If you want to start a business, it helps if you aren’t particularly concerned about pesky reality.
Being certain that your company will make it doesn’t actually predict that it will succeed. But overconfidence might be necessary to becoming an entrepreneur in the first place.
James Surowiecki, writing in the The New Yorker, notes that the fundamental pillar of an entrepreneurial personality isn’t inventiveness, drive, or even a comfort with risk. It’s self-confidence. Not just the garden-variety self-confidence that makes us feel good about ourselves, but the kind of overconfidence that leads entrepreneurs to believe that their businesses will undoubtedly succeed despite the fact that the vast majority of new businesses fail.
He cites a study in the Journal of Business Venturing that concluded that entrepreneurs are overconfident about their ability to prevent bad outcomes as well as the prospects for their business. Another study found that 81 percent of entrepreneurs believed their businesses had at least a 75 percent chance of success.
Another study in that journal of managers and entrepreneurs found that it wasn’t whether people had the skills most needed to start and run a business who became entrepreneurs, but those that thought they did.
While it might seem investors would recoil from grandiose thinking, that is far from the case. Revenue-free tech companies don’t have much trouble raising serious cash. Investors just spread the money around knowing that the odds are stacked against new businesses, brash promises or not.
The Impact on Women Entrepreneurs
One downside of this system is that women, who are less likely to exhibit that level of confidence, have more trouble convincing investors to sign on. Women are only getting 4.2% of venture capital, according to a recent Stanford University study. And only 4% of venture capitalists are women. If more women were both pitching companies and investing in them, the decisionmaking might be a little different.
Interestingly, women do far better when raising money for their ideas through crowdfunding and angel investors, notes Jules Pieri, entrepreneur-in-residence at Harvard University and co-founder of The Grommet. Women have raised 47% of capital on Indigogo. The Center for Venture Research says women receive 25% of angel investment.
Confidence is crucial to make it through tough times in business, but if we want to see more businesses, and more diverse founders and ideas, it might be time to come back to reality.