The Kafkaesque nature of confidence in startups and venture capital

Note:

Sometimes being a founder feels like turning into a beetle while everyone around you becomes more and more enamored with your perceived success.

A huge part of the venture capital and startup ecosystem idolizes confidence, past successes, and those who claim to know better. But in some true Orwellian doublethink everybody knows that Success is overwhelmingly driven by luck, while we can't admit that this applies to our startup too. Likewise there is broad recognition of Herd Mentality across VCs, while no VC will admit this drives their investment decisions.

↳ From the source
“Entrepreneurial Delusions

The chances that a small business will survive for five years in the United States are about 35%. But the individuals who open such businesses do not believe that the statistics apply to them. A survey found that American entrepreneurs tend to believe they are in a promising line of business: their average estimate of the chances of success for “any business like yours” was 60%—almost double the true value. The bias was more glaring when people assessed the odds of their own venture. Fully 81% of the entrepreneurs put their personal odds of success at 7 out of 10 or higher, and 33% said their chance of failing was zero.”

Thinking, Fast and Slow - Daniel KahnemanPage 179

↳ From the source
“Confidence is a feeling, which reflects the coherence of the information and the cognitive ease of processing it. It is wise to take admissions of uncertainty seriously, but declarations of high confidence mainly tell you that an individual has constructed a coherent story in his mind, not necessarily that the story is true.”
Thinking, Fast and Slow - Daniel KahnemanPage 212

This happens at all levels:

  • LPs convince GPs that they know what startups will succeed, they don't.
  • Founders convince LPs that their startup will succeed, they pivot in 6 months.

And it's self-reinforcing:

  • GPs give money to LPs that express no doubt.
  • LPs give money to Founders who express no doubt.
↳ From the source
“Bullshit is unavoidable whenever circumstances require someone to talk without knowing what he is talking about.”
On Bullshit - Harry G. FrankfurtPage 63

It is all a great example of how We underweight statistics and overweight causes in our judgement. The statistics are clear: most founders and VCs fail to hit their marks, but admitting the statistics apply to you won't get you far.

↳ From the source
“Students “quietly exempt themselves” (and their friends and acquaintances) from the conclusions of experiments that surprise them.”
Thinking, Fast and Slow - Daniel KahnemanPage 173

It's overwhelmingly privilege and luck.

Reference Notes3 books
  1. The MetamorphosisFranz Kafka
  2. Thinking, Fast and SlowDaniel Kahneman
    pp. 173, 179, 212
  3. On BullshitHarry G. Frankfurt
    p. 63
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