with the external world (Kolb, 1984).

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Entrepreneurs are constantly immersed in streams of immediate experiences (Gartner, 1989; Morris, Kuratko, Schindehutte, & Spivack, 2012; Reuber & Fischer, 1999; Reuber, Dyke, & Fisher, 1990). The entrepreneurial environment is so turbulent that entrepreneurs rarely have time to theorize (Busenitz & Barney, 1997). Hence, we argue that the dominant mode for entrepreneurs to acquire experience is apprehension. Two concrete sources provide raw materials for the apprehension of experience: personal involvement with the venture and direct observation of creating and growing a new venture (Minniti & Bygrave, 2001; Reuber et al., 1990). These two sources do not exist in exclusion of each other. In reality, most entrepreneurs rely on both during different stages of their ventures, although the degree to which a particular source is relied on varies. For example, during prestart, entrepreneurs gain industry experience via previous employment in relevant industries (Cooper et al., 1989) as well as prior engagements with comparable opportunities (Carroll & Mosakowski, 1987). Entrepreneurs could also have been exposed to direct experience by observing role models such as parents (Scherer et al., 1990) and mentors (Kram, 1983). After launching a new venture, entrepreneurs’ own practices become their major source of experience. Entrepreneurs could continue to gain valuable experience by observing their business partners as well as competitors; interacting with investors, board advisors, and clients; and actively participating in their learning communities (i.e., local networks) (Szarka, 1990). Once entrepreneurs have acquired a “stock of experience” (Minniti & Bygrave, 2001), a transformational process involving the conversion of experience into practical wisdom must take place for learning to occur. The transformation consists of reflecting upon one’s vision and mental framework, actively seeking performance feedback and gathering information, and adjusting business strategy accordingly (Cannon & Edmondson, 2001). Deviating from Kolb (1984), who argued that individual preferences determine the adoption of either intention (reflective observation) or extension (active experimentation) as the dominant mode of transforming experience, we maintain that both intention and extension are needed in the process of transforming experience into entrepreneurial knowledge that subsequently contributes to venture success. In the learning experiment of creating and managing a venture, entrepreneurs learn the meaning of their concrete experiences by internally reflecting on the implications of these experiences, both to themselves and their venture. With insights gained and schemas developed, entrepreneurs act on the external environment to further extend their experience.

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Although acquisition and transformation of experience are described as if they assume a sequential order, these two aspects of learning happen simultaneously. Moreover, rather than having acquisition and transformation as two independent entities, experience is continuously being created and recreated (Holmqvist, 2004). Consider an entrepreneur’s experience of launching a marketing campaign to promote a new product. Once the campaign was launched, the entrepreneur would continuously monitor and evaluate its process and outcome. If the campaign failed to realize a predefined marketing goal, the entrepreneur may ruminate on the frustration such failure caused and examine the loss his or her venture suffered. These reflections would lead the entrepreneur to reassess key aspects of his or her assumptions (Cope, 2003; Mezirow, 1990). Simultaneously, the entrepreneur may gather information on how and why the campaign failed and obtain feedback from followers in the research and development, production, and marketing departments as well as clients and external mentors; such information would help the entrepreneur generate a new understanding of the market and the product. The entrepreneur could then test his or her new understanding by using different marketing techniques in future campaigns. Should these updated campaigns fail, another learning circle would be initiated. Given the experiential nature of learning, there is broad agreement that learning is the primary mechanism through which leaders develop (Derue & Wellman, 2009; Kolb, 1984; Petriglieri, Wood, & Petriglieri, 2011). An increasing number of scholars have highlighted the link between identity development and leadership (Carroll & Levey, 2010; Day & Harrison, 2007; Derue & Ashford, 2010; Lord & Hall, 2005; Shamir & Eilam, 2005), and some have even argued that leadership development is essentially personal development (Petriglieri et al., 2011). A starting point of personal development is becoming more aware of one’s self (Hall, 2004). The intension dimension of entrepreneurial learning, in which the entrepreneur internally reflects upon implications of failure experiences for both his venture and himself, renders an opportunity to examine one’s core beliefs, assumptions, and ways of making sense of the world and self. In doing so, the entrepreneur develops a clearer vision. When exercising the extension dimension of entrepreneurial learning, the entrepreneur verbally and nonverbally communicates vision to followers and lays down plans for achieving that vision. While a clear vision provides a necessary condition for transformational leadership, effective vision delivery results in

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followers’ perception of the leader’s charisma (Awamleh & Gardner, 1999; Howell & Frost, 1989). The foundation for the entrepreneur’s deep reflection and active experimentation comes from the entrepreneur’s concrete and observational experience of failure. The entrepreneur actively gathers information related to failure from various stakeholders, including followers. This active engagement provides a means for the entrepreneur to involve followers’ self-concept in the venture, which enhances followers’ self-worth by making them feel a part of something important (Shamir, House, & Arthur, 1993). According to Berson, Shamir, Avolio, and Propper (2001), incorporating followers’ self-concept in the tasks to be undertaken and enhancing their identification with challenges facing the organization is the inspirational influence unique to transformational leaders. The feedback-gathering process involves two-way communication. When trying to pinpoint why and how failure occurred, the entrepreneur not only discusses prior mistakes with followers, but also takes in their suggestions and concerns. Consequently, the entrepreneur customizes his or her leadership behaviors to reflect an individualized consideration. This interactive communication allows the entrepreneurial leader to encourage followers to think about reasons for and solutions to the problems and therefore provides a form of intellectual stimulation for followers. Taken together, these learning behaviors of entrepreneurs can be translated into dimensions of transformational leadership, namely, charisma, inspiration, individualized consideration, and intellectual stimulation. Consequently, we expect a positive relationship between entrepreneurial learning and transformational leadership. Failure and its Learning Implications for Entrepreneurs The entrepreneurial journey is “riddled with interrupted plans, unexpected obstacles, conflicting goals, and unattainable aspirations” (Morris, Kuratko, Schindehutte, & Spivack, 2012, p. 21). From a learning perspective, both minor mistakes and major mishaps could offer valuable lessons to entrepreneurs (e.g. Ellis & Davidi, 2005; Morris & Moore, 2000; Shepherd, 2003; Wong & Weiner, 1981). Consequently, for the present research, we used Cannon and Edmondson’s (2001) definition of failure as deviation from expected and desired results, including both avoidable errors and unavoidable negative outcomes of entrepreneurial activities. We argue that failure is an outcome that deviates from certain expectations, be it aspirations or a

