In these unprecedented times of (using the word unprecedented) uncertainty, many of us are contemplating taking the leap of faith and becoming a fulltime entrepreneur. In this edition of the Zymurgist Diaries, let’s aim to understand how founders continue to succumb to the overconfidence bias, and what they can do about it.
Courage vs Over-confidence
Courage is the willingness to take the risk once you know the odds. Overconfidence means you are taking the risk because you don’t know the odds, and that is what the difference is all about. If you have an overconfidence bias, you will most likely also “believe” that your assumptions are facts.
Founders, Investors and the Over-confidence Bias
In regards to an entrepreneur’s risk of failure, it simply translates to: “Overconfidence is an overestimation of one’s accuracy, or, alternatively, an overestimation of one’s ability relative to others, and links with increased failure risk of firms (Hayward et al., 2006).”
This type of bias causes founders to latch on to the “that-shall-never-happen-to-me” mentality. And, this can be quite dangerous for a startup because it can cause founders to engage in excessively risky decision-making behaviours. This bias, coupled with the survivorship bias can ruin the lives of startup founders, investors and staff.
So, before you attempt to beat the odds, be sure you could survive the odds beating you.
Incompetence is annoying. Overconfidence is terrifying.
Need I say more?
The “Anna Karenina principle” applied to startups
The Anna Karenina principle states that a deficiency in any one of a number of factors dooms an endeavour to failure. Consequently, a successful endeavour (subject to this principle) is one for which every possible deficiency has been avoided. The name of the principle derives from Leo Tolstoy’s 1877 novel Anna Karenina, which begins with:
“All happy families are alike; each unhappy family is unhappy in its own way.”
In other words: happy families share a common set of attributes that lead to happiness, while any of a variety of attributes can cause an unhappy family. All happy startups are different because they found something unique that defines their mission and their purpose in this world, whereas all unhappy startups are alike because they somehow failed to escape the essential sameness that is competition.
Over-confidence will kill your self-confidence.
Need I say more?
“The Hindsight Trap”
When Investors are supremely overconfident about something, they tend to use “hindsight” as a means of reinforcing some of their choices. Founders (and Investors) almost always look back at past successes and assume a successful outcome without considering the variety of combinations of attributes that contributed to past success.
Founders (and Investors) overestimate the talent in the team and often underestimate the risks (which come in all shapes and sizes). The fundamental problem with this mindset is that people eliminate or overlook the range of activities that were completely beyond their control, but somehow had a positive impact on the past outcomes.
Hindsight, coupled with overconfidence, is a recipe for failure.
Beyond over-confidence bias: How can founders overcome some of these biases?
The Reverse Anna Karenina Principle (yes, this exists) states and to paraphrase Leo Tolstoy:
“All successful startups look alike because they understand their uniqueness and correct for it, every unsuccessful startup fails in its own unique way, because it failed to understand its uniqueness.“
Self-awareness is an important characteristic that founders need to be effective. It is part emotional-intelligence, part perception, part critical-reasoning and the inane ability to understand your own strengths, weaknesses, thinking, emotions, and values — and anticipate their impact on the people around you. But that’s only half the story. Self-awareness is not as effective unless it is coupled with an equally important skill: self-management.
Unknown knowns and Unknown unknowns
As C.G. Jung, the Swiss psychiatrist and psychoanalyst aptly put it: “Until you make the unconscious conscious, it will direct your life and you will call it fate.” The Johari window is one such technique that helps people better understand their relationship with themselves and others. By working with feedback (both – soliciting and providing), it is possible for you to discover your blind spots and reduce the “unknown unknowns” in the process – thereby improving your perception of your strengths and weaknesses and reducing over-confidence.
We cannot change anything until we accept it. Condemnation does not liberate, it oppresses. Knowing your own weaknesses is the best method for dealing with the weaknesses of other people. The privilege of a lifetime is to become who you truly are.
When was the last time you really, truly listened?
Need I say more?
Parting thoughts till the next blog:
To paraphrase my long-lost schoolmate, Raghav Hegde: “Sanity is wealth in an otherwise insane world” as the antithesis to Carl Jung’s “Show me a sane man and I will cure him for you.”
Pause, reflect, act.
#TheZymurgistDiaries #GrowthMindset #Leadership #EntrepreneurialMindset #EntrepreneurialChallenges #covid19times
About the author:
24x Founder, 3x Success, 2x VCExit, 19x Failure, 100x Resilient, 14x Sectors, 6x Continents, $2+bn deals originated and advised.
Chennakeshav Adya (Keshav) is an eclectic value creator for mid-sized firms and PE/VC funds on Fund-raising, M&A, growth, corporate strategy and deal-making (currently, as co-founder of Adan Corporate). He is a resourceful entrepreneur with 20+ years of global experience in building businesses from a concept and growing global teams from 2 to 200+.
A deca-lingual, multi-talented zymurgist, Keshav is skilled at using the founder’s mentality and thrives in uncertainty and chaos, directing teams through the “Unknown” in the initial 1-2 years of setting up any type of new venture.
As an Entrepreneur Mentor in Residence (EMiR), Keshav is associated with London Business School’s experiential entrepreneurship activities supporting students and alumni who are interested in pursuing a career in entrepreneurship, whether launching or growing their own ventures.