Start-and-Up: Dunning-Kruger Effect on Startups
“Startup” has become a usual word for us. Everybody knows what it means, but this word had no official definition for a long period of time. Commonly when we talk about a startup, we often think about a young company with innovative ideas and the will to scale. At most of the cases, such companies have a few investors ready to help them to grow up. Angel investors always chase the future “unicorn” — a company with a valuation of more than $1 billion. This is the dream company because the investor can get a valuable convertible note or equity for comparatively inconsiderable financial contributions. According to the latest statistic, a startupper portrait looks like this: the average founder is a male (82.8%), has a university degree (84.8%), and is currently 38 years old.
Internet technologies have become a fertile ground for new businesses. It happened because the Internet has opened endless possibilities with minimal financial investments. Taking these opportunities, a lot of people start building new companies from the kitchens of their own apartments. All you need is a laptop, mind, and a cup of coffee/tea. However, there is another side of the coin. Terrifying statistics of the startups’ failure rate is 98% during the first year.
I’ve been working with startups in different positions for 10 years. Firstly I was a marketer and helped to create brands and strategies for Brand promotions. Later I was working with the sales and marketing departments. My main goal was the improvement of sales processes. For the last 2.5 years, I’ve been working as a client engager and a product owner in Dashdevscompany. We create hi-tech products for various businesses all over the world. Once I’ve tried to calculate the number of startups I worked with. This number is already above 80 at the moment. Startup owners usually talk about the success and glittering future. In most of the cases, I need to stop them and emphasize the risk zones. Fundamentally, I’ve always been working with startup leader as a person, not with a company or brand. And this is the startupper who is a real brand heart and a root of every problem.
Why do the startups fail?
Once Dave McClure, a co-founder of 500 Startups, said:
“A ‘startup’ is a company that is confused about — 1. What its product is. 2. Who its customers are. 3. How to make money.”
This expression totally fits the statistic: 42% of such products were not the market demand, 29% startups run out of money, 23% had a wrong team, 14% ignored their customer’s needs. The source of these issues is that all of them are caused by the leader’s illusions confused with reality. But let’s take a closer look at the failure process.
Why do the startuppers can’t see they are going to fail?
Have you ever met a person super confident in own skills, but for you it was obvious that this person would fail? We can observe these cases in our everyday life all the time (at work, amongst friends, and in the family). In general, people are not good at estimating their skills and performance at something. And that plays a bad game and can lead an indiscreet person to the breakdowns and financial loses.
Usually, the primary blocker for a successful startup is self-deceit of the entrepreneur. This behavior is described as the Dunning–Kruger effect. The first time I’ve met this term was a while ago when I was studying coaching science. We were discussing the decision people make and the reason for such behavior. The key to everything is psychological distortion. The cognitive bias of illusory superiority comes from the inability of low-ability people to recognize their lack of ability. In other words, people overestimate their skills and they like this illusion. Everything may cover one expression:
“Poor performers — and we are all poor performers at some things — fail to see the flaws in their thinking or the answers they lack. When we think we are at our best is sometimes when we are at our objective worst.”
But what happens with startups? Once an entrepreneur decides to start own business — everything seems so easy and clear. The product or service is perfectly scrutinized. The newcomer thinks that he/she knows the market and has foreseen all the risks and problems. A startupper is confident and full of powers. Usually, the selective perception of humans mind helps to see only positive examples of individual entrepreneurship. Therefore the airy-fairy schemes may look so ground at the start. At this stage, the adrenaline rush is very high. And then a vigorous person meets the reality and starts to understand that the perfect illusion mistaken for knowledge leads the wrong way. Sometimes such a category of people is called confident idiots. Here I need to admit, that some people are staying at the peak of the curve for the long haul. They don’t accept any rational criticism of their activity. After the reality finds a startupper, he/she loses his confidence in an extremely rapid way. On this phase, a lot of startups fail and never get back on the track. When the person is at the bottom of the curve, the awakening comes. The entrepreneur starts to realize own incompetence and tries to overcome it.
What are the losses caused by the Dunning–Kruger effect?
The first thought that comes to my mind about people who are stuck by the Dunning–Kruger effect is the loss of time. People are blinded by their own illusions and deny the reality. The competitor with the quick and clear mind may grab the idea and make it successful. That’s why some business ideas become the first on the market and some of them are the best. I had this situation in my work life experience. At the start, we’d been building an application with a vast number of features. The initial release was planned in 9 months including the full functionality. During this time a competitor submitted the application with less functionality and became the leader of the market in a short period of time.
Besides, people relationship and career can be ruined by a cranked leader. The Dunning–Kruger effect brings the wings to the startupper and the entrepreneur becomes an evangelist of own business. Evangelists can convince other people to quit their full-time jobs, work free of charge (or for equity) or invest their money. I’ve seen such people after they realized the dire consequences of their actions. They were literally torn to pieces after the blind spot became visible.
I understand that this is just a human experience and it can’t be positive or negative. It is as it is. For the last two years, I have been working with different startups with various job senioritis. But all of them have one thing in common — they can inspire co-workers in the beginning. I can see these shining eyes at the meetings. They shine because they can’t grasp the actual state of the things. The Dunning–Kruger effect is infectious.
Why does the person who is caught by the Dunning-Kruger Effect can’t recognize it?
