It is common for businesspeople to make excessively rosy predictions of their prospects for success. When entrepreneurs offer overly optimistic forecasts, their investors end up disappointed. But investors can contribute to this problem by encouraging founders to be optimistic. Venture capitalists often push founders to set big, hairy, audacious goals. When potential investors demand a promise of glorious revenues in five years, founders often oblige.
How VCs Can Overcome the “Winner’s Curse”
The more rivals you outbid, the more likely you are to have paid too much.
April 21, 2022
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Summary.
When many investors bid on a target start-up of uncertain value, a common result is that the winner pays more than the target is worth. Winning can thus become more of a curse than a blessing. In this article, the authors explain the dynamics of the ‘winner’s curse” and suggest that investors should consider adopting what’s known as a contingent contract, which, in effect, allows founders to bet on what they say they believe about their company.
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Accelerate your career with Harvard ManageMentor®. HBR Learning’s online leadership training helps you hone your skills with courses like Decision Making. Earn badges to share on LinkedIn and your resume. Access more than 40 courses trusted by Fortune 500 companies.
Practical ways to improve your decision-making process.