2 min read In this article, we look at five common investor biases.
It’s natural to have biases – we all do. We’re only human after all. However natural or not, some of these biases may be interfering in our relationships with our startups. It’s important to be aware of these biases so that we can do our best to overcome and understand them.
Overcoming these biases can help strengthen your startup relationships and your deals. Who knows, you may even break through a current issue with a startup and see a higher return on investment.
Bias Blind Spot
The bias blind spot is a cognitive bias defined by Wikipedia as the tendency to see oneself as less biased than other people. To clearly identify more cognitive biases in others than in oneself. All investors have blind spots and biases, investing in experiences causes one to be biased unconsciously.
To overcome biases, focus on self-awareness. Learn more about the common types of bias such as anchoring and confirmation bias. Pay attention to how you react and respond to different pitches. Question your judgment to see if it’s based on fact or on personal feeling or opinion. Identify what type of deals and founder types make you uncomfortable.
Question your judgment process to see where it may be flawed. Are you biased against certain types of people because of past experiences? If certain types of startups and founders make you uncomfortable then spend more time with them. Becoming familiar with them will make you more aware of potential biases you may have.
The self-serving bias is a cognitive bias defined by Wikipedia as the tendency to claim more responsibility for successes than failures. Investors use successful investments as proxies for their skill but attribute the failures to other causes. Investors are naturally optimistic, and when things go wrong it’s easy to blame external factors.
To overcome the self-serving bias, consider the following: Maintain awareness about the self-serving bias. Check yourself when giving yourself the credit and give credit to other factors for success. For failures, take some time to review it so you understand it well. Make yourself accountable for any failures on your part. And look for ways to improve your skills and process.
Selective perception is a cognitive bias defined by Wikipedia as the tendency for expectations to affect perception. Investors tend to see what they want to see in a startup deal. Investors choose those elements in the pitch that match their experience and expectations. Selective perception comes from previous experiences with startups both good and bad.
Make sure you are an active listener, truly hear what the person speaking is saying. Ask questions to confirm understanding and that you heard correctly. Check with other investors for their perception to see how it matches and differs from your own. It’s easy to focus on parts of the deal that matches your understanding and ignore those elements that don’t fit.
Stereotyping is a cognitive bias defined by Wikipedia as expecting a member of a group to have certain characteristics without having actual information about that individual. Investors can stereotype startups based on their previous experience. This can be a bias against a sector of business, a leadership style, or other.
To overcome stereotyping, investors should set aside preconceived notions and examine the facts available. Investors should look at the deal, the team, and the market as a growth opportunity. Look at similar investments by other investors to learn more about the deal. Investors need to generate self-awareness to understand biases that come into their decision-making. Staying in the know will make changes easier as the startup world is constantly changing. Out with the old and in with the new.
Reactive devaluation is defined by Wikipedia as devaluing proposals only because they purportedly originated with an adversary. Founders tend to ignore and or discredit lessons and or advice given by their competitors as they see it as just that, their competition, and how would their competition know better than them.
To overcome reactive devaluation, consider the following: Maintain awareness of reactive devaluation and watch for it when making decisions. Separate yourself from the situation and view it as an impartial bystander to evaluate the information without bias.
Consider the same information but coming from another source. Would you perceive it differently?
Check with others about their view of the situation and if the information is worthy of consideration. If so, review the information with other founders to verify it is legitimate. It’s helpful to separate the information from its source in order to remove any bias either for or against it.
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Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: firstname.lastname@example.org