5-4-3-2-1 Countdown for Entrepreneurs (3/15/23)
5
Biases that lead to bad startup decisions
Hindsight bias is our tendency to overestimate how well we can predict something -- but only after we learned what actually happened. It’s like after a movie ends with a plot twist that no one would have guessed, yet your friend claims, "Yeah, I totally saw that coming."
The more hindsight bias we apply, the more we convince ourselves that either the result was certain or we’re just really awesome at predicting the future. Both are dangerous. Startups are highly uncertain, and nobody has a crystal ball.
Why does it matter? Because if we convince ourselves that we clearly see the future, we will experiment less. We will challenge fewer assumptions. We won’t push for more validation. All those things lead to bad decisions.
Anchoring bias is our tendency to put too much faith in the first bits of information we collect. A classic example is when a salesperson jacks up the "full price" of an item so when they offer you a “special” discount you feel like you're getting a good deal.
Anchoring is an especially big problem when startups are still sizing the market opportunity or trying to raise money. We have the tendency to "start big" — big markets, big opportunities, big exits. When we do that, opportunities that don't reach that level feel less worthwhile, even if the original "anchor" was not realistic or achievable. That leads to bad decisions.
Availability bias is our tendency to be more influenced by information we receive more often or remember more readily. Imagine visiting the website of a new gadget. Afterward, Google starts blasting you ads for the product, and you think, “Wow, this thing must be great; it’s everywhere!”
In the startup ecosystem, success stories of a venture or entrepreneur are shared 10, 20, maybe 50 times more often than tales of failure. Compared to what is happening in real life, that is upside down. We have ample opportunities to produce success, but availability bias can distort the path to get there. Yes, it leads to bad decisions.
Self-serving bias is our tendency to link our successes to things we control -- like skill. And we blame our failures on things we don’t control -- like luck, or other people. Imagine a golfer hitting a great shot then humblebrags about all their practice time and coaching from a pro. But when their next shot flies into the woods, they ask, “Where the hell did that wind come from?”
Failures happen all the time, even for the most successful ventures, and failures create the best opportunities for learning, innovation, and growth. But when self-serving bias creeps in, we chalk up those “non wins” to tough luck. And that rationalization leads to bad decisions.
Confirmation bias is our inclination to favor ideas, information, and people that reinforce our perspective. An example is when CEOs promote and reward "yes men" more often than team members who raise critical questions and propose more unconventional alternatives.
The operational motto of a startup should be: “Challenge Every Assumption.” Given that startups are uncertain, the winners aren’t the ones who know the most at the start. The winners are those who learn the most as they execute.
Startup leaders blinded by Confirmation Bias learn less. They usually start with a strongly held belief they just “know” is true…and double-down. And yes, indeed, that leads to bad decisions.
4
Attributes of a great entrepreneur
RESOURCEFUL. “However desperate the situation and circumstances, don’t despair. When there is everything to fear, be unafraid. When surrounded by dangers, fear none of them. When without resources, depend on resourcefulness.” Sun Tzu
RESOLUTE. “Some people are more talented than others. Some are more educationally privileged than others. But we all have the capacity to be great. Greatness comes with recognizing that your potential is limited only by how you choose, how you use your freedom, how resolute you are, in short, by your attitude. And we are all free to choose our attitude.” Peter Koestenbaum, Leadership
RESILIENT. “We all have battles to fight. And it’s often in those battles that we are most alive: it’s on the frontlines of our lives that we earn wisdom, create joy, forge friendships, discover happiness, find love, and do purposeful work.” Eric Greitens, Resilience
RESPECT. “Respect your efforts, respect yourself. Self-respect leads to self-discipline. When you have both firmly under your belt, that’s real power.” Clint Eastwood
3
Views of our startup ecosystem: good, bad, and ugly
I love the startup ecosystem, but that doesn’t mean I like everything about it. In this short personal video, you’ll hear my candid critique.
Our startup ecosystem is great and vital. It makes a huge difference for many founders. But it’s important that we understand its good...bad...and ugly elements...so we can make it even more effective.
Let’s start with the good. The startup community genuinely pays it forward. No strings. No ulterior motives. Just genuine help. Whether it’s mentoring, networking, advising or other assistance, there’s more mutual support here than I’ve seen in any other business sector.
Now the bad. For all its benefits, the startup ecosystem often gives status to the wrong things. And getting funded is at the top of that list.
There’s too much status given to successful fundraising, and too little status given to building and growing a sound venture. For so many young startups, becoming “venture-backed” can feel like a bigger accomplishment than becoming cashflow positive, or better yet… profitable.
And when these priorities get mixed up, it makes founders less entrepreneurial… and ultimately… less successful.
Now let's talk about the ugly. It’s what I call “vision creep.”
Vision creep is what happens when a viable startup struggles to raise money because their potential isn't big enough. In order to impress potential investors, they scale up their vision – to something much bigger, but usually not better.
They make their projections bigger; they make their expectations bigger; they make their plans bigger. And while this more ambitious vision might make a venture more fundable, it makes their actual prospects for success...ugly.
Because they can’t realistically achieve those new projections, expectations, and plans. And when they fail -- when investors complain, when employees are demoralized…. the stress is killer.
You can’t entirely blame an ecosystem for the failure of an individual venture. After all, startup founders and CEOs are only human. And entrepreneurship is risky.
But we, as individuals, can work to improve an ecosystem meant to help new founders.
That’s our mission – to help new entrepreneurs, just as we’ve been helped. To pay it forward.
2
Articles to help you create a compelling presentation
“Storytelling tips for Founders” from The Science of Storytelling by Will Storr in Forbes
38 Pitch Deck Examples – How to improve your pitch deck, NEXEA
1
Question for startup CEOs
Do you see yourself as a Chief Executive Officer...
or as the Chief Entrepreneurial Officer?
I proposed this more aspirational title and concept in a commentary several months ago – “The kind of CEO a startup really needs”. And I will be elaborating on it very soon.
We often talk about the need for a leader to have a clear, motivational vision. So true. But a CEO’s vision doesn’t just require an imagining of the future; it’s also a matter of self-vision. And when a CEO sees herself or himself as the Chief Entrepreneurial Officer, that changes not just one’s perspective, but also one’s decision-making and priorities.
It’s an exciting, hopeful idea and I hope you’ll join me in contemplating the possibilities.
Stay safe, stay happy, stay in touch!
Adam
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