December 24, 2011 by startupengineering .
One of the catchphrases from the last post, “make sure the lemons ripen early” is usually meant to warn investors against putting more money into failing companies. Entrepreneurs do better too, when they keep it in mind.
Both entrepreneurs and their investors are usually optimists. Daniel Kahneman takes a dim view of entrepreneurial optimists, accusing them of the following judgment errors:
- Focusing on their own goal and on plans, neglecting relevant experience and statistics from similar efforts
- Focusing on their own actions, neglecting the plans and skills of others
- Believing they are superior to most others with respect to most desirable traits
- In understanding the past and predicting the future, focusing on the causal role of skill and neglecting the role of luck, thereby gaining an illusion of control
- Focusing on what they know and neglecting what they do not know, making them overly confident in their beliefs.
In other words, entrepreneurial optimists believe they can buck the odds and do better than others, based on an illusion that they can control things and buoyed by an unwarranted level of confidence. Without optimists, we wouldn’t have startups; but the same traits and mindsets that lead to starting a new business also lead to new business failure. It’s an environment where a little pessimism goes a long way.
When VCs talk about lemons, they’re talking about lemon companies in their portfolio. Entrepreneurs can think of lemons as lemon hypotheses in their business model. Every idea about how your company is going to operate starts out as a guess, and every guess can be wrong. Steve Blank and Eric Reis urge you to validate those guesses. If entrepreneurs were rational, that would be sufficient advice. But entrepreneurs aren’t rational, they’re optimists. So telling them to “validate” is an invitation to over-reach and stamp “validated” on things they merely wish to believe are true. Instead, try to invalidate. Pretend your idea about the customer segment or a good value proposition or the way you’ll reach the market is someone else’s idea – someone you don’t like. What would your obnoxious neighbor have to do to prove to you that he was right about something and you were wrong? Approach your hypotheses like that, and you’ll ripen the lemons early – leaving you enough time and money to discover the real winners.
 Daniel Kahneman, Thinking Fast and Slow, pages 258-259.