Illusory Superiority Illusory superiority is defined by Wikipedia as overestimating one’s desirable qualities and underestimating undesirable qualities, relative to other people. Every founder considers themselves superior and should be funded accordingly. This is a flawed view of the startup world in which investors can see many startups while the founder…

Illusion of External Agency Illusion of external agency is defined by Wikipedia as when people view self-generated preferences as instead being caused by insightful, effective, and benevolent agents. Founders often believe someone else can make their fundraiser successful. The responsibility of fundraising for startups lies solely on the founder’s shoulders….

Group Attribution Error Group attribution error is defined by Wikipedia as the biased belief that the characteristics of an individual group member are reflective of the group as a whole. Startups often project the characteristics of one investor on the entire group when the group is much more diverse. Angel…

Zero-Risk Bias Zero-risk bias is defined by Wikipedia as the preference for reducing a small risk to zero over a greater reduction in a larger risk. Customers will choose a product that eliminates risk over another product that has a greater price reduction. For example, you could offer two products…

Survivorship Bias Survivorship bias is defined by Wikipedia as concentrating on the people or things that “survived” some process and inadvertently overlooking those that didn’t because of their lack of visibility. Incubators often measure their results based on startups that get funded rather than all the ones who go through…

Subjective Validation Subjective validation is defined by Wikipedia as the perception that something is true if a subject’s belief demands it to be true.  In developing products founders look for information that matches their own view of the problem and solution. Founders build their products for a market based on…

Pseudo-certainty Effect The pseudocertainty effect is defined by Wikipedia as the tendency to make risk-averse choices if the expected outcome is positive, but make risk-seeking choices to avoid negative outcomes. As the startup finds success, the founder becomes more risk-averse because something at stake can be lost. For startups that…

Authority Bias Authority bias is defined by Wikipedia as the tendency to attribute greater accuracy to the opinion of an authority figure and be more influenced by that opinion. Founders seek experts in various roles to help grow their startups. In particular, this occurs when the founder is working in…

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…

Ostrich Effect The ostrich effect is defined by Wikipedia as ignoring an obvious negative situation. It’s common among founders to ignore the challenging parts of the startup such as competitive position or weakness of the product, and more. Some founders handle it by not paying attention to it. Others misinterpret…

Planning Fallacy The planning fallacy is defined by Wikipedia as the tendency to underestimate task completion times. Projects take twice as much time and cost as planned. First-time founders don’t have previous experience and cannot rely upon past projects when making plans. Some founders recall selected cases in the past…

Pro-Innovation Bias The pro-innovation bias is defined by Wikipedia as the tendency to have an excessive optimism towards an invention or innovation’s usefulness throughout society, while often failing to identify its limitations and weaknesses. Startups overestimate the speed of adoption of new technology. Users are often slow to adopt new…

Projection Bias The projection bias is defined by Wikipedia as the tendency to overestimate how much our future selves share one’s current preferences, thoughts, and values, thus leading to suboptimal choices Founders who hire team members in the early stage come to realize that different skills will be required later…

Omission Bias The omission bias is defined by Wikipedia as the tendency to judge harmful actions (commissions) as worse, or less moral, than equally harmful inactions (omissions). Founders will often omit details rather than give outright lies when pitching their startup to an investor. Ultimately, in due diligence, all the…

Observer Expectancy Bias The observer expectancy bias is defined by Wikipedia as when a researcher expects a given result and therefore unconsciously manipulates an experiment or misinterprets data in order to find it. Startups will take customer feedback and ignore the elements that don’t match their expectations. This is a…

Normalcy Bias The normalcy bias is defined by Wikipedia as the refusal to plan for, or react to, a disaster that has never happened before. First-time startups suffer from the normalcy bias as they have limited experience with what can happen to startups over time. Founders with previous experience tend…

