Survivorship Bias in the World of VC-Funded Startups: How It Influences Decision-Making and Advice

The venture capital (VC) funded startup world is a high-risk, high-reward landscape, where countless stories of success and failure intersect. Yet, it is a well-documented fact that experienced venture capitalists (VCs) do not solely rely on the successes they have witnessed. In contrast, they often grapple with survivorship bias, a cognitive bias where one considers only the successes and overlooks the ventures that failed. This article explores the impact of survivorship bias on decision-making and advice given within the startup ecosystem.

Understanding Survivorship Bias

Survivorship bias is a common logical error that occurs when only the successful outcomes or well-known examples are considered, while the failures are overlooked.

Taken literally, survivorship bias refers to the observation of a subset of entities that have made it past a certain point. In the context of entrepreneurship, this manifests as the tendency to pay attention primarily to the successful startups that survive long enough to publicly share their stories, disregarding the countless attempts that never made it off the ground or faced significant failure.

Impact on Decision-Making

When VCs make investment decisions, they often draw upon their extensive experience to gauge future success. However, their focus on survivor stories may inadvertently skew their assessment, leading them to:

Overestimate the likelihood of success: By only considering well-known successful startups, VCs might overestimate the probability of success for similar ventures. This can result in undervaluing the complexities and difficulties of building a successful startup. Underestimate risks and challenges: The flip side of overestimating success is underestimating the risks and challenges that come with startup life. Successful founders or VCs may inadvertently overlook the challenges faced by their predecessors, leading to a false sense of security for new ventures. Miss critical lessons from failures: By focusing on successes, VCs might miss the valuable insights that come from understanding the lessons learned from failures. These insights could guide future decision-making and prevent similar pitfalls from recurring.

Implications for Advice Given

VCs are not only investors but also advisors to the startups they support. The biases that influence their decision-making directly impact the advice they offer. Here are some ways in which survivorship bias shapes the advice given to startups:

Overemphasis on known paths to success: For example, if a particular strategy led to success for a well-known startup, VCs may strongly recommend similar strategies to other startups, regardless of their unique circumstances. This can lead to one-size-fits-all approaches that do not account for individual differences and market dynamics. Ignoring critical feedback from failures: When analyzing the failures of other startups, VCs might undersell the importance of certain factors that contributed to these failures. For instance, they may downplay the role of market challenges or competitive pressures in the startup's demise. Overlooking systemic risks: The attention on successful outcomes can mask the broader systemic risks that many startups face. VCs might fail to provide necessary advice on how to navigate financial instability, regulatory changes, or technological obsolescence.

Addressing Survivorship Bias in Decision-Making and Advice

To mitigate the impact of survivorship bias, VCs and casual investors alike need to adopt a more holistic approach to decision-making and advice-giving. Here are some strategies:

Emphasize a data-driven approach: Rely on comprehensive data and analytics to gain a more accurate picture of potential outcomes. Use real-world metrics and benchmarks to inform decision-making, rather than relying solely on anecdotes or high-profile success stories. Promote transparency and diverse representation in startup stories: Encourage the sharing of both success stories and failure stories. This can provide a more balanced view and ensure that decision-makers are aware of the full range of potential outcomes. Consult a variety of sources: Seek input from a wide range of stakeholders, including unsuccessful founders, industry experts, and researchers. This can provide a more nuanced understanding of the challenges and opportunities in the startup landscape.

Conclusion

The venture capital world is inherently filled with survivorship bias, but by recognizing its impact and actively working to counter it, VCs and other stakeholders can make more informed decisions and provide more valuable advice. A nuanced and balanced approach can help ensure that the next generation of startups has a higher chance of success and can thrive in this complex and challenging landscape.