Belief that Entrepreneurship is risky fosters risky ventures

You have seen my attempt to analyze data provided by a VC firm on how they decide to invest in startups. Contrary to what they thought they were doing there was just one factor that decided investment decision.

Do VCs make informed evidence based decisions by meticulously rating startups like the data we saw led us to believe? That requires a meta analysis across all VC firms and someone just did that.

These are some quotes from a  article by http://goo.gl/WivWG“>Stanford GSB Professor, Jeffrey Pfeffer, on the need for Evidence Based Management in Entrepreneurial environments:

  1.  … it has become conventional wisdom, accepted by all the parties ranging from entrepreneurs to those who provide them financing, that a high rate of failure is an inevitable consequence of doing new things, inventing new technologies, and opening up new markets—activities which are inherently risky and uncertain because they involve doing things that have not been successfully done before. Because this conventional wisdom suggests that a high failure rate is inevitable, there is often little effort expended trying to improve decision-making in new venture activity.
    (In other words, people start ventures without trying to validate customer demand and VCs invest based on all kinds of criteria but validity.)
  2. Many of the VC firms do what they do without much introspection or reflection, partly as a result of the egos and self-confidence of the VC partners. People who have survived and prospered in the venture industry have obviously done well, and those VC’s who don’t do well generally don’t last. Therefore, it is axiomatic that most fund managers (those who survived and prospered) believe they are much above average in their abilities and in their decision making.
    (Hey, smart people succeed. If not they wouldn’t have succeeded, would they?)
  3. Positive qualities get attributed to the people, groups, or companies that enjoy those good outcomes whether or not these qualities are true or causal. This means that high-performing VC’s will be perceived as having individual skill as a consequence of their performance, whether or not such skill actually exists.
    (No wonder we bow at the altar of success. This finding was first stated decades ago John Kenneth Galbraith in his Conventional Wisdom essay.)
  4. Entrepreneurs, too, mostly have strong egos, which is what is required to take on something new where the risks of failure are high. But this overconfidence among entrepreneurs and those that back them makes it difficult for people involved in creating new businesses to question things and to learn from setbacks and other experience.
    (Everyone is killing it! Disrupting status quo! I hope they would stop at that and not write seemingly erudite articles on brain science.)
  5. Most venture capitalists and entrepreneurs believe that outstanding individual people make the difference, leading them to focus on finding and recruiting stars and to eschew much attention to process, including decision making processes.
    (If you are already successful you are perceived to be outstanding and thought of as having success potential)
  6. Few of the participants in entrepreneurial activity suffer significant consequences from unsuccessful decisions, and therefore many players have less incentive than one might expect to improve their decision-making  – VCs get guaranteed principal and Entrepreneurs often, although not always, are working with other people’s money, so their financial downside, except in terms of the opportunity costs of their time, are also limited
    (Because failure is most often seen as an unavoidable risk of being an entrepreneur, there are few if any career risks for starting something that doesn’t work out!)

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