Money Illusion The money illusion effect is defined by Wikipedia as the tendency to concentrate on the face value of money rather than its value in terms of purchasing power. In pricing the product, a startup should list their product price in the smallest unit possible such as daily cost…

Illusory Truth Effect The illusory truth effect is defined by Wikipedia as the tendency to believe that a statement is true if it is easier to process, or if it has been stated multiple times, regardless of its actual veracity.  In a startup pitch, facts repeated several times can increase…

Singularity Effect The singularity effect is defined by Wikipedia as the tendency to behave more compassionately to a single identifiable individual than to any group of nameless ones. People in general feel compelled to help individuals.  In a disaster scenario such as an earthquake, donors will feel numb to the…

Reactive Devaluation   Reactive devaluation is defined by Wikipedia as devaluing proposals only because they purportedly originated with an adversary. Founders skip the lessons that can be learned from competitors because they view the competitor as wrong in their approach. This also applies to situations in which the founder discounts advice…

Product Segmentation Product segmentation creates different versions of the product for different users. Novice users may get a version that is simple to use while power users have access to tools that are more complex. One can achieve product segmentation by using a platform approach to the product. A platform…

Illusion of Control The illusion of control phenomenon is defined by Wikipedia as the tendency to overestimate one’s degree of influence over other external events. Startups often display an illusion of control about how their product and sales efforts will take over a market. Just as the gambler in the…

Hindsight Bias The hindsight bias is defined by Wikipedia as the tendency to see past events as being predictable at the time those events happened. When an investor sees a  startup fail or succeed, early indicators come back to the investor’s mind. In some cases, investors selectively remember certain events…

Benefits of a Platform-Based Approach A platform-based approach to your business brings many benefits  Platforms make it easier to use a recurring revenue model.  Investors appreciate the value of this revenue model. It brings predictability to the forecast and makes it somewhat easier to manage the business and raise funding….

Applying AI to E-commerce AI brings new capabilities and benefits to e-commerce businesses. AI can enhance e-commerce companies in the following ways: Create better search tools for customers seeking products and services online. Retarget customers for related products. Provide better recommendations to customers for similar products. Enhance the customer shopping…

Applying AI to Current Product AI can be applied to your current products. Here are some benefits of integrating AI with your product line: Add new capabilities to the existing product. This could be a better analysis of the information coming out of the product. Reduce costs. AI capabilities could…

How To Use Data With AI Data is a key component of Artificial Intelligence systems. AI looks for patterns in the data and draws conclusions from it. The better the quality of the data, the better the output. AI requires a substantial amount of data with which to discover insights….

The Use of Data and Algorithms in AI Artificial intelligence utilizes data and algorithms to create technical solutions. Data and algorithms could be open or closed giving the business a competitive advantage. Here’s a list of the business models and how open and closed data and algorithms impact the business….

Why Add AI to Your Business AI brings many advantages to your business. Here’s a list of benefits to consider for your company: Automate repetitive tasks such as those found in sales, administration, and customer service. For support, AI can enhance help desk functions by searching the network for potential…

Types of AI Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing. There are many types of Artificial Intelligence. Here’s a list of the types: Narrow AI — focuses on a single task or narrow range of functions. Applications…

Issues in adding AI In adding AI to your business consider these best practices: Create a list of potential applications and order them by the ease of use and value to the company. Identify a simple use case for the first effort. Check to see if you have the skills…

Business Benefits of AI AI brings many benefits to a business. Here’s a list of key benefits that can help your business. Improve existing products with new features. AI adds another layer of functionality to current products. Optimize the business. AI points out ways to improve business operations by reducing…

How AI Can Be Used in a Business AI can enhance the operations of a business. Here are some steps to implement AI in your startup: Identify an application where AI can enhance your operations. Define the outcome of the solution and what it should do. Choose an AI tool…

AI Art Generators AI brings new capabilities for generating art. There are many tools now available to create art of all styles, subject matter, and formats. One can even generate a new piece of artwork using the same style as an original work. By using machine language, algorithms, and data…

