It’s clear that the above negative consequences can drag down other-wise talented founding teams and significantly reduce a startup’sprobability of success. But, specifically, how does entrepreneurialpassion play a role in these outcomes? How can positive emotions,so vital in propelling a great idea forward, also undercut a startup’sodds of success?
The answer lies in a simple, sneaky pattern, a looping interactionbetween internal factors (such as a founder’s biases, perceptions, andchoices) and forces that operate outside the founder (such as actions,data, and results). The pattern feeds and strengthens existing beliefsand biases—what we think is true, and what we hope to be true—aboutthe startup idea we are putting into action.
THE FOUR INTERDEPENDENT STEPS OF THE CORE PATTERN
The core passion-trap pattern consists of four interdependent steps,each leading to the next (as shown in Figure 2-1):
Attachment to an Idea. Whether through an incrementalprocess or a single bolt of inspiration, you latch onto a com-pelling business concept: a cool product, an innovative ser -vice, or an unstoppable mission. It’s good. You know it. Andyou can feel your enthusiasm building. The more you thinkabout it, the more excited you get. Your emotional attach-ment grows, and leads to . . .
Investments and Actions. You invest time, energy, money, orother resources and move forward with your idea. This caninclude many different actions, depending on how far youhave gotten along your startup path—sharing your idea withcolleagues, exploring the Web, talking to potential customers,hiring team members, or building a prototype. These actionsgive rise to . . .
Feedback or Results. Early actions always lead to somethingthat can be seen, heard, and evaluated—the reactions offriends and family, information about customers and com-petitors, a duct-tape version of your first product, or evenearly sales results. These results are then subject to . . .
Biased Interpretation. At the heart of the passion trap is theenthusiastic entrepreneur’s well-documented tendency tonotice and embrace information that supports existing beliefsand to discount or completely miss contradictory evidence.
Figure 2-1. The core pattern of the passion trap
This selective filtering process is governed by a set of subtlebut powerful cognitive biases operating just beneath thefounder’s awareness. As a result, he or she develops an evenstronger emotional attachment to the idea, and the cycle rollsforward. Wash. Rinse. Repeat.
Not only does each step in the pattern lead to the next in a self-reinforcing cycle, but smaller reinforcing loops are at work as well.As discussed in Chapter One, when you invest in an idea and start tomake it real (oval 2 in Figure 2-1), you strengthen your attachmentand commitment to it. And, as your attachment to the idea grows, sodoes the likelihood that your biases will distort incoming reality (oval4 in Figure 2-1).
THE ROLE OF COGNITIVE BIASES
If there’s a single psychological concept that every aspiring entre-preneur should understand, it’s the phenomenon of cognitive biases.Cognitive biases are mental and emotional filters that help us makesense of the constant barrage of information coming at us everyminute of every day. They determine how we frame our interactionswith the world, where we focus our attention, what patterns we select,what data we see as important versus irrelevant, and how we reachconclusions. Like software programs running quietly in the back-ground of our mental computer, these biases operate continually andreflexively. As with blinking and swallowing, they are always at workbut rarely noticed.
For the most part, cognitive biases are tremendously helpful, al-lowing us to make quick judgments and navigate through an increas-ingly information-rich world. It would be impossible to get throughour day without them. But they also play a central role in perpetuatingthe passion trap, leading to errors in reasoning and the recycling offlawed assumptions and choices.
In one sense, launching a business isnothing more than a rapid series of decisions, one after the other, and startup founders must continually improve their ability to recognizepatterns, analyze these patterns efficiently, then make the right calls, all at a rapid-fire pace. In growing D1 from a blank sheet of paper into a successful national competitor, J.C. Faulkner didn’t think of his busi-ness as being about mortgages. Instead, he focused on making quick,high-quality decisions and on building a team and a culture that coulddo the same. “That’s the core business we were in,” he says. “Makinggreat decisions efficiently.”
In the startup environment, the importance of making good de-cisions is complicated by the naturally high levels of passion and emo-tion associated with launching a big idea. As we saw in Chapter One,the mechanisms that reinforce our beliefs operate at a neurologicallevel, where thoughts and emotions are tightly intertwined. No choiceis made at a purely intellectual level. In fact, a good deal of researchin cognitive psychology and neuroscience suggests that emotions driveour decision making processes, even when we are completely unawareof their role.
Of the many biases that sabotage our startup reasoning, here are afew that every startup founder should understand, as they are espe-cially likely to trip up entrepreneurs who are passionate about theiridea:
Confirmation Bias—our tendency to select and interpretavailable information in a way that confirms our pre-existinghopes and beliefs. Lynn Ivey, for example, heard a lot of pos-itive feedback about her idea for a high-end adult daycarecenter, but she can also recall some notable dissenters: a for-mer healthcare system CEO, who thought in-home careservices would be a formidable competitive force; a boardmember, who was concerned that customers wouldn’t paysuch high fees; and an expert on services for the aging, whofelt a for-profit center would never work. These views wereeasily dismissed and drowned out by supporters, whose opin-ions paralleled her own. In retrospect, the dissenting viewsform a pattern of concern. But at the time, they were just iso-lated exceptions to a clear majority.
Representativeness (belief in the law of small numbers)—thetendency for entrepreneurs to reach conclusions based on a small number of observations or a few pieces of data. Entre-preneurship researchers have concluded that startupfounders often fall victim to this bias, because they operatein uncertain and fast-moving environments where facts canbe hard to obtain.
The new founder who hears positive re-views from three out of four friends and then assumes that75 percent of the general population will react similarly isunder the spell of representativeness. It’s also in play when awanna-be entrepreneur reads a magazine’s worth of successstories and assumes much higher success rates than actuallyexist across the general population.
Overconfidence/Illusion of Control—these are actually dis-tinct cognitive biases, and each has both positive and negativeimpacts on entrepreneurial success. Overconfidence leadsfounders to treat their assumptions as facts and see less un-certainty and risk than actually exists. Illusion of controlcauses business owners to overrate their abilities and skillsin controlling future events and outcomes.
Both of these ten-dencies drive entrepreneurs to develop rose-colored plansand fail to prepare for inevitable bumps in the road. Onestudy of startup ventures across a range of industries, for in-stance, found that more than 80 percent failed to meet con-fidently established market share targets.
Anchoring—our mind’s tendency to give excessive weight tothe first information we receive about a topic or the first ideawe think of. This bias is all about the stickiness of first ideasand impressions. It encourages founders to cling to an orig-inal idea or, if pressed, to consider only slight deviations fromthe idea instead of more radical alternatives. An example ofanchoring is the role it plays after initial sales or cost targetsare set by a founding team. Even if the forecasts are wildlyoptimistic (as they often are), they continue to serve as an-chors for future planning processes, influencing forecasts to-ward unrealistic levels.
Escalation of Commitment (“sunk cost” fallacy)—the ten-dency to continue or increase commitment to an endeavorbased on prior investment of money, time, and energy.Startup founders may refuse to abandon a losing strategy inan attempt to preserve whatever value has been created upto that point. Paul Graham, accomplished entrepreneur (Via -web) and investor (Y Combinator), refers to this phenome-non as the “still life effect,” based on his experience as apainter.
He noticed his tendency to continue painting apoorly arranged composition (a bunch of stuff “plonked” ona table) simply because of the time already invested in theproject. This parallels a common approach among startupteams. “You come up with a random idea, plunge into it, andthen at each point (a day, a week, a month) feel you’ve put somuch time into it that this must be the idea . . . Plunging intoan idea is a good thing. The solution is at the other end: torealize that having invested time in something doesn’t makeit good.