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Key points
- New ventures can fail due to poor strategy or execution, but behavior and mindset play a pivotal role.
- Psychological traps such as underestimation, overconfidence, and fear hinder success.
- Learn how to avoid common errors like under-estimation, premature growth, and approval addiction.
- Overcome challenges by cultivating a marathon mindset, self-awareness, coping strategies, and flexibility.
For many people, the idea of starting and running your own business is quite alluring. I completely get it: I’ve been a small business owner, helped launch and lead a startup IT company, and scaled another business from five to 250 people across three continents.
Being your own boss can create a sense of independence that many people find alluring. The U.S. Census Bureau reported that over 5.5 million new businesses were started in 2023 alone, and I coach many doctors and professionals who want to open their own private practice and innovators who want to turn their technology concept into a company.
Entrepreneurship seems simple enough—you identify a segment that needs what you offer, then sell your services to those folks, and you become wealthy. Yet the hard truth is that many new ventures fail in the first year, and the U.S. Bureau of Labor Statistics reports that over 50 percent of all small businesses fail by the fifth year.
If that’s not hard enough, entrepreneurs often have excessive anxiety, sleep deprivation, and financial stress. Just surviving the first year or two is some marginal sign of success.
In many cases, there are obvious business reasons for a collapse, including poorly designed strategy, bad execution, lack of finances, labor pool, and tough competition. There could also be technology or quality gaps between those who succeed and those who fail. These are all very important. But to gain better insight into some entrepreneur's failures, we also must look towards behavioral science.
Behavioral Traps
Despite all their passion and commitment, many entrepreneurs can fall into a few specific patterns that may lead to failure. This article explores 10 of these psychological and behavioral tendencies that can trip up even the most driven entrepreneurs.
1. Underestimation. It is virtually impossible to predict with any accuracy what life will look like in your new business. Some people thought they’d have to learn more about customer service or sales but, in fact, realized they spent much more time on bookkeeping and contract minutiae (or vice versa). Others who thought they’d get by with their qualifications alone came to realize that the old mantra “if you build it, they will come” is not accurate.
You will likely underestimate how much effort it takes to get a new customer, make a sale, convert a lead, or master social media. Estimation bias is one of the most common reasons small business owners simply give up because of a lack of preparation and planning in advance.
2. Overconfidence. Similarly, nobody would ever open their own medical or therapy practice, grocery store, or yoga studio if they weren’t confident in its potential for success. While a dose of confidence is healthy, many people are overconfident in their abilities to adapt and respond.
Confidence can fuel the courage needed to launch a business. Yet exuberance leads many entrepreneurs to overlook risks, shortcut some important steps in the process, take on more risk than they can handle, disregard critical details or red flags, and make decisions based on inflated expectations rather than objective facts.
3. Fear. Fear is the most dominant emotion among entrepreneurs. Typically, it’s fear of failure or fear of running out of money. But many other fears emerge when profit margins are low and your expenses exceed your revenue. Fear short-circuits good decision-making processes.
4. Control. Entrepreneurs often have a strong need for control, which can be beneficial in the early stages of building a business but holds you back as you scale. Most founders believe that working harder is the solution, but entrepreneurs who try to manage every detail can become bottlenecks, ultimately limiting their company’s scalability and stifling their team’s growth.
5. Need for premature growth. Often, entrepreneurs try to scale up their businesses too quickly. There is a psychological inclination towards growth, and growth is an external sign of success. This is usually accompanied by social comparison, where you compare your success to that of other firms or individuals. Entrepreneurs often try to add more real estate, buy new machinery, or expand into a different geography or service line way too soon. The first thing you must do is master where you are today.
6. The need for approval. It can be quite embarrassing and difficult to admit when you’ve taken on too much. Your need to please and uphold a certain image can create a (metaphorical) approval addiction. Pride, shame, guilt, and embarrassment in front of your spouse and family, let alone your neighbors and community, often get in entrepreneurs’ way. Don’t let this need for approval and validation by others stop you from making sound choices.
7. Confirmation. It’s our basic nature to, subconsciously at least, absorb only those pieces of information that support our own ideas and strategy. We also tend to ignore other's input, especially when it differs from our own. This bias may lead you to hang on to a flawed business model even when there are multiple warning signs.
8. Sunk cost. When you put your hard work and financial resources behind an idea, it’s difficult to just walk away. So, what do most people do? Keep putting in more time, energy, and money. It’s important to recognize when you are continuing to sink more resources simply because of your past investment. Every new month, quarter, or fiscal year is another opportunity to re-evaluate your business.
9. Expectation bias. Sometimes, businesses take time to grow, yet many entrepreneurs expect immediate results. This expectation bias causes many to call it quits after only a few quarters or years. Go into any new venture expecting that it will take many years to become successful.
10. Imposter syndrome. Finally, many entrepreneurs think they’re just not enough. They don’t have enough certifications or enough training. You have enough. Stop paying for services and training that you don’t need. Recognize the value you bring and use that to create and market your services.
Actionable Strategies
Each of these behavioral tendencies can be overcome. Applying proper behavioral tools will allow entrepreneurs to adapt quicker to real market conditions or recognize when a strategy isn’t working.
Working on your financial savvy and business acumen is key—but at the same time, be attentive to potential psychological traps and train your brain around a successful mindset. Challenge your beliefs, biases, and behaviors through these tips:
- Develop a marathon mindset. Entrepreneurs who call it quits after a few quarters or years are taking a myopic perspective and thinking about things as a race rather than a marathon. Don’t expect immediate results. Sometimes, business just takes time to grow. Remind yourself to think long-term.
- Focus on coping mechanisms. Uncertainty and anxiety can be extreme. Try changing your coping strategies by altering your goals or shifting your perception of the circumstances. If you can’t change the actual situation itself, work on how you frame it going forward. Humor, imagery, and positive mantras can all play a role here.
- Cultivate self-awareness: Daily, reflect on your assumptions and seek feedback from others that will challenge your own beliefs. Each day, ask yourself what you are missing and what positive results you can take into a new day.
- Embrace flexibility: Be willing to pivot. You will underestimate things and be too confident in areas you will soon find weak. So, expect that, and be flexible in responding.
- Prioritize information over ego: There are sources of financial and market information that should guide you and serve as indicators of your success. Look at those closely, examine gaps in your expectations, and spend time contemplating alternatives rather than using intuition alone.
- Be realistic: Very few small businesses become a success overnight. It takes time. Losses should be expected, and many bumps along the way. So, start small, prove yourself, and test the business model. Manage social comparison by setting goals based on your business’s unique circumstances, not someone else’s achievements or expectations.
Are you an entrepreneur who’s faced similar challenges? Drop me a note if you have other examples of how applied psychology has helped improve your business success.
