The Startup Genome Report Extra on Premature Scaling is a project coauthored by Berkeley & Stanford faculty members with Steve Blank and 10 startup accelerators as contributors. They analyzed 3,200 high growth web/mobile startups and found that within 3 years, 92% of startups failed. Of those who failed, 74%, failed due to premature scaling. Premature scaling refers to spending money on marketing, hiring etc. either before you found a working business model or in general, spending too fast while failing to secure further financing.
Why would someone rush right into spending a bunch or money before they even had a product people really wanted? Because we believe our idea is something people would actually pay for. There is clearly a gap between what we think people want and what they really want. And this is the main issue…the gap between an idea and a valuable product. The problem is never coming up with a great idea, people have ideas all the time. The problem is completely understanding what it is people need as the basis of a product rather than an idea as the basis of the product; a great idea but a useless product.
Why do we have such arrogant thoughts? It might be easy to write this off to egotistical self-importance. But it’s more fundamental than ego; it is a function of cognitive errors in neurological information processing that blind us from seeing what customers really want. And ultimately whether our idea is of value. These are referred to as psychological biases. Different lenses that obscure or alter our view of the world. These aren’t just results of messing up facts or errors in logic but real deficiencies or limitations in our thinking.
There are dozens of cognitive biases known in psychology but the ones that typically affect startups include:
- Confirmation Bias – We listen to or focus on information that tends to back-up our own beliefs about a topic or idea. Startups need to be careful of this blind-spot given all the analytical techniques involved in growth hacking. Vanity metrics could lead startups to think they are doing better than they are since they are not measuring customer adoption or satisfaction but simply page hits and sign-ups.
- Attentional Bias – We tend to avoid data that is inconsistent with our thoughts…almost the reverse of the confirmation bias. This is a common mis-step undisciplined entrepreneurs and investors (or anyone for that matter) have towards avoiding information that may challenge their ideas. The person using this bias is so focused on success that they fail to pay attention to data that would have signaled they were on the wrong path. People and groups who experience this tend to have sensational blowout failures rather than small failures and pivots.
- Dream Bias – Many startups fantasize about being purchased or going public making the founders rich. Dream bias is the extremely narrow view that makes startup exits extremely exciting because that is all we hear about online and in the media. We join with the dream and don’t attend to the 99 out of 100 that did not succeed.
- Curse of Knowledge Bias – Many founders have creative ideas that are very forward looking and have immense potential. The Curse of Knowledge Bias is the narrow filter that inhibits these people from understanding an idea from someone with less information, education, or initiation about the idea. This is often the curse of people with gifted intelligence who make such rapid connections in their mind that they are dumbfounded why others cannot see it how they see it.
- Group Think Bias – When the entire development group is so gung-ho that they all think the same way and avoid alternative points of view.
What these biases have in common is that they are related to a sense of clinging to one’s own idea of value rather than understanding customer’s needs. What’s interesting about modern startup approaches, like Eric Ries’ Lean Startup, is the conscious and explicit priority of the customer’s needs. Entire business models should be uprooted if they fail to meet with market expectations. It is difficult to say if this philosophy is the full antidote to failing businesses but it certainly is focusing our attention on the right habits.
Here are a couple simple strategies that startup leadership can build in to their processes that will help inoculate the group from troubling biases.
- Employing Black Hat approaches to discussions at core decision junctures in development. Thinking Hats was coined by Edward De Bono who taught that there were a number of ways of thinking (i.e., the hat one is wearing) that influences the group or team. To avoid these biases the team focuses on strategizing about a problem in stages, including the Black Hat stage, which essentially forces the group to think about why it won’t work. A trick is to hire a “Black Hat” to do the work for you as we all have proclivities to one way of the thinking (We all know that special person who can find reasons why it won’t work).
- At specific times of the project, bring on board a thoughtful consultant or external friend of the startup who can present research that may force the group to attend to information that is contrary to the hope the group has for success.
- Have the group present their idea, its value, and its merit to a group of consumers and experienced, successful entrepreneurs who have been able to be rational in their business development success. Listen to their perspectives of what is wrong with the idea.
- Try to avoid saying I, me, or mine as much as possible in any conversation. You’d be surprised how much this helps you think about other’s needs, particularly potential customers.
Biases in thinking, problem-solving, or information processing are simply part of being human. We cannot magically remove them from our psyche. However, we can become aware of them thus reducing their effect on our business decisions, and more importantly actively work to moderate their impact, which is essentially what the lean approach to a startup is. That is, build something small, get feedback, assess, tweak or pivot. By constantly evaluating our product through the eyes of the consumer, startup leaders close the gap between a good idea and a valuable product.
This regular reflection shouldn’t just be done on products but on our own thoughts and assumptions that build our companies, products, and relationships. When we try our best to keep on top of these things, meeting customers’ needs isn’t so hard.
These biases in thinking not only pervade our business life but also our home life. They affect product development, relationships with staff, team functioning, and life at home. So you can use these techniques at work or at home with your loved ones as well. Like asking your customer for feedback about the startup, asking your wife if she is having her needs met by you is a powerful way to avoid thinking bias with often the most important people in our lives….those who love us. And, of course, those with whom we work.
written by Bob Acton, executive coach at Obair Leadership.