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set of right solutions (Cannon & Edmondson, 2001; Cyert & March, 1963; Ellis & Davidi, 2005; March & Simon, 1958; Morris & Moore, 2000). Individuals start with a standard (although this standard is subject to modification), with which they constantly compare outcomes, and the feedback generated by such comparison provides important messages for learning. While a variety of reasons for such deviation have been discussed in the literature, including legal problems, partnership dispute, the withdrawal or death of a founding partner (Bruno, Mcquarrie, & Torgrimson, 1992), financial difficulty, lack of relevant experience (Shepherd, 2003), and simply a shift of interest (Singh et al., 2007), we do not consider a shift in the entrepreneur’s interest to be a form of business failure, for it does not imply an inability to meet initial expectations. Since we consider entrepreneurial learning to be an individual level phenomenon, special attention is paid to the psychological mechanisms and reactions triggered by personal failures underlying the learning process. The existing literature has recognized a few learning mechanisms following failure: attributional search (Wong & Weiner, 1981), self-focused upward counterfactual thinking (Morris & Moore, 2000), and the enrichment of mental maps (Ellis & Davidi, 2005). Failure motivates deep reflection. When individuals fail, they usually ask themselves “Why did I fail?”. Wong and Weiner (1981) proposed that expectancy disconfirmation (unexpected events) and frustration (failure to attain a certain goal) give rise to an attributional search. Individuals carry with them sets of beliefs, schemas, or hypotheses to interpret how various causes and effects are related (Kelley & Michela, 1980). An attributional search will take place when one’s experiences cannot be readily assimilated into one’s existing belief system (Wong & Weiner, 1981). The law of effect indicates that individuals are motivated to terminate or prevent a negative state of affairs, and effective coping depends on locating the causes of failure and eliminating that behavior. Hence, attributional search serves as an “adaptive function” (Wong & Weiner, 1981, p. 651). In addition to probing into the causes of failure, individuals also reflect upon questions like “What I could have done differently?”. Morris and Moore’s (2000) study of “close calls” in an aviation setting provided intriguing findings regarding how failure induced learning from “imagination” (p. 738). Cognitive and social psychology research indicates that counterfactual thoughts are most frequently provoked by unexpected and negative outcomes (Roese & Olson, 1997; Williams & Lees-haley, 1996). Morris and Moore (2000) argued that failures and

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accidents, while causing both surprise and frustration to individuals, could induce counterfactual thinking. Furthermore, among the four types of counterfactual thinking—upward (comparison of reality to better possible alternative), downward (comparison of reality to worse possible alternative), self-focused, and external-focused—one combination (upward, self-focused) is especially conductive to learning. Defining learning as “performance-promoting lessons” (Morris & Moore, 2000, p. 739), these authors contended that upward counterfactual comparisons help people draw useful lessons for future reference by focusing on a factor that has causal potency to make the difference between the actual outcome and a better one (Roese & Olson, 1997). Particularly for those self-focused thoughts, there is a direct link between the focal factor and a behavioral intention to improve performance (Morris & Moore, 2000). Using both archival data of pilots’ reflection over actual close-calls reports and experimental results from college students’ reflection on simulated flights, Morris and Moore (2000) demonstrated that the degree of future action improvement was significantly higher in the presence of self-focused upward counterfactual thinking, confirming that self-focused upward counterfactual thinking is a mechanism for learning, more so than other types of counterfactual thinking. The result of these deep reflections is an enriched metal map. Individuals carry with them mental models to interpret the world (Kelley & Michela, 1980). The concept of mental models covers a range of similar ideas of individual knowledge structures, including belief structures (Fiske & Taylor, 1991), cognitive maps (Weick & Bougon, 1986), and schemas (Neisser, 1976). Ellis and Davidi (2005) asserted that the creation of mental models starts with generating and then testing hypotheses. In particular, individuals tend to generate new hypotheses when they encounter unexpected problems, when their acts are frustrated, or when there is a notable failure. Furthermore, failure leads individuals to switch their information processing from an automatic to conscious mode, where cognitive activities are characterized by awareness, attention, active information gathering, and reflection (Louis & Sutton, 1991). In the conscious mode, people invest time and effort in deepening their understanding of the problems they are facing. As a result, the number of constructs representing objects or phenomena increases and the potential connections among constructs expand. To the extent that the complexity and extensiveness of one’s mental model reflects the depth and breadth of knowledge (Evans, 1988), failure helps individuals learn by discovering new variables and recognizing causal relationships between old and new constructs. This process of discovery and exploration, as Ellis and Davidi (2005)

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viewed it, is a course of generating hypotheses and validating them through experiments. In direct support of the arguments above, Ellis and Davidi (2005) found that a group of Israeli soldiers who just experienced failed assignments had mental maps richer in constructs and links than the group with successful events. Madsen and Desai (2010) concluded that the learning implication of failure is both motivational and informational. Failure facilitates two necessary conditions of learning: “the motivation to alert knowledge and ability to extract meaningful knowledge from experience” (Madsen & Desai, 2010, p. 454). Failure motivates individuals to reflect upon the attributes of an event and their own actions and emotions during the incident. Individuals are urged to ponder their personal failures by asking themselves, “Why did I fail?” (Wong & Weiner, 1981) and “What could I have done better?” (Morris & Moore, 2000). In either case, failure leads individuals to question their taken-for-granted beliefs and assumptions and reframe their appreciation of the situation (Argyris & Schön, 1978; Ellis & Davidi, 2005). For entrepreneurs, an essential feature of crises is their capacity to stimulate deep reflection, which is instrumental in generating higher-level learning from these experiences (Cope, 2003). Failure also provide a roadmap, showing why previously learned responses and habitual ways of behaving are ineffective (Marsick & Watkins, 1990). With the guidance of this roadmap, individuals can actively search for information and seek feedback about the failure experience. This information or feedback then helps individuals experiment with new ways of doing things and increase the variance in their decision-making algorithms, which together signify a shift into the exploration mode of solution search (Minniti & Bygrave, 2001). In the exploration mode, individuals strive to deepen their understanding of the nature of the problem and the environment where the problem is situated. As a result, individuals gain knowledge about new variables and recognize causal relationships between old and new constructs (Ellis & Davidi, 2005). In the entrepreneurial context, an experience of failure helps the entrepreneur pinpoint why and how failure occurred (Sitkin, 1992) and discover uncertainties that were previously unpredictable (McGrath, 1999). Politis (2005) thus concluded that prior failure expands the entrepreneur’s knowledge base by reducing uncertainty, increasing variety, and expanding the search for new opportunities. Accounting for all the learning implications of failure demonstrated in the literature, there should be a positive relationship between failure experience and entrepreneurial learning. Moreover, failure experience does not play a direct role in all four dimensions of

