Don’t let overconfidence cloud your judgment.
5 min read
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You have to be confident to start a business. Depending on the study, between 75 and 90 percent of startups fail. To be an entrepreneur, you have to believe that your business, that you can beat those odds. If you are confident enough to start a business, then you are smart enough to know you mustn’t be overconfident. Confidence gives you gumption, but overconfidence can make you blind.
Every day you chant “Don’t be overconfident!” with your morning coffee. You grow confident you’ve vaccinated yourself against overconfidence. Then your new business joins the sad 75 to 90 percent of vanished ventures. You wish you’d had even one tiny, trivial doubt.
No entrepreneur sets out to be overconfident, but overconfidence happens. So what causes it? How do we become overconfident, if it’s the last thing we want?
I am sorry to report that there are at least three roads to overconfidence, and none of them has a sign that says “Warning: Entering Overconfidence.” On the contrary: In a cruel twist, the road signs say “Capitalist Nirvana, Straight Ahead.” The deceptive signs were not put there by pranksters, but by well-meaning investors. The investors also suffer from the overconfidence they induce, if it’s any consolation. And it isn’t.
The first road to overconfidence is called due diligence. Due diligence invites skeptical investors to question the numbers on your forecasts. If your numbers survive, you think your business plan has been thoroughly, soberly vetted. Unfortunately, that’s wrong. Investors’ due diligence focuses largely on ensuring they won’t get fleeced by you. It is designed to make sure your numbers add up. It is not designed to make sure your business can compete.
The second road is called great expectations, and it is a perverse consequence of the long odds against success. Investors know most startups fail. They need high returns because their few hits have to cover their many misses. That, in turn, pressures you to make big promises. You may not feel overconfident, but you have to sell the promises.
The third road to overconfidence is called “just do it.” The culture around entrepreneurship often bombards you with simplistic, gladiatorial advice. Go all-in! Don’t be afraid to fail! Believe in yourself! Far from preparing you for success, that advice may lead you to ruin. It deludes you into thinking that being nimble and agile, and listening to every minor market shift from your Big Data, is somehow a foolproof competitive strategy. Who needs all that dry, boring analysis and preparation you learned in business school?
So what should the thoughtful entrepreneur do? Approach with healthy skepticism and watch out for these four warning signs.
1. You look for more, more, more evidence your plan will work.
Remedy: Look also for disconfirming evidence; that is, evidence that contests your case. For example, why might the market for autonomous toasters not be ready to take off? One of the most-often cited causes of startup failure, according to failed entrepreneurs themselves, is that there was no market need. It’s good to learn from mistakes, but it’s better to prevent them.
2. You assume a smooth launch, with everything going according to plan.
Remedy: Ask yourself what has to happen, and what has to not happen, for your venture to succeed. At the top of your list should be actions or reactions by the market incumbents or other new entrants like you. What would you do if you were them? What can you do to respond, defend, prevent, or sidestep?
3. You dutifully do due diligence, as requested, on your financial projections.
Remedy: Invite investors to join you in strategic due diligence on your business model. Or conduct simulations — role-playing, war games, decision analysis, scenarios, or even vigorous brainstorming — on your own, and tell them what you’ve found. Remember that improving your strategy reduces their risk, and reducing their risk increases the odds they’ll give you what you need.
4. You rely on positive anecdotes and aspire to be the [insert wonderful company] of your industry. Remedy: Pay attention to your reasoning. If someone else used the same logic to ask you for money, would you give it to them?
Learn those warning signs of overconfidence, and adjust your plan, even if investors don’t make you do it. Investors only risk money they can afford to lose. You are playing for bigger stakes. Consider how you could be wrong when you’ve still got time to figure out how to do it right.