Bias and Its Entrepreneurial Impact

If there’s one thing that I love about the startup world, it’s the pertinence of basic psychological principles. On almost a daily basis, I review pitch decks that lack basic market research, but somehow argue a business will address an “$[insert outrageous number here]consumer need.” This lack of market research leads to biases in market sizing - an issue that can be resolved by talking with real customers and accumulating insight.

Many entrepreneurs believe that there’s an overwhelming market for the product or service that they’re developing, but they’ve really just identified a niche, improperly vetted customer base. Just because the entrepreneur has the need does not mean that the market has the need. In this sense, the entrepreneur is suffering from selection bias, because he/she is only taking notice of the customers that justify the business hypothesis. This can lead to thousands of dollars worth of wasted time and resources. Don’t address a problem that isn’t a problem - it isn’t worth it.

Other entrepreneurs do basic market research, but they succumb to confirmation bias. They accumulate findings to guide strategy, but they neglect the information that challenges their preconceived beliefs. This only can hurt the startup and the entrepreneur, because at the end of the day, customers’ preferences are what will guide sales. If the entrepreneur neglects these consumer preferences in the short run, when the time comes to scale sales efforts, the market may not respond favorably. An entrepreneur needs to be selling something that people actually like, if the end-goal is to build a successful business. Confirmation bias can inhibit this effort.

These biases are just the beginning of how psychology can influence the startup ecosystem. To prevent these biases from causing negative influence, it is important that the entrepreneur constantly does market research and fairly interprets the feedback from his/her surveys, even if this means using a third party to do the analyses. Granted, some of the most powerful startup ideas will not be immediately accepted or statistically validated by the market because of their innovative premises, but these cases are anomalous. More often than not, the entrepreneur will benefit from listening to his/her potential clients and building a business that meets a salient, confirmed market need.

The moral of the story: entrepreneurs, do your research, and be wary when when vetting new ideas.