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transformational leadership, but it motivates and facilitates the learning that makes a leader transformational. The entrepreneur’s learning behaviors should mediate the effect of his or her failure experience on transformational leadership. Accordingly, we hypothesize a full mediation effect of entrepreneurial learning. H2. The positive relationship between the entrepreneur’s failure experience and his or her transformational leadership is fully mediated by entrepreneurial learning. Entrepreneurial Learning from Failure: An Emotionally Charged Process Intrapersonal psychological factors create a dilemma for learning, which, unless effectively managed, presents a significant obstacle for individuals to learn from failure (Cannon & Edmondson, 2001). Vince (1998, 2001).has identified emotion, one of the psychological factors, as an indispensable piece in the learning puzzle. The onset of a learning process is often characterized by anxiety, fear, and doubt (Vince, 1998). These negative emotions tend to trigger a defensive reaction (Bion, 1961), either fight (taking a hostile stance toward the difficult situation) or flight (running away from difficult emotions). Individuals involved in a defensive reaction move in the direction of “willing ignorance” (Vince & Martin, 1993, p. 210), meaning that they develop avoidance strategies and search for information for self-justification. Although “willing ignorance” might be an effective means to maintain self-esteem and thus protect one against the treat of self-destruction (Vince, 1998), it is detrimental to learning, especially higherlevel learning that failure entails. Entrepreneurs’ learning from failure is complicated by negative emotions (Shepherd, 2003). Because of the substantial financial and personal resources devoted to found, nurture, and develop a venture, entrepreneurs are personally identified with their business. Their business is of such personal significance that it could be compared to a child (Cardon, Zietsma, Saparito, Matherne, & Davis, 2005). Therefore, business failure represents a form of personal loss that could generate negative emotional responses (Shepherd, 2003). Shepherd (2003) argued that the failure of a business has the emotional intensity of the death of a loved one, and entrepreneurs who experience failure are subject to a specific form of negative emotion- grief. Through indepth interviews with five entrepreneurs who had recently experienced a business failure, Singh, Corner, and Pavlovich (2007) found that besides grief, interviewees experienced negative emotions such as guilt, frustration, anger, and depression.

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Emotional intelligence As individuals proceed further into the learning process, emotions and affect play a dual role in impacting what and how they think (Morris, Kuratko, Schindehutte, & Spivack, 2012). Baron (2008) articulated two influences of affect on entrepreneurs’ cognition that are particularly pertinent to learning from failure. First, individuals experiencing positive affect tend to be more creative than those experiencing negative affect; thus, the former are better able to connect informational “dots” in a complex and ambiguous situation such as business failure. Second, positive affect encourages use of more effective coping strategies, such as direct efforts to address problems, whereas negative affect enhances preferences for less effective strategies such as withdrawal, denial, or even reliance on substances. Since emotions can take learning in two directions, either discouraging learning or promoting it, an entrepreneur’s ability to master emotions will determine the effectiveness of his or her learning from failure. Hence, an important individual difference, emotional intelligence (EI), is likely to moderate the relationship between failure experience and entrepreneurial learning. Mayer and colleagues (Mayer, Salovey, & Caruso, 2004; Peter Salovey & Mayer, 1990) defined EI as the capability to accurately perceive emotions and access and generate emotions so as to assist thought, to understand emotions, and to reflectively regulate emotions so as to promote personal growth. In short, EI indicates the extent to which individuals’ cognitive capabilities are informed by emotions and the extent to which emotions are cognitively managed (George, 2000). EI consists of four interrelated abilities: understanding and expressing one’s own emotions, regulating one’s emotions, perceiving and understanding the emotions of others, and channeling one’s emotions toward constructive activities that facilitate performance. The fact that learners cannot be separated from their social and situational context (Holman, Pavlica, & Thorpe, 1997) makes emotional abilities regarding both self and others relevant to facilitating the learning process. Not surprisingly, the critical role of EI has received empirical support from various learning contexts, including school children’s academic performance (Parker, Summerfeldt, Hogan, & Majeski, 2004) and individuals’ moving forward from project failure (Shepherd, Patzelt, & Wolfe, 2011). Therefore, we advance the following hypothesis:

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H3. The entrepreneur’s EI positively moderates the relationship between failure experience and entrepreneurial learning, so that the higher the EI, the stronger the relationship. Goal Orientation Another reason why learning from failure is not universal is that emotional responses to failure vary across individuals with different goal orientations. Dweck and colleagues referred to goal orientation as the cognitive framework that defines individuals’ appraisal and reaction to an event (Dweck, 1986; Elliott & Dweck, 1988; Heyman & Dweck, 1992). According to affective event theory (Weiss & Cropanzano, 1996), failure is subject to appraisal, which results in the experience of emotions. Integrating cognition with emotion, Weiss and Cropanzano (1996) advocated a two-stage appraisal process. Appraisal begins with evaluating an event for its relevance to one’s personal set of goals in simple positive or negative terms. The initial appraisal then leads to more specific interpretation, focusing on the focal event’s consequences attributions and available options to cope with failure. The relevance of an event is determined by goal relevance, the extent to which it touches on personal desires or concerns (Lazarus, 1991). The positive or negative emotional valance of an event is later evaluated against goal congruence, whether the event is consistent (beneficial) or inconsistent (harmful) with one’s desires and concerns. In addition, the intensity of the emotions associated with an event is closely tied to the importance or desirability of the goals. Depending on the personal goals, events of similar characteristics could eventuate in the experience of different emotions, or emotions with different intensity, due to varied appraisal processes. Elliott and Dweck (1988) contended that in an achievement situation such as creating and growing a venture, two typical sets of goals pursued by individuals are learning goals and performance goals. Accordingly, learning goal orientation (LGO) refers to the desire to understand something new or to improve one’s level of competence in a given activity, whereas performance goal orientation (PGO) refers to the desire to gain favorable judgments and avoid unfavorable judgments about one’s ability (Button, Mathieu, & Zajac, 1996; Elliott & Dweck, 1988; Heyman & Dweck, 1992; Payne, Youngcourt, & Beaubien, 2007). When individuals are learning goal oriented, they strive to increase their ability. They tend to view failure as an event that is diagnostic and provides valuable feedback for developing

