As a startup founder, shutting down your business will be one of the hardest decisions you’ll ever have to make. However sometimes it’s also the smartest option. Especially if you’re able to close things down gracefully, give folks a good severance package and potentially return some unused funds to investors; not to mention gaining back some valuable time. Unfortunately, many entrepreneurs refuse to admit defeat and keep pouring resources into a failing endeavour. The tendency for people to double down in the face of growing negative evidence is known in behavioural psychology as “escalating commitment to a losing strategy”. In this short article I’ll attempt to highlight a few of the cognitive biases that help make this happen.
Why Startup Founders May Not See the Writing on the Wall
There are several reasons why startup founders struggle to see when things things are heading in the wrong direction. For one, being a successful founder requires a strong belief in one’s vision and the ability to ignore setbacks and naysayers. You wouldn’t be here today if you’d have listened to everybody telling you to give up, so you’ve been trained and socialised to filter out negative signals. Additionally, social proof from sophisticated investors can give founders extra confidence that they are on the right track. Optimism bias, which makes people believe that they will be the exception to the rule, can also contribute to this phenomenon. Finally, the endowment effect can make founders believe that their product is worth more than it actually is, leading them to hold onto an idea for longer than is workable.
Why Founders Continue to Plow Forward Despite Setbacks
Once things start to go wrong, founders may continue to plow forward for a variety of reasons. Sunk cost fallacy-the tendency to keep investing in a losing venture because of the resources already invested-can make it difficult for founders to pull the plug. Promises made to staff and investors can also create pressure to keep going, as can pressure from investors who want to see a return on their investment. While getting some of their stake back might be important to angel investors, institutional…