AI in Gaming AI brings many new capabilities and enhancements to gaming. Here’s a list of how AI improves gaming: Image improvement — AI can enhance the imagery in games by using neural networks to increase the number of pixels in the image. Level generation — AI can create new…

AI Applications in Business AI solves many business problems. Here’s a list of AI business applications: AI can create content for marketing campaigns building copy for social media, email, and website pages. It can assist sales in prospect management by searching all past correspondence with the lead. It can augment…

Generative AI Use Cases Generative AI even in its earliest stage provides meaningful use cases. Here’s a list of use cases it can handle: Creating marketing copy such as product descriptions and social media content. Assisting in sales work such as screening prospects and completing sales contracts. Code generation for…

Generative AI Artificial intelligence has been around for over fifty years. Through the use of large language models and machine learning tools, it is possible to mimic human output. Generative AI is artificial intelligence that uses algorithms to generate text, data, or images, that is new information. Generative AI models…

Curse of Knowledge The Curse of knowledge is defined by Wikipedia as when better-informed people find it extremely difficult to think about problems from the perspective of lesser-informed people. Startup founders are often experts in their field and find it difficult to discuss with investors who are not experts. They…

Default Effect The Default effect is defined by Wikipedia as when given a choice between several options, the tendency to favor the default one. It’s also called the Status Quo bias in which people choose the default option because it’s less risky. Startups should position their deal as the default…

Expectation Bias The expectation bias is defined by Wikipedia as the tendency for experimenters to believe, certify, and publish data that agree with their expectations for the outcome of an experiment, and to disbelieve, discard, or downgrade the corresponding weightings for data that appear to conflict with those expectations. Startups…

Fading Affect Bias The fading affect bias is defined by Wikipedia as a bias in which the emotion associated with unpleasant memories fades more quickly than the emotion associated with positive events. Startups encounter both hard times and good times.   People forget the hard times but remember the positive moments….

Framing Effect Bias Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing. The framing effect bias is defined by Wikipedia as drawing different conclusions from the same information, depending on how that information is presented. How you frame the…

Ambiguity Effect The ambiguity effect is a bias defined by Wikipedia as the tendency to avoid options for which the probability of a favorable outcome is unknown. Startups are risky and make proposals about the outcome of their deal.  Investors avoid engaging with startups when they do not have confidence…

Attribute Substitution The attribute substitution is a bias defined by Wikipedia that occurs when an individual has to make a judgment that is computationally complex and instead substitutes a more easily calculated heuristic attribute. Startups presenting a complex concept such as how their technology works should replace it with a…

Backfire Effect The backfire effect is a bias defined by Wikipedia as the reaction to disconfirming evidence by strengthening one’s previous beliefs. Investors can reject a startup’s pitch if they doubt the premise even if confronted with the facts.  Providing more facts will only make the investor dig in further. …

Belief Bias The belief bias is a bias defined by Wikipedia as an effect where someone’s evaluation of the logical strength of an argument is biased by the believability of the conclusion Similar to the confirmation bias, investors bring their experience to the startup pitch and make judgments on the…

Ben Franklin Effect The Ben Franklin effect is defined by Wikipedia as a person who has performed a favor for someone is more likely to do another favor for that person than they would be if they had received a favor from that person. This effect comes from a statement…

Shared Information Bias The shared information bias is a cognitive bias defined by Wikipedia as the tendency for group members to spend more time and energy discussing information that all members are already familiar with and less time and energy discussing information that only some members are aware of. Investors…

Picture Superiority Effect The picture superiority effect is a phenomenon defined by Wikipedia whereby the notion that concepts that are learned by viewing pictures are more easily and frequently recalled than are concepts that are learned by viewing their written word form counterparts. Investors identify and remember more from images…