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their competencies. Since individuals with LGO tend to believe their ability can be improved (Chen & Mathieu, 2008), failure does not represent a fixed hopeless state but motivates them to engage in learning activities to bridge the gap between their current level of ability and that required to reach desired outcomes. In other words, if an individual is learning goal oriented, the negative valance of failure is partially offset by its motivational and informational value. Individuals with higher LGO are expected to be less anxious about the end result and focus on mastery of the task. As a result, when presented with failure and obstacles, individuals with higher LGO are able to maintain higher levels of self-efficacy and develop more effective learning strategies (Chen & Mathieu, 2008). In contrast, individuals who are performance goal oriented seek to maintain positive judgments of their ability and avoid negative judgments by seeking to prove, validate, or document their ability (Elliott & Dweck, 1988). These individuals view failure as a contradiction to their personal goals or disproval of their abilities and therefore respond with negative emotions and even “learned helplessness” (Diener & Dweck, 1978, 1980). PGO is also associated with a belief that ability is difficult to develop (Chen & Mathieu, 2008). Hence, while failure provides negative feedback on current ability, it does not create much motivation to improve for individuals with high PGO due to their fixed view of ability. In the learning context, high PGO is believed to lead to maladaptive responses (Kozlowski et al., 2001). When faced with failure, efforts directed at demonstrating competence and managing impression could be detrimental to skill or knowledge acquisition. Consequently, individuals with high PGO are expected to be less efficacious in learning from failure. Early empirical research supported these considerations. In an experimental study with school children, Elliot and Dweck (1988) found that with salient performance goals, participants responded to mistakes with negative affect and with giving up attempts to find effective ways to overcome prior mistakes, but when the learning goal value was heightened, participants actively sought challenging tasks despite public errors, and as a result, their problem-solving strategies became more sophisticated. Similarly, Button, Mathieu, and Zajac (1996) found that individuals with high levels of PGO reported experiencing thoughts unrelated to the task (e.g., stress and escape intention), which directed attention to aspects of an event that were not conductive to learning while consuming the cognitive resources needed for processing the information and feedback generated by failure (Mogg, Mathews, Bird, & Macgregor-Morris, 1990). In contrast,

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LGO individuals felt challenged by failure but continued to strive for improvement despite the negative feedback that accompanied difficult or novel tasks (LePine, 2005). More recent goal orientation research revealed that PGO has two dimensions: prove and avoid (Elliot & Harackiewicz, 1996; Vande Walle, 1997). Vande Walle (1997) defined prove performance goal orientation (PPGP) as “the desire to prove one’s competence and to gain favorable judgment about it” and avoid performance goal orientation (APGO) as “the desire to avoid the disproving of one’s competence and to avoid negative judgments about it.” These two dimensions of PGO are associated with different motivational and performance outcomes. Vande Walle (1997) found APGO to be negatively related to motivation for mastery, motivation for effort, and feedback-seeking behaviors, whereas PPGO did not demonstrate any significant relationship with these vital elements in learning. In a conclusive meta-analysis, Payne, Youngcourt, and Beaubien (2007) reported that APGO was positively related to state anxiety (r = .36) and negatively related to academic performance (r = –.05), task performance (r = –.11), feedback seeking (r = –. 20), and self-efficacy (r = –.26). PPGO had a smaller positive correlation with state anxiety (r = .16) and was virtually unrelated to performance, feedback seeking, and self-efficacy. Many have concluded that APGO is in fact the dysfunctional element of PGO (Payne et al., 2007; Vande Walle, Cron, & Slocum, 2001). In situations that involve learning from failure, APGO may be particularly dangerous, whereas PPGO’s influence is not as significant. A negative outcome (i.e., failure) is the center of concern for individuals with APGO and hence produces a hard blow to their self-efficacy. Compared with PPGO, APGO has a stronger relationship with negative emotional arousal, such as test anxiety and fear of failure (Elliot & McGregor, 1999). In contrast, for individuals with PPGO, failure is not as relevant to their personal set of goals and therefore generates less negative emotions. To sharpen the focus of the present research, we contend that between the two PGO dimensions, APGO is the one that negatively moderates the relationship between failure and learning. In summary, individual difference in goal orientation has a profound impact on individuals’ appraisal of failure experience and the emotional response following that appraisal, which in turn influences the effectiveness of learning from failure. Additionally, as the intensity of affect is determined by the desirability or importance of goals (Weiss & Cropanzano, 1996),

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the strength of an individual’s goal orientation should predict its impact on learning. Based on theoretical grounds and empirical findings, we advance the following hypotheses: H4a. LGO positively moderates the relationship between failure experience and entrepreneurial learning, so that the stronger the LGO, the stronger the relationship. H4b. APGO negatively moderates the relationship between failure experience and entrepreneurial learning, so that the stronger the APGO, the weaker the relationship. Failure normalization The attitudes toward entrepreneurial failures are culturally based (Cope, 2011; Hayton, George, & Zahra, 2002; Mueller & Thomas, 2001). Negative attitudes towards failures may cause barriers for entrepreneurial activities primarily because fears of stigmatization (Cannon & Edmondson, 2005; Cope, 2011). For example, Cave, Eccles, and Rundle (2001) found that entrepreneurs in the United Kingdom perceive a more acute social stigma to failure than do entrepreneurs in the United States. The attitudes toward failures do not only vary between countries and cultures but also between regions and subcultures. For instance, Cardon, Stevens, and Potter (2009) found that in certain regions of the United States, failure is perceived as mistakes of entrepreneurs and results in stigmatization, whereas in other regions the reason of failure is more often seen as misfortune. These findings indicate that entrepreneurs’ perception of their societal attitudes and cultural norms regarding failure are likely to influence entrepreneurs emotional response to failure and in turn the extent to which they learn from it. Shepherd and colleagues (2011) suggest that the deep-rooted cultural tolerance of failure can be manifested in “failure normalization”, which speaks to the degree that failure is viewed as an ordinary occurrence rather than something to be shameful about. These authors further argue that failure normalization affects individuals’ failure tolerance in a way that failures are seeing as something normal and a part of the entrepreneurial journey. Failure normalization thus diminishes the salience and significance of failures and reframes them as learning opportunities (Shepherd et al., 2011). Although Shepherd and colleagues’ (2011) argument regarded organizational culture and perceptions of organizational members, we believe that it is reasonable to extend it to a broader context (i.e. societal culture). Thus, we argue that failure normalization as a cultural variable

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influences entrepreneurs’ emotional response to failure and in turn the effectiveness of learning from failure. H5. Failure normalization positively moderates the relationship between failure experience and entrepreneurial learning, so that the stronger the failure normalization, the stronger the relationship.

