In the United States, the possibility of a start-up that will not survive in 5 years is 65%. For a shorter run, SBA survey showed that startups have 22% chances to fail in the first 12 months. Do you believe in that statistics?
Now for most of you that don’t work in a start-up company, you probably gonna believe in that statistics, because the result doesn’t impact you directly. But to those of you that work in a start-up company, you probably will not believe that the statistics will relevant to your startup. Because if the results were right, then your startup more likely to not survive in 5 years (65%) than to survive (35%). In fact, a survey found out that ⅓ entrepreneurs believe that their chances for their startups to fail are slim to zero.
That’s when overconfidence bias and optimism bias were implied. Overconfidence bias is when people confident and overrate their own ability to perform, rather than looking for real actual performance. Optimism bias is when people don’t believe that bad or negative events could happen to them.
In this case, the entrepreneurs that believe that their startup has 0 chances to fail are so delusional in their own confidence of his team or his own performance to lead the company with good performance. Entrepreneurs also delusional with denying their chances of the company to experience or going through negative events. So they don’t take the decision carefully and critically.
Another bias that influence startups are planning fallacy. Planning fallacy happened when a project or business that planned and forecasted unrealistically and almost refer to the best-case scenario. The forecasting could be duration, money, and performance.
For example in 2002, a survey showed that people usually expect the cost of renovating the kitchen for $18,685, but the real cost is $38,769. So they plan unrealistic forecast for renovating their kitchen.
Entrepreneurs usually proposed a good prospect and promising business to their potential investors when present their business plan. But as the plan implemented, there are some external and internal variables that they don’t consider when writing a business plan. So that’s why often, investors will be disappointed with the performance compared to the business plan that full of fallacy and bias (delusion).
So that are some biases and mental process that could impact start-ups to fail. Tell me your opinion in the comment box below!
REFERENCES AND SUPPORTING ARTICLES
Kahneman, D. (2015). Thinking, fast and slow. New York: Farrar, Straus and Giroux.
Optimism bias. (2017, July 31). Retrieved August 05, 2017, from https://en.wikipedia.org/wiki/Optimism_bias
Overconfidence effect. (2017, July 21). Retrieved August 05, 2017, from https://en.wikipedia.org/wiki/Overconfidence_effect