Optimism Bias or Persistent Vision?

by George Audi

Product-market “mis”fit tends to be the most common source of failure for new startups. A key reason why entrepreneurs fail to see the misfit, despite MVP launches, senior advice, or lack of customer interest can be linked back to their optimism bias. Optimism bias as discussed in class refers to risk-takers underestimating the odds they face and overestimating the likelihood of positive events. Such behavior is witnessed not just with startups, but also in mature companies. We have repeatedly read of overconfident CEOs paying excessive premiums for an acquisition and later dealing with post-merger integration dilemmas.

But when does an entrepreneur’s persistence in the face of obstacles become naiveté rather than the source of the next big thing? In hindsight, Mark Zuckerberg was a visionary to introduce a platform on which users can “Poke” their friends and “Like” their “Statuses” – terms which, if asked to users at the time, would have raised eyebrows and generated smirks. On the other hand, Steven Carpenter was considered too “optimistic” in his belief that users of his Cake Financial software would share their portfolio activity with friends and family. The former persisted in his vision and created a multi-billion-dollar social network powered by advertisers’ seek for a “Like”. The latter should have listened less to his gut and shut the curtains on his 4-year-old venture much earlier than he did.

I believe there are 3 main reasons why entrepreneurs are optimistically biased:

  1. Egocentrism: new business ideas frequently arise from an entrepreneur’s own frustration with a specific situation, prompting him/her to find a solution. But such solutions may be considered nice-to-have’s rather than must-have’s by mainstream users.
  2. Pressure to impress: entrepreneurs face a tremendous pressure to perform according to specific milestones, especially after they receive VC funding. This may encourage them to block out negative feedback and/or suboptimal test results.
  3. Lack of adequate industry knowledge: when entrepreneurs do not master the specificities of an industry (or are not surrounded by people who do), they may fully understand its ecosystem. They neglect failed precedents or current competitors, assuming no one else has thought (or is thinking) of the same idea.

While by no means an expert on optimistic bias (I am trying hard to avoid it in my current startup!), I have some thoughts on how one could try to mitigate it.

Identify your vocal customers and engage with them regularly

  • Whether a few hundred in B2C ventures, or a handful in B2B ones, those customers who are willing to give feedback on your product can become your reality check, and help you calibrate your value proposition to address the true pain points they face

Build an advisory team of topic experts you trust and give them “halt” power!

  • You can set your own “halt” rules, but for example, your advisors can force a pivot after three failed attempts from your part to prove a certain hypothesis that you are reluctant to let go of

Discuss the feedback you collect from some customers with others

  • Doing so allows you to separate idiosyncratic criticism/excitement from systemic one. If a certain negative/positive feedback is expressed by some users, bring it up with other users and gauge their reaction. If that new pool has opposing feedback, it’s an indication for you to refute/validate your hypothesis

Offer a free trial to naysayers

  • If they remain unconvinced after using your service, you would have learned a valuable lesson. If they value it, you’ve earned yourself a paying customer.

This list is by no means exhaustive! I invite you to share your own comments as well and validate/discredit mine. It would be great to have a practical list of Do’s and Don’t’s for us current and future entrepreneurs to transcend to persistent visionaries rather than failed optimists.

George Audi
Twitter: @audi_george


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