METHOD Sample and Participant Recruitment Founder-CEOs (CEOs) of young small and medium enterprises (SMEs) in the Information Technology (IT) industry from the United States and Finland comprised the population for this study. According to the U.S. Small Business Administration, firms with less than 500 employees are considered SMEs. As leadership has been shown to be most critical for firms at their postlaunch period—typically 18 months to 6 years after launch (Baron, 2007)—this study targeted founders of IT SMEs established between 2006 and 2010. In both the United States and Finland, a random sample of 1000 was drawn from comprehensive databases containing information of such firms. For both countries, we followed Sirén, Kohtamäki, and Kuckertz (2012) sampling framework to include IT companies with five to 499 employees. Participants were sought from CEOs and their direct reports of the targeted firms. Individual contact information was obtained from company websites and commercial databases. We e-mailed CEOs recruitment letters with description of the study, instructions to complete the survey, and a link to the online-based survey. Based on previous research (Hambrick & Mason, 1984), direct reports are defined as senior executives with whom CEOs shares the strategic decision-making process. CEOs were asked to identify two managers they consider to be direct reports and assist in recruiting them to participate in the study. We asked CEOs to forward the recruiting email to the direct reports whom they had identified. Participants were given approximately 3 weeks to complete the survey. Up to two e-mail reminders were sent during that 3-week time span, and a hard copy survey followed if no electronic response had been received. All surveys were completed on a voluntary and anonymous basis. Surveys were coded to pair participants from the same firm, but no individual identifying data were collected.

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Confidentiality of survey data has been strictly maintained. Participants who completed the survey were regarded with a $10 Amazon.com gift card. Measures Most of the study variables were measured by well-established scales. The measures chosen for this study were based on their quality (i.e., validity and reliability) and pervasiveness in the relevant literature. To alleviate common-source bias, data was collected from two sources. CEOs self-reported study variables including failure experience, learning behaviors, EI, and goal orientation, failure normalization, as well as control variables such as personality, trait affect, and relevant experiences. Managers independently evaluated CEO’s transformational leadership, learning behaviors, EI, and failure normalization of their society. When more than one manager provides evaluations on a particular CEO, all assessments were averaged to provide a balanced view of the focal entrepreneur’s transformational leadership. In addition, demographic information (age, gender, ethnicity, and education) and firm characteristics (revenue, number of employees, and age of the firm) were collected from both CEOs and managers. A summary of the definition, operationalization, and rating source of each study variable is provided in Table 1. A five-point Likert scale was used for survey items unless otherwise noted. Independent Variable Failure experience. Since we conceptualize failure as deviation from expected and desired results, failure experience can be gauged by having entrepreneurs assess results regarding important business objectives. Entrepreneurs were asked to assess results achieved by their businesses over the past 2 fiscal years. A rating of 1 indicates that results were far worse than expected, and a rating of 5 indicates that results were far better than expected. Assessments were applied to 10 generic objectives common to new business development, which were identified by McGrath (2001) after analyzing 56 exploratory projects. Examples of these criteria are “meeting budget objectives” and “meeting quality objectives.” These projects resemble the start-up process in that they require a company to learn about new markets, products, or technologies in order to develop new business. Ratings were reversed to indicate failure experience. McGrath (2001) reported good internal coherence (alpha = 0.85) and criterion validity (significantly and positively related to revenue, r = .53, p < .001) of this scale.

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Table 1 Summary of Study Variables Study variables Failure

Role Definition Independent Deviation from desired or expected results

Subcategories None

Source of Scale McGrath, 2001 Selfdeveloped

CEO Items Type report  10 Reflective 4

Reflective

Mgr report

 

Transformational leadership

Dependent

An influence process in which the leader elevates followers beyond selfinterests through idealized influence or charisma, inspiration, individualized consideration, or intellectual stimulation

Charisma, inspiration, individualized consideration, intellectual stimulation

Podsakoff et al., 1990

12

Formative

Learning behavior

Mediator

A dynamic process in which individuals transform experience into knowledge, skills, and competencies

Intention, extension, apprehension, comprehension

Edmondson, 1999

7

Reflective





Emotional intelligence

Moderator

The ability to accurately perceive emotions, assess and generate emotions to assist thought, understand emotions, reflectively regulate emotions to promote personal growth

Others’ emotion Wong & appraisal, self-emotion Law, 2002 appraisal, regulation of self-emotion, and uses of emotion to facilitate performance

16

Formative





Goal orientation

Moderator

The framework that defines individuals’ interpretation and reaction to events or outcomes

Learning goal orientation, performance goal orientation

13

Reflective



Vande Walle, 1997

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To triangulate the concept of failure, we developed a measurement to capture the subjective experience of failure. In-depth interviews and case studies on entrepreneurial failure revealed that entrepreneurs experience failure in multiple aspects of their lives, especially in the financial and psychological dimensions (Cope, 2003; Singh et al., 2007). Based on a comprehensive review of the literature, we generated 16 items that tap into entrepreneurs’ failure experience. One potential risk associated with attempts to study entrepreneurial failure, as Zacharakis and colleagues (1999) noted, is that questions regarding failure are likely to be threatening for entrepreneurs due to the stigma associated with failure and an instinct for self-preservation. We therefore avoided inquiring directly about failure, but set the referent as “events that deviated from your expected and desired results.” Three experts from the fields of entrepreneurship, organizational psychology, and management learning independently rated these items for face validity. Eight items were selected to form the initial scale of failure experience, with four items for the financial dimension and four for the psychological dimension. A pilot study was conducted to test the internal validity of this self-developed scale. Thirty-three members of the Entrepreneurs Organization Washington, DC, chapter completed the pilot survey and provided feedback regarding survey items. We used exploratory factor analysis (EFA) to explore the factor structure of the new measurement. The EFA results revealed a single factor, suggesting that entrepreneurs experience failure in a holistic manner rather than differentiating it in financial or psychological perspectives. Four items with the highest factor loadings were retained. We further conducted confirmatory factor analysis (CFA) to examine the internal consistency of the measurement model. CFA results regarding factor loading of each item and the internal reliability of the final scale are presented in Table 2.

