Why Startup Founders Quit, and What Investors Can Do
By: Max Burwick
Tags: Startup Lessons, Success, Resilience, Grit, Investing Tips

Grit should be the number one factor investors look for when putting their money into early-stage companies. Grit determines whether startup founders have the resilience to endure the endless trials of entrepreneurial life. The current paradigm of investment analysis considers traditional business plan and pitch analysis, including the team’s experience, market size, and traction.

This methodology works, and by works, 93% of funded startups still fail, regardless of the strength of their business plan. This is because business plans are exactly that, plans. They don’t tell investors whether the startup team has what it takes, the grit required to deal with the difficulty of building a company. Business plans are important, they demonstrate an ability to think into the future and subject-matter expertise, but no business plan or pitch competition measures the grittiness of a startup’s team.

Until now, grit has been challenging and costly to measure. Subject to boring surveys, high costs, and unreliable due to bias. Advances in machine learning and natural language processing have changed this. BizPsych Labs gives investors the ability to measure grit, in less than 30 minutes, without hiring an analyst or Ph.D. Even better, BizPsych Labs provides precision insights to improve grit. This improves a founder’s chance of success and saves investors millions.

What is Grit?

Angela Duckworth, a leader in Grit research at the University of Pennslyvania, defines grit as:

Perseverance and passion for long term goals. Being gritty enables people to work towards challenging goals, to overcome obstacles despite failures, and to conquer adversity.

Although grit is correlated with the big five personality traits, like conscientiousness, it is not measured through traditional personality testing. Additionally, it is not related to IQ. Grit is a composite of several factors; including:

courage

conscientiousness

endurance

resilience

excellence

Grit Predicts Success

Grit is more likely than any other factor to predict success when facing adversity. Psychological researchers have been studying the impact of grit on performance in the military, academia, and business.

The military, particularly special forces training, is known for testing an individual’s resolve. Through grueling exercises, military instructors test candidates’ physical, mental, and psychological limitations. Being a startup founder is similar to the military; success takes everything you have, and your resolve will be tested in every way imaginable.

At universities, gritty students outperformed their peers, achieving higher GPAs. Interestingly, grit was associated with lower SAT scores, suggesting that grit rather than college entrance exams are a better predictor of educational success.

Additionally, grit predicts the retention of sales representatives. Sales is an essential part of building a startup. It is filled with rejection, requiring perseverance to succeed. Researchers tested variables including demographics, experience, and personality traits. They found that grit was the most accurate predictor of whether salespeople had what it took to stay the course.

Investor Roadblocks: Bias and Intuition

Most people, investors included, are prone to unconscious biases. As people, we read into things that aren’t true, making incorrect and costly conclusions. We see evidence of characteristics that are unsubstantiated. It takes a degree of humility to accept that our intuition can be wrong.

Whether it is someone’s physical appearance, the way they present, or the sound of their voice, investors are often incorrectly convinced that a startup team has the attributes required to succeed. The fact that 93% of funded startups fail identify a truth.

Investment analysis needs new metrics

Making matters worse is the need for social desirability. The internet is full of useless articles, irrelevant self-help advice, and redundant opinions describing the attributes of successful startup founders. In an attempt to be desirable to investors, entrepreneurs conform to these norms. The unfortunate truth is that words do not translate into action, but they do skew perceptions, frequently resulting in significant financial losses.

BizPsych Labs, Grit, and Revolutionizing Investing

BizPsych Labs built the first investor tool that accurately measures a team’s grit in less than 30 minutes. By using natural language processing, BizPsych Labs has eliminated the biases that plague other forms of self-reporting.

In addition to grit, BizPscyh Labs tests for resilience, psychological safety, trust, and collective vision. Research in organizational psychology, namely Google’s Project Aristotle, has identified these factors as the strongest predictors of team success.

Going beyond psychometric analysis, the BizPsych Labs system provides pinpointed AI coaching recommendations to improve performance and ROI.

Data science is changing the way investors conduct their analysis. The future will go beyond traction, business plans, and financial metrics. It will go from correlation to causation, providing opportunities for better outcomes.