Modality Effect The modality effect is a phenomenon defined by Wikipedia whereby memory recall is higher for the last items of a list when the list items were received via speech than when they were received through writing. In a startup pitch, the last slides are the ones that the…

Levels of Processing Effect The level of processing effect is a phenomenon defined by Wikipedia whereby different methods of encoding information into memory have different levels of effectiveness. Different forms of communication and listener processing will affect the investor’s ability to remember. Shallow learning results in short-term knowledge retention. Deep…

Lag Effect The lag effect is a phenomenon defined by Wikipedia whereby learning is greater when studying is spread out over time, as opposed to studying the same amount of time in a single session.  Investors learn more about the startup if the information is spread out over time. It…

Semmelweis Reflex Semmelweis reflex is a cognitive bias defined by Wikipedia as the tendency to reject new evidence that contradicts a paradigm. Some investors reject startups if it goes against conventional wisdom. In the startup world, there are always new technologies, markets, and business models to support them.   It takes…

Stereotyping Stereotyping is a cognitive bias defined by Wikipedia as expecting a member of a group to have certain characteristics without having actual information about that individual. Investors can stereotype startups based on their previous experience. This can be a bias against a sector of business, a leadership style, or…

Halo Effect The halo effect is a cognitive bias defined by Wikipedia as the tendency for a person’s positive or negative traits to “spill over” from one personality area to another in others’ perceptions of them.  Investors often presume those who are good at pitching and are passionate are also…

Ingroup Bias The Ingroup bias is a cognitive bias defined by Wikipedia as the tendency for people to give preferential treatment to others they perceive to be members of their own groups. Investors give preference to those in their network over those outside their network. This can be a challenge…

Self-Serving Bias The self-serving bias is a cognitive bias defined by Wikipedia as the tendency to claim more responsibility for successes than failures. Investors use successful investments as proxies for their skill but attribute the failures to other causes. Investors are naturally optimistic. When things go wrong it’s easy to…

Selective Perception Selective perception is a cognitive bias defined by Wikipedia as the tendency for expectations to affect perception. Investors tend to see what they want to see in a startup deal. Investors choose those elements in the pitch that match their experience and expectations. Selective perception comes from previous…

Present Bias Present bias is a cognitive bias defined by Wikipedia as the tendency of people to give stronger weight to payoffs that are closer to the present time when considering trade-offs between two future moments Early exits weigh stronger on investors than further-out exits even if substantially larger. Under…

Not Invented Here Not invented here is a cognitive bias defined by Wikipedia as the aversion to contact with or use of products, research, standards, or knowledge developed outside a group.  Investors can be biased toward startups that have developed the idea and strategy with the investor’s input.  This leads…

Neglect of Probability Neglect of probability is a cognitive bias defined by Wikipedia as the tendency to completely disregard probability when making a decision under uncertainty. Investors can be biased by their previous experiences and ignore the probability of success or failure in potential startup investments. Those who lost money…

Law of the Instrument The Law of the instrument is a cognitive bias defined by Wikipedia as the over-reliance on a familiar tool or method, ignoring or under-valuing alternative approaches.  “If all you have is a hammer, everything looks like a nail.” Investors use the deal flow and screening process…

Loss Aversion Loss aversion is a cognitive bias defined by Wikipedia as the disutility of giving up an object is greater than the utility associated with acquiring it. Investors will continue to hold a position in losing startups because of hating to lose and clinging hopefully to a potential turnaround….