Table 2. Item, Factor Loading, and Alpha Value of the Self-Developed Measurement Item These events put me into a substantial amount of debt. These events have defined me as a person. These events caused great financial loss to my company. I have been deeply concerned about these events.

Factor loading .90 .89 .83 .76

alpha .87

Dependent Variable Transformational leadership. We measured transformational leadership using the 12 items adapted by Rafferty and Griffin (2004) from Podsakoff, Mackenzie, Moorman, and Fetter’s (1990) transformational leadership scale. This adapted measure has been validated and used by numerous researchers (e.g., Bommer, Rich, & Rubin, 2005; Herold, Fedor, Caldwell, & Liu, 2008; Hill, Seo, & Kang, 2011; Rubin et al., 2005). More importantly, this measure is consistent with our conceptualization of transformational leadership. The four transformational leadership dimensions to be measured include charisma (i.e., “My leader has a clear sense of where he/she wants our company to be in the future”), inspiration (i.e., “My leader inspires others when he/she discusses our direction for the future”), intellectual stimulation (i.e., “My leader challenges others to reexamine some of their basic assumptions about their work”), and individual consideration (i.e., “My leader behaves in a manner which is thoughtful of the personal needs of others”). Managers identified by the founder-CEOs to be their direct reports will be invited to evaluate their leader’s transformational leadership. Intervening Variables Learning behaviors. We employed the seven-item scale created and validated by Edmondson (1999) to measure entrepreneurs’ learning behavior using a. Consistent with the individual level of analysis of this study, the referent point will be changed from team to individual. When self-reported by CEOs, an example item is “I regularly take time to figure out ways to improve my company’s performance.” When rated by managers, a sample item is “My CEO regularly takes time to figure out ways to improve the company’s performance.” Walumbwa, Cropanzano, and Hartnell (2009) employed a similar approach and reported good internal reliability (alpha = .87). Goal orientation. We used Vande Walle’s (1997) three-factor instrument to assess the three dimensions of goal orientation. The learning goal orientation will be measured by five items (e.g., “I look for opportunities to develop new skills and knowledge”), the avoid performance goal orientation will be measured by four items (e.g., “I’m concerned about taking on a task if my performance would reveal that I had low ability”), and the

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prove goal orientation will be measured by four items (e.g., “It’s important for me to prove my ability to others”). Emotional intelligence. We measured EI using the Wong and Law Emotional Intelligence Scale (WLEIS; Wong & Law, 2002). The WLEIS consists of four dimensions, three of which relate to self and one of which relates to others: self-emotion appraisal, others’ emotion appraisal, regulation of self-emotion, and uses of emotion to facilitate performance. Self-emotion appraisal measures the ability to understand and express one’s own emotions (e.g., “I have good understanding of my own emotions”), whereas others’ emotion appraisal measures the ability to perceive and understand others’ emotion (e.g., “I am a good observer of others’ emotions”). Regulation of self-emotion measures the ability to regulate one’s emotion (e.g., “I can always calm down quickly when I am very angry”), and, finally, uses of emotion to facilitate performance measures the ability to channel one’s emotions toward constructive activities (e.g., “I am a selfmotivated person”). Entrepreneurs will self-report all dimensions of their own EI, and managers will be invited to evaluate their CEO’s EI with regard to the others’ emotion appraisal dimension. While other measures are available for EI, most have been developed in educational settings and thus face constraints when applied to organizational settings. For example, the original Mayer-Salovey-Caruso Emotional Intelligence Test (Mayer, Salovey, & Caruso, 2002) consists of 141 items and requires 30 to 45 minutes to complete. Given the demanding tasks and challenges entrepreneurs face, it is difficult for researchers to solicit their participation for lengthy surveys. WLEIS was specifically developed for management studies and consists of only 16 items. In addition, WLEIS has demonstrated high internal consistency, convergent and discriminate validity, and incremental validity in a number of empirical studies (Hur, van den Berg, & Wilderom, 2011; Law, Wong, & Song, 2004; Sy, Tram, & O’Hara, 2006; Wong & Law, 2002). For these reasons, we consider WLEIS an adequate and suitable measure of EI in an entrepreneurship study. Failure normalization. We measured failure normalization using the perceived normalization scale developed and validated by Shepherd and colleagues (2011). The extent that failure is perceived as a normal occurrence in a society will be measured with

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three items (“Social communications signal that failure is considered an ordinary occurrence”), (“The society takes failure in stride”) and (“As far as the society is concerned, failure is not seen as anything extra-ordinary”). Shepherd et al. (2011) reported good internal reliability for this scale (alpha = .86). Control Variables In selecting variables to include as controls, we focused on those variables that have been shown to influence learning and leadership outcomes in past research or that could potentially be viewed as alternative explanations. Recognizing that we could not include all possible variables, we selected control variables in three general categories: demographics,

individual

characteristics

of

entrepreneurs,

and

organizational

characteristics. Demographics. We controlled for a number of demographic variables, including the participants’ age, gender, and ethnicity, as they have been shown to impact individuals’ learning, fear of failure and leadership outcomes in previous studies (e.g., Button et al., 1996; Maurer, 2001). Cognitive ability. Existing studies have suggested that cognitive or mental ability impacts learning (Ackerman, 1988; Yeo & Neal, 2004) and leadership effectiveness (Judge, Colbert, & Ilies, 2004). In the present study, we controlled for entrepreneurs’ cognitive ability by using education as a proxy. Education will be coded as 1, high school diploma; 2, associate’s degree; 3, bachelor’s degree; 4, master’s degree; and 5, doctorate or professional degree (e.g., M.D. or J.D.). Experience. Both industry experience and venture experience have implications on learning (Baum, Bird, & Singh, 2011; Venkataraman, 1997). We controlled for these experiences to focus the present study on failure as a special type of experience. Industry experience will be measured by the number of years that the entrepreneur has been working within the industry pertaining to his or her current business. Venture experience will be reflected by the number of ventures the entrepreneur has founded. Personality. Existing research on transformational leadership has identified two Big Five personality dimensions, extraversion and agreeableness, as the strongest and most consistent correlate of transformational leadership (Judge, Bono, Ilies, & Gerhardt,

