Monitoring performance in start-ups can compensate for entrepreneur over-optimism

November 21st, 2013 → 6:56 pm @ // No Comments

Entrepreneurs tend to be bullish about their performance.  They need extreme optimism to keep them motivated, but that optimism can easily turn to self-delusion.  I thought about  that the other day when Henry rang to tell me he was about to ‘crack’ the Japanese market.  I was sceptical.  I remembered him being about to ‘crack’ the USA a couple of years earlier, and New Zealand a year before that.  I dismissed his comment as just more puffery.

Henry has a track record of not delivering on his promises, but he does slowly move toward his goals, and I’m sure he’ll ‘crack’ the Japanese market… though it will take a lot longer and cost a lot more than he expects.

It’s easy to be unduly dismissive of entrepreneurs who seem to promise great things then consistently underperform.  A number of Henry’s detractors are gleeful that they didn’t invest, since he has missed his targets every year.  The targets Henry has missed were genuine ‘stretch’ targets, but his main reason for missing them was because the business was undercapitalised.  The benefit of the undercapitalisation, which partly offsets the underperformance, is that we investors will get a higher percentage return than if we’d had more investors. So, although my returns will be much lower than I was promised, I still expect a 10x or better return.

Marianne also overpromised, and under-delivered.  In her case, the business collapsed and I, along with all the investors, lost my money.  Her business should have been easier than Henry’s to get to profitability, and her promises were less extravagant than Henry’s.  But whereas Henry was open to criticism and correction, Marianne became devious and defensive when things started to go bad.  Each entrepreneur was overly optimistic about what they could achieve.  In Henry’s case, as the Board monitored performance we were able to adjust expectations, and adjust his behaviours, though we never ‘cured’ his extreme optimism.  Marianne was able to stop the Board getting good information, with fatal results for the business.  It wasn’t her overly optimistic promises that destroyed the business; it was her ability to undermine the reporting processes so the Board could not recognise her delusion and intervene, until it was too late!

 


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