IKEA effect The IKEA effect is a cognitive bias defined by Wikipedia as the tendency for people to place a disproportionately high value on objects that they partially assembled themselves, such as furniture from IKEA, regardless of the quality of the end product. Investors will have more affinity for a…

Groupthink Groupthink is a cognitive bias defined by Wikipedia as the psychological phenomenon that occurs within a group of people in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome.  Since many investors invest as a group and use social proof…

Mere Exposure Effect Mere exposure effect is a cognitive bias defined by Wikipedia as the tendency to express undue liking for things merely because of familiarity with them. Angel investors are much more likely to invest in deals in which they have more exposure to it.  This can lead to…

Gambler’s fallacy The gambler’s fallacy is a cognitive bias defined by Wikipedia as the tendency to think that future probabilities are altered by past events when in reality they are unchanged.  Investors bet on startups that follow what other recent successful startups have done even though the potential of the startup…

Frequency Illusion Frequency illusion is a cognitive bias defined by Wikipedia as the illusion in which a word, a name, or other things that have recently come to one’s attention suddenly seems to appear with improbable frequency shortly afterward. This comes from the mind’s selective attention kicking in when hearing something…

Decoy Effect Decoy effect is a cognitive bias defined by Wikipedia as a situation in which preferences for either option A or B change in favor of option B when option C is presented, which is completely dominated by option B (inferior in all respects) and partially dominated by option A….

Continued Influence Effect Some investors will hold onto their preconceived notions even when presented with corrected information. For example, a startup positions their company as providing a service but they don’t mention they have recurring revenue. Recurring revenue shows scalability while service businesses typically do not. Even after the investor…

Courtesy Bias Courtesy bias is a cognitive bias defined by Wikipedia as the tendency to give an opinion that is more socially correct than one’s true opinion, so as to avoid offending anyone. Courtesy bias arises when an investor tells the startup what they think the startup wants to hear…

Base Rate Fallacy The base rate fallacy is a cognitive bias defined by Wikipedia as the tendency to ignore base rate information (generic, general information) and focus on specific information (information only pertaining to a certain case). One-off sales to specific companies while helpful do not define the startup’s growth…

Bias Blind Spot The bias blind spot is a cognitive bias defined by Wikipedia as the tendency to see oneself as less biased than other people or to be able to identify more cognitive biases in others than in oneself. All investors have blind spots and biases. Investing in experiences…

Confirmation Bias Confirmation bias is a cognitive bias defined by Wikipedia as the tendency to search for, interpret, focus on and remember information in a way that confirms one’s preconceptions. Investors bring their recent investment experiences to fund new startups. If the investor recently lost their investment in a deal…

Availability Heuristic The availability heuristic is a cognitive bias defined by Wikipedia as a mental shortcut that relies on immediate examples that come to a given person’s mind when evaluating a specific topic, concept, method, or decision.  The availability heuristic operates on the notion that if something can be recalled,…

Bandwagon Effect The bandwagon effect is a cognitive bias defined by Wikipedia as the tendency to do (or believe) things because many other people do (or believe) the same. Investors follow the lead of others. The more investors following a deal, the more investors are willing to join. Investors look…

Anchoring Anchoring is a cognitive bias defined by Wikipedia as the tendency to rely too heavily, or “anchor”, on one trait or piece of information when making decisions (usually the first piece of information acquired on that subject). Investors tend to attach to the first thing startup pitches and stick…

Build a Moat Warren Buffet once said, “I look for economic castles protected by unbreachable moats.” In the startup world, investors look for a competitive advantage that can build a moat around the business. “Me too” businesses are difficult to fund because anyone can start one and compete. To build…

Repeatable Systems Repeatable systems are a key element in growing and scaling a business. Once the business is up and running, the founder should start to build repeatable systems. Anything you do more than once should be documented. The key steps should be written down and followed each time you…

Start With Why A key concept in aligning people’s motives is to start with the Why. The Why represents the motives behind people’s actions and their purpose. The How represents the methods or steps to get there. The What represents the results or outcome to achieve. To align the team…

Social Proof Social proof is the idea that people look at others to see what they did and then copy their actions.   The need for social proof can be found throughout the startup world. Customers will look to see if others have bought the product before they buy it. Investors…

Gamification Gamification applies game-design techniques to applications outside of gaming. Game techniques can make the application more engaging and productive. Here are some gamification techniques to include in your application: Establish flow in the software which is a combination of challenging and workable. Break large tasks down into smaller ones…