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2002; Rubin et al., 2005). In addition, a growing body of research has suggested an indispensable role of affect in entrepreneurial cognition (e.g., Baron, 2008). By controlling for agreeableness, extroversion, and trait affect, we focused our analysis on that portion of transformational leadership not explained by personality factors. Entrepreneurs’ agreeableness and extraversion will be measured with scales adapted by Rubin and colleagues (2005). Both scales contain five items from Goldberg’s (1999) Big Five Inventory. Trait affect will be measured by a 10-item short version of the Positive and Negative Affect Schedule developed and validated by Thompson (2007). Firm characteristics. Prior research suggested that organizational context is likely to influence learning (Chuang & Baum, 2003; Haunschild & Sullivan, 2002). We accounted for the effect of context on individuals by controlling for firm age and size in terms of annual revenue and number of employees. Analytical Approach Since all the hypothesized relationships are at the individual level, we will employ hierarchical multiple regression to test our hypotheses. To examine the main effects specified in the first two hypotheses, we will enter all the control variables in the first step. In the second step, we will enter the independent variable. For the relationship to be significant, we will look for significance of the independent variable after controlling for the control variables as well as the significance of the change in r2. To test the interaction effects as specified in Hypotheses 3, 4a, and 4b, we will use the procedure suggested by Aiken and West (1991). We will enter the control variables in the first step, followed by the main effects of the independent variable and the moderating variable. In the final step, we will enter the interaction terms. For the interaction to be significant, we will look for evidence of (a) significance of the interaction terms after controlling for the main effects and the control variables and (b) significance of the change in r2 in the final step. DISCUSSION Entrepreneurship research has grown dramatically over the past 30 years, few empirical studies have helped researchers understand how entrepreneurs become

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effective business leaders in the process of launching and growing a venture. Prior research on entrepreneurs has primarily focused on personality (i.e. Stewart, Watson, Carland, & Carland, 1999), cognitive styles (i.e. Busenitz & Barney, 1997; Mitchell, Smith, Morse, Peredo, & Mckenzie, 2002), or behaviors such as decision making and opportunity recognition (i.e. Busenitz & Arthurs, 2007), despite scholars’ recognition of the importance of entrepreneurial leadership (Fernald et al., 2005; Gupta, MacMillan, & Surie, 2004; Swiercz & Lydon, 2002). We began to fill this gap in literature by investigating how and when entrepreneurs develop a specific form of effective leadership (i.e. transformational leadership) that is critical for venture success. An emerging evidence that entrepreneurs learn most from their failure experience (McGrath, 1999; Politis, 2005) led us to examine the role of learning from failure in an entrepreneur’s leadership. Taking an experiential learning perspective, we argued an entrepreneur learns from failure experience and translate that learning into transformational leadership behaviors. With affective event theory as the theoretical underpinning of our model, we made three sets of moderating hypotheses. First, as negative emotions can undermine learning (Cannon & Edmondson, 2001; Vince, 1998), an entrepreneur’s ability to master emotions determines the effectiveness of learning from failure. Second, since personal goals and negative emotions influence the interpretation of failure (Weiss & Cropanzano, 1996), goal orientation affects the learning process. Third, failure normalization as a cultural variable influences entrepreneurs’ emotional response to failure and in turn the effectiveness of learning from failure. Theoretical Implications In the present study, we proposed and empirically tested a conceptual model of how entrepreneurs acquire leadership competence through failure experiences, which is likely to enhance our understanding of transformational leadership in the entrepreneurial context. We extend the research on the genesis of TFL that has traditionally focused on more stable individual differences such as extroversion, agreeableness (Judge & Bono, 2000; Rubin, Munz, & Bommer, 2005) and achievement needs (Pillai, Williams, Lowe, & Jung, 2003). We do so by examining the impact of failure experience above and beyond personality and state affect. Our study echoes a steam of research arguing that

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both the quantity and quality of on-the-job experience matter for leadership development (Dragoni, Tesluk, Russell, & Oh, 2009; Quinones, Ford, & Teachout, 1995). While entrepreneurs’ on-the-job experiences contain both routines and critical events like failure and major mistakes, our focus was on those critical events. Future research may benefit from exploring what type of experience or what combination of venture related experiences is most effective in terms of the development of entrepreneurial leaders. Another theoretical implication of this paper lies in its extension of management learning theory. Existing learning theories, such as ELT (Kolb, 1984, 2005) and transformative learning theory (Mezirow, 1991), offer an excellent description of the ideal way of learning. How learning actually happens under varying circumstances, however, requires more theoretical development. Entrepreneurship is a dynamic phenomenon and the ways entrepreneurs manage and grow their businesses represent a rich context to study learning in the organization (Reuber & Fischer, 1999). By extending the concept of experiential learning to the entrepreneurial process, the present paper contributes to the management learning literature with a theory describing how managers (i.e. entrepreneurs) learn from critical events (i.e. business failures). While grounded in ELT, we also incorporate a myriad of management and organizational learning approaches (Argyris & Schön, 1978; Appelbaum & Gorannson, 1997; Edmondson, 2002; March, 1991) to address the limitations associated with ELT. For example, ELT has been accused with overlooking the emotional aspects of learning (Vince, 1998). In the present study, emotions have been the central piece of our theoretical arguments. We recognized the emotional repercussion that failure experience brings to entrepreneurs and the defense mechanisms triggered by negative emotions. While this study wholeheartedly champions the idea that entrepreneurship is an emotional journey due to an extreme level of personal risks and identification between the entrepreneur and the organization (Baron, 2008), direct influence of emotion or affect was not explicitly tested. Due to the nature of research design, we were not able to measure the negative emotions immediately following the occurrence of failure. Future research could employ longitudinal design to monitor the changes in state affect following key events, and study the nuances and direct effects of emotions. With documentation of emotions and EI together, scholars could also explore more in-depth

