Confirmation Bias Kills Companies

Confirmation Bias Kills More Companies Than Anything Else

In practice, most technology companies, particularly ones that will be venture backed, are started by technologists as technology solutions – which then seek to find a market.  Technology companies rarely start from a business problem – and then seek a genuinely technology-    agnostic solution. The mantra from the venture and tech community is that this is because companies often “don’t know what they need, until it is shown to them”.   In a way, this tends to give startup leaders something of a free pass in what should be early validation of market need – because ‘my future customers don’t even know they need what I am building … but they will’. And this makes them highly susceptible to confirmation bias.

Confirmation bias refers to the very human tendency to search for, interpret and favor information in a way that confirms or supports one's prior beliefs or values.

Company founders are generally very smart people – so they DO know that they need to validate that there will be a market for their product or service. They reach out to potential customers - often large customers, with well known brands – to validate that their solution is something that these customers would buy.  Generally, these larger companies are aware that they need to understand what technology solutions are being developed – because they don’t want to miss out on something they might use and they don’t want their competitors to gain a competitive advantage. They usually do this in one of two ways (or sometimes both). They either form an ‘innovation group’ (to scan the market for innovations that might be helpful) or they form a ‘venture group’ (so they can invest in and, in theory, benefit from being an early customer). But, at the end of the day, these generally turn out to be defensive actions, and almost never lead to actual adoption. This is because the ‘innovation’ or ‘venture’ functions are almost never actually integrated with the core elements of the business. I spoke with an accomplished executive that held CEO positions with two national technology firms – both had innovation and venture functions: and both had perfect track records of never seeing a technology identified in either the investing or innovation function turn into large scale demand in the core business. 

The practical reality is that innovation and venture functions are NOT demand confirmation functions. They exist to make sure that companies don’t ‘miss something’.  And because they want to present a forward looking, innovation mindset, these functions usually react positively to new technology ideas. The people who staff these functions are almost always ‘imagine what might be possible’ people, and generally their message is often ‘yes, if you build this, we can see that there could be a market’. THIS is confirmation bias. 

And once a founder hears “yes, if you build this – no promises – but we can see how we might buy it, or bring it to market”, they don’t really want to know the answer to the much more important question: “And if we don’t build this, how would that impact your business”. Because, the real answer to that question is often “Honestly, we have lots of other solutions to this problem, that are practical”? Or “Your solution is interesting, but it isn’t even close to a top ten priority for us”.

The practical reality is that – despite outsize intelligence - very few founder/entrepreneurs actually have the fortitude to acknowledge that the     idea they have spent the past 6 months developing has limited legs.  It can feel like the better course of action is to pursue the idea, and bet that there will be changes     in demand – or that at least they have a company, and there is always the possibility to pivot once customer demand becomes clearer.

Entrepreneurs are told that they have to ignore all the people who tell them that they won’t succeed. But what if some of those people are raising real and valid objections?  Instead, entrepreneurs adopt a mantra like ‘fake it til you make it’. This is really just confirmation bias.  

In reality, founders (and entrepreneurs) have to be GREAT at hearing feedback. And unless there is strong customer traction, founding teams have to be willing to abandon (or at least dramatically modify) their ideas.

Here are three approaches to avoiding confirmation bias:

• Be curious (and skeptical). Genuinely try to understand why the company wants to buy your product. How will they use it? How does it either save or make them A LOT of money? What significant, company-altering problem is it solving?
• What if your solution didn’t exist? Many companies create products that are useful – but really not critical. There are lots of alternatives, including the status quo. 
• Be willing to kill your idea. This is really hard. But if you are going to really commit to avoiding confirmation bias, that has to be not only an option … but actually a likely outcome. It is WAY better to kill your idea early than waste money (and time!) on an idea that isn’t going to work

Because confirmation bias kills more companies than anything else. 

Tell me what you think?

Ron is a founder, entrepreneur, venture capitalist and allocator of capital – who has suffered from confirmation bias more often than he would care to admit. He is now leading IBET, a company creation platform focused on high impact climate opportunities – and intensely focused on avoiding confirmation bias.