Open Platform vs. Closed Platform Open platform vs. closed platform is a key concept in the startup ecosystem. It defines how the startup will interact with customers, partners, and others. A closed platform is one in which the startup restricts access in order to monetize its content. It’s often called…

Freemium Freemium is a key business model in the startup world. It’s a pricing strategy that provides a product or service for free in order to attract more users.   After the user is engaged with the product, the company can upsell the user for paid services.  The freemium strategy is…

Technology Adoption Lifecycle Technology adoption lifecycle in the startup world shows how new technologies and products are adopted first by lead users and technologists.  Following this group are early and late-stage majority users. The laggards are the last group to accept the new technology.  This concept comes from Geoffrey Moore…

Forcing Function Forcing function is an activity or event that forces one to take action and produce a result. Forcing function is a mental model for how to set up a startup so it produces a result.  Here are some examples: Precommitment — in selling your product use monthly or…

Technical Debt Technical debt is a concept in software development that accounts for additional work to recode a program that was developed quickly rather than properly. It’s the result of prioritizing the speed of development over the quality of code. To manage technical debt in your business consider the following:…

Thought Experiments for Startups A thought experiment is a hypothesis laid out for thinking through its consequences. Many great thinkers have used this technique to solve problems. Galileo used it to prove his idea that mass does not influence acceleration when he dropped both a heavy and light ball from…

First Principles First principles are basic truths that cannot be deduced from any other proposition or assumption. Founders should base their startups and products on first principles. First principles research requires direct contact with customers to uncover the core problem. By going back to first principles the startup founder can…

Second-Order Thinking First-order thinking looks at solving the immediate problem. Second-order thinking looks at the consequences of solving the problem. To practice second-order thinking, ask the question, “and then what?” Most people look at the world through first-order thinking such as: “That product is on sale, I should buy it.”…

Probabilistic Thinking Probabilistic thinking is making an estimate using math or logic to determine the likelihood that an outcome is going to happen. This often involves statistics and historical data. If the revenue in a company has grown by 10% for each of the past five years, then probabilistic thinking…

Economies of Scale Economies of scale is an economic principle in which the costs of delivering a product go down as the volume goes up. Over the life of a product, the cost per unit should decrease. For startups, this means the cost to build your product should go down…

Jobs To Be Done Jobs to be done is a mental model in which you look at the customer’s workflow to determine what they might need to complete their jobs. This concept came from Clayton Christensen and provides insight into what product your startup should build. It provides a framework…

Circle of Competence Circle of competence is the area in which one has a skill or expertise. Tom Watson the founder of IBM once said, “I’m no genius.  I’m smart in spots and I stay around those spots.” You don’t have to be an expert in everything to be successful….

Schlep Blindness Schlep is a tedious or difficult journey. Schlep’s blindness is overlooking the obvious startup ideas as everyone is used to working in a current manner. Most founders can’t see many ideas because of schlep blindness — they know how hard it is so they don’t consider it.  Look…

Power Law The power law is a key mental model for venture investing.  The power law states that the majority of the returns will come from just a few of the investments. Similar to the Pareto principle, 20% of the deals will account for 80% of the returns. In venture…

Total Addressable Market The total addressable market is the size of the market that represents the total potential revenue for a product.   This is the market that could ever buy the startup’s product. In the startup world, there’s truly no limit to how big a company can grow. Investors look…

Flywheel Effect The flywheel concept comes from the industrial world in which a large mechanical flywheel gains momentum from small steps and eventually creates enough momentum to generate its own motion. In the startup world, the flywheel effect refers to an alternative to the sales funnel by building a growth…

Agile Development Agile development takes an iterative approach to building software. Instead of one monolithic development, agile proposes incremental changes. Agile is a useful mental model in the startup world as it fits well with the startup dynamic. Startups use agile development as they are still learning about customer requirements….