A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship refers to all new businesses, including self-employment and businesses that never intend to become registered, startups refer to new businesses that intend to grow large beyond the solo founder. At the beginning, startups face high uncertainty and have high rates of failure, but a minority of them do go on to be successful and influential.
Actions
Startups typically begin by a founder (solo-founder) or co-founders who have a way to solve a problem. The founder of a startup will begin market validation by problem interview, solution interview, and building a minimum viable product (MVP), i.e. a prototype, to develop and validate their business models. The startup process can take a long period of time (by some estimates, three years or longer), and hence sustaining effort is required. Over the long term, sustaining effort is especially challenging because of the high failure rates and uncertain outcomes. Having a business plan in place outlines what to do and how to plan and achieve an idea in the future. Typically, these plans outline the first 3 to 5 years of your business strategy.
Design principles
Models behind startups presenting as ventures are usually associated with design science. Design science uses design principles considered to be a coherent set of normative ideas and propositions to design and construct the company’s backbone. For example, one of the initial design principles is “affordable loss”.
Heuristics and biases in startup actions
Because of the lack of information, high uncertainty, the need to make decisions quickly, founders of startups use many heuristics and exhibit biases in their startup actions. Biases and heuristics are parts of our cognitive toolboxes in the decision-making process. They help us decide quickly as possible under uncertainty but sometimes become erroneous and fallacious.
Entrepreneurs often become overconfident about their startups and their influence on an outcome (case of the illusion of control). Entrepreneurs tend to believe they have more degree of control over events, discounting the role of luck. Below are some of the most critical decision biases of entrepreneurs to start up a new business.
- Overconfidence: Perceive a subjective certainty higher than the objective accuracy.
- Illusion of control: Overemphasize how much skills, instead of chance, improve performance.
- The law of small numbers: Reach conclusions about a larger population using a limited sample.
- Availability bias: Make judgments about the probability of events based on how easy it is to think of examples.
- Escalation of commitment: Persist unduly with unsuccessful initiatives or courses of action.
Startups use several action principles to generate evidence as quickly as possible to reduce the downside effect of decision biases such as an escalation of commitment, overconfidence, and the illusion of control.
Mentoring
Many entrepreneurs seek feedback from mentors in creating their startups. Mentors guide founders and impart entrepreneurial skills and may increase the self-efficacy of nascent entrepreneurs. Mentoring offers direction for entrepreneurs to enhance their knowledge of how to sustain their assets relating to their status and identity and strengthen their real-time skills.