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how regulation of emotions plays a role helping the entrepreneur interact with various stakeholders and obtain resources. As Cardon, Foo, Shepherd, and Wiklund (2012) eloquently argued in a recent special issue of Entrepreneurship Theory and Practice - On the Heart of Entrepreneurship, entrepreneurship provides an excellent context to study affect and emotions. In leveraging the unique opportunity to study learning and emotions, we are not simply apply management and psychology theories in an entrepreneurial context, but also to develop and extend those theories and contribute back to those core disciplines. Third, in introducing personal moderators- learning goal orientation (LGO), avoid performance goal orientation (APGO), and emotional intelligence (EI), the present study seeks to answer the question why some people benefit from past failure experience more than others. Further, by exploring the role of the cultural moderator- failure normalization, this study also represents an attempt to incorporate situational influence in the entrepreneur’s cognition and emotions. When setting forth the reason why APGO negatively moderates learning from failure, an intriguing phenomenon came to our attention: APGO is both related to anxiety before learning activities and destructive emotional reactions after receiving negative feedback. As Payne and colleagues (2007) suggested it would be interesting to see whether the negative moderation effect is reduced when negative affect (i.e. state anxiety) is controlled. As far as individuals with high EI are capable of regulating their emotions, EI should attenuate the negative moderation effect of APGO in the relationship between learning and failure. Similarly, as individuals with APGO are generally less prone to the potential risks associated with negative emotions, APGO should attenuate the positive moderation effect of EI. These more complex interactions among personal moderators as well as those between personal and cultural moderators offer promising avenues for future research. Practical implications Beyond the scope of the present study there exist potentially an infinite number of factors that could affect the entrepreneurial learning and transformational leadership. Many of them we deem promising for future theorizing or empirical testing, including individual variables (e.g., self-efficacy, with regard to both being a leader and being able

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to learn), firm variables (e.g., slack resources), and contextual variables (e.g., environmental dynamism). With an objective of producing entrepreneurship research that informs entrepreneurship policy and practice, we chose to focus on a limited subset that could be influenced via entrepreneurship education, mentoring programs, or policy reform. The present study offers a number of suggestions for entrepreneurship pedagogy. From an educational perspective, failure could be more powerful than success because “it’s often easier to pinpoint why a failure has occurred than to explain a success” (McGrath, 1999: 28). Given that there is a significant undersampling of failure in contrast to the high rates of failure reported in entrepreneurial businesses (Denrell, 2003), we urge entrepreneurship educators, insider or outside universities, to design training and education programs that better reflect the reality facing entrepreneurs. As Shepherd (2004) suggested, a number of actions can be taken to improve the entrepreneurship education. First, lecture contents should offer statistics on the likelihood of business failure and highlight the point that failure represents an opportunity to learn. Second, entrepreneurs who failed or once committed major mistakes should be considered as potential guest speakers in class. A third-party observer of business failure, such as lawyers and accountants who assisted declaring for bankruptcy, could serve to provide additional information on business failure. Third, case study should include a more diverse range of business cases, including those near failure and failure stories. Last and the most effective way of failure education, is the first hand experiences of business failure, which can be gained by involving in role-play activities and simulations. For example, students could be put into the role of entrepreneurs who are preparing an announcement to inform employees that their business is about to close and layoff is inevitable. Fourth, classroom discussion should include when and how one considers terminating a business with dignity. A “real options” (McGrath, 1999) mindset together with thorough "cost-benefit analysis" would eventually prevent entrepreneurs from wasting personal and financial resources in inevitable business closure. Our study also raises important political implications with regard to legislations and cultural attitude towards failures. Cave and colleagues (2001) argue that policy makers’ attitudes toward failures are reflected in their countries bankruptcy laws.

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Traditionally, US has been a forth runner in the positive approach towards bankruptcy legislation. After declaring a bankruptcy, entrepreneurs may open their next venture and with the money they earn in it, pay their debts for the bankrupt venture (Landier, 2006). On the contrary, in Finland as well as other EU countries in general, a fair and quick second chance is not adequately recognized by national legislations. Due to this pitfall, European Commission (2011) recently launched a “Bankruptcy and Second Chance” policy program, aiming to find ways to minimize the lost entrepreneurship potential associated with bankruptcy and give entrepreneurs a “second chance”. Three fundamental conditions for easier and more efficient “second chance” were recognized. First, in order to reduce the stigma from bankruptcy, national legislation should have more effective measures against fraudulent bankruptcies in order to separate the non-culpable from the dishonest. Importantly, effective mechanisms to identify wrong-doers give creditors some safeguards and help those who come cleanly through bankruptcy gain a better chance of a fresh start. Furthermore, a more modern system for discharge is paramount to reduce the stigma of bankruptcy. Discharge should be as automatic and as reasonably limited in time as possible. In principle one to three years could be a good target to aim for. Contribution beyond the period of discharge is not reasonable and all debts should be discharged after this time. Finally, suitable financing solutions for re-entrepreneurs need to be put in place. Re-starting entrepreneurs need capital, cash flow and credit, with few, if any, restrictions on future trade, without being encumbered with long repayment periods of debts captured by a bankruptcy proceeding. Governments should work with financial sectors and coordinate lending practices to allow entrepreneurs with prior debt history to obtain financial resources for a fresh start. Addressing these problems help societies to adopt an “entrepreneur-friendly” view of failure and encourage individuals to view bankruptcies or other forms of business failure as learning experiences. The normalized perception of failure and learning-orientated goals, according to this research, are crucial for entrepreneurs to learn from failure, which in turn contribute to the ongoing success of existing SMEs.

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CONCLUSIONS Failure represents one of the most difficult but at the same time valuable learning experiences that individuals face. The question of how and when entrepreneurs learn from these experiences and translate that learning into transformational leadership is fundamental to our understanding of SMEs’ adaptation. The present research suggests that entrepreneurs are able to learn from their failure experience and translate that learning into transformational leadership behaviors. The extent to which one is able to employ the unique learning opportunity presented by failure, however, is influenced by one’s emotional intelligence, goal orientation, and the attitude towards failure in one’s society. This study contribute to the theoretical framework of entrepreneurial learning by articulating the dynamic learning process and identifying a myriad of personal as well as cultural elements that facilitate or inhibit entrepreneurs’ learning from failure. This enhanced understanding of entrepreneurial learning in turn improves our knowledge regarding the genesis of transformational leadership, particularly in the entrepreneurial context. We hope that our research contributes to inform entrepreneur educators and policy makers and help entrepreneurs to move forward from prior failure experiences. REFERENCES

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