Everything seems so easy to understand when you look at the situation from the outside or retrospectively. It is as easy as a pie to recognize the Dunning–Kruger effect in other companies. Yet, the human beings can’t recognize it in themselves. There is an explanation for this:
- Mainly the Dunning–Kruger effect is caused by positive experience (of a person itself, close friend or well-known person). The person had already built a successful company in the past or was the part of somebody’s success team.
- Some people think that they may harmlessly take successful experience from one market/company/product, bring it to the other, and to conquer the world. They don’t realize that there always will be gaps in knowledge that need to be covered.
- Another factor is the complete lack of experience. Hence, the person can full of dreams and illusions. In this case, a curve on the graph can go up extremely and then extremely down. Anything is possible when you don’t understand what you are talking about.
- Sometimes people think that copying somebody’s success can help them to win. Still, you will never know everything that was done to achieve this success. In most cases, the applicative transfer of experience is not working the same for all companies.
- The lack of self-criticism. How often do you think that you are the best at something?
- The common illusion that a leader can’t fail.
Due to these reasons, people fail to recognize their own lack of competences (in some cases even inadequacy of the behavior). One more outcome of being on the top of the Dunning-Kruger curve is the inability to identify other people’s abilities and knowledge base correctly. Such a person do not accept the fact that somebody can know something better and have a clearer picture. That’s why they are blind for the real advice and strong people. Another real-life story is a startup with 12 people on the client side. They have one leader with his own vision of the brand, market, and development process. One of the employees (executive level) started to understand that the flow of brand development went the wrong direction. They needed to hire professionals who know what to do and needed to review the positioning on the market. The reaction of the leader was really mad. He became personal and started to dish the dirt about this person. It took 3 weeks to make this person with a distinguished opinion to quit this startup.
The Dunning–Kruger can deeply affect people with weak self-esteem and make them see an enemy in every opponent.
How can we test that we are not under the Dunning-Kruger Effect?
I’ve created a list of question that can help leaders to test themselves. You need to be honest with yourself about every answer. The Dunning-Kruger Effect questionnaire:
- How long are you in this particular market? a) more than 5 years; b) 1–5 years; c) less than a year.
- How can you estimate your level of competence in this market? a) a pro who doesn’t need any help; b) has experience, but need advice; c) the newcomer.
- Have you ever started your own business? a) yes, by myself; b) yes, with a partner; c) no.
- Have you ever been the part of a startup failure? a) yes, I had been the part of the team; b) yes, it was my own business; c) no, I haven’t.
- How many people in your team are you ready to listen? a) None, they don’t have enough experience; b) I’m open to opinions if people want to share; c) There are a few advisers.
- How much time did you spend on market research? a) less than a month; b) 1–3 months; c) more than 3 months
- Do you know your competitors or substitute products? a) I don’t have any competitors; b) I know them; c) I have the competitors analysis and track every rival step.
- Why do you think your team must stick to you? a) I have a groundbreaking idea and they must listen to me; b) I can lead them to success; c) Together we can make it real.
- How can you define your role in the company? a) main visioner (high-level understanding); b) main decision maker; c) worker bee.
- Can your company continue working without you? a) no; b) yes, for a few months; c) yes, up to a year or even more.
- If most of yours are A-answers, then you are in the risk zone of the Dunning–Kruger effect influence. You need to create the list of your real weak sides you’ve been ignoring as fast as you can.
- If you have mostly B-answers, you need to gather the most experienced team-mates in your environment whom you trust and review your business. There can be a list of pitfalls you are unaware of.
- People who have C-answers are mostly in the safe zone of the Dunning–Kruger effect, but you can be in the risk zone of imposter effect. This is an opposite state of the Dunning–Kruger effect — you don’t know how cool you are.
The goal of this questionnaire is to make you think about reality and how you perceive it.
What is the maintenance checkup of the Dunning–Kruger effect?
As every problem has a cure, there are some actions you can take to avoid the Dunning–Kruger effect (or make it less painful):
- Just admit the fact that there is something you don’t know and always be ready to improve yourself.
- Set real plans and measure results during the process. Usual retrospectives of the prior period can help you to define zones of your own incompetence at early stages.
- Hire people for balance. A great team should consist of people with different complementary skills.
- Interact with people smarter than you as much as possible. (Accept the fact that there are people smarter than you.
- Test the water before starting the business. Do not be afraid to get back to the drawing board.
- Do proper market research and update the data on the regular basis. The helicopter view is great but you need to stay tuned for more news.
- Focus your time and efforts on areas where you have the greatest competitive advantages.
- Ask for the feedback about your performance and be ready to accept it.
Need to say, that business partners can be guardian angels saving you from falling down to the bottom of the despair desert of the Dunning-Kruger Effect. They can be the voice of wisdom, stopping you from taking the wrong steps, showing the other side of the coin. By the way, the questions “How long do you know your business partner?” and “How many crisis situations have you survived?” are crucial for investors. They don’t trust people who have not faced f*ckup experience. Equal collaboration between business partners, support and sincerity can help the entrepreneur to survive in the hardest times.
The leader of the business carries responsibility for the future of the company and the employees he hires. It is vital to stand on the solid ground but think of the great ideas. Moreover, it is normal to find yourself in the Dunning-Kruger Effect trap. We need this because “Fail often so you can succeed sooner”. All great leaders have been in it. They reach success because of the correct self-estimation and the team. These two inputs helped them to find the balance between the craziest idea and the reality.
“Success is walking from failure to failure with no loss of enthusiasm.”
From this perspective, don’t be afraid of the Dunning–Kruger effect but be ready to defeat it. Get the ball rolling and succeed!