Optimism Bias

The optimism bias is defined by Wikipedia as the tendency to be over-optimistic, overestimating favorable and pleasing outcomes 

Startup founders often focus solely on the opportunity while ignoring the risks.

Skeptical investors do the opposite by focusing on the risks.

Startups succumb to the optimism bias because they believe more things are under their control and they can influence outcomes by their own efforts.

To overcome the optimism bias, consider the following:

Identify the average time it takes to perform each step in a startup such as hiring the team, building the first product, onboarding the first customer, etc.

Then use those averages in building out the schedule.

By using industry averages one can overcome the optimism bias.

In addition, conduct a premortem with the team in which you ask “Pretend we are in the future and the project failed.  Ask why it failed.”

Consider the negative outcomes to identify the risks in the plan.

This will reduce overconfidence in the plan and identify areas for improvement.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.