Intelligence and leadership is not always the solution to poor decision-making. While it is believed in most domains that leaders can make great decision, finance seems to be the sector that breaks the norm. Experts like Morgan Housel believe that financial success is more dependent on function of behavior than function of knowledge. This can witnesses in real-time when it comes to startups as it goes through an unforgiving environment with very less room for errors and experimentation.
Startup decisions are often made under compressed timelines, uncertainty, and a huge amount of emotional pressure where raw intelligence might not be that helpful. Let’s take a better look at it.
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Why Financial Models cannot safeguard you?
Founders of startups and small-scale companies are more likely to understand numbers, unit economics, revenue scenario, annual projection, tradeoffs and other aspects. However, having financial models does not guarantee the fact that there would not be any poor decisions. In reality, a majority of financial decisions are made in control and analytical way. It requires a complete strategy which includes negotiation with investors, creating response for competitive moves and handling internal expectations. It also requires analyzing circumstances, emotional incentives and cognitive biases which allows avoiding purely rational decisions. That is why, a financial model can quickly become a reference point instead of a decision making tool.
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Founders Tell Themselves Stories to Justify
One of the most patterns among founders which is recurring overt time is making financial decisions based on narratives. Starting from hiring decisions, expansion plans and other aspects are represented as strategic necessity by calling other purposes like signaling leadership and capturing market share. These narratives can be true but the drivers for these decisions are often obscured. These might not be operational necessities which are important for financial discipline.
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You Can Get Broke Even If You’re Right
A lot of people try to relate correctness with success but that is not the case. There is no point in taking pride in making market predictions but there is a significant difference between being wrong and being early. An organization can currently predict the future opportunity but can still fail for inefficiency, excessive burn or premature scaling. The ability to remain operational for long requires considering external financing conditions as well as internal issues that can drain a significant amount of money.
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Crucial role of Emotional Incentives
The financial decisions in startups are often intertwined with psychological factors and premature expansion is often triggered by the fear of missing out. Ego is something that can lead to complicated situations with over-commitment. In the modern days, social comparisons can distort the idea of what is considered as ‘normal’ behavior. Intelligence cannot help to mitigate these issues.
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Too Much Optimization
The modern world is obsessed with optimization and high-performing founders are more likely keep everything optimized to keep the teams lean, allocate work efficiently, and many others. These instincts can be good but it can also lead to uncertainty. In financial terms, optimizing can often lead to over-expenses than improved productivity. Too much optimization also leads to an amplified impact even for the minor miscalculations and errors.
Make Decisions without Trusting Yourself
The root of the problem is not informational but it is more likely to be behavioral and the solution has to be structural. Leaders are required to prioritize organization survival as only optimizing everything cannot help since an organization also needs stability. Focus on the durability of company and focus on taking financial decisions with narrative framing to bring a change!
