Startup Reality Distortion #2: The Lake Wobegon Effect

For those of you not familiar with the “Lake Wobegon Effect”, I provide a brief definition located on the web:

Lake Wobegon effect (layk WOH.bee.gawn uh.fekt) n. The tendency to treat all members of a group as above average, particularly with respect to numerical values such as test scores or executive salaries; in a survey, the tendency for most people to describe themselves or their abilities as above average.

It is named for the fictional town of Lake Wobegon from the radio series “A Prarie Home Companion”, where according to Garrison Keillor, “all the children are above average".

So, what does the Lake Wobegon Effect have to do with startups?  Most startup founders I’ve met (including me) manifest this effect to some degree.  It’s a subtle form of reality distortion that causes most software entrepreneurs to believe that they and their companies are better than most others.

Here is an example manifestation of this:

“Yes, I realize that Venture Capitalists only fund a small percentage of companies they look at, but I am well above average, so my odds are much better than other companies.”  (Note:  Most startup founders think this way, and VCs know, for a fact, that they all can’t be right).

So, lets assume (for a second) that you are a victim of TLWE.  As noted, this is not uncommon – in fact, some might argue that if you don’t have an element of this effect (whereby you think you are better), you’re likely not to succeed as an entrepreneur.  Though this may be true, I think there are ways to make this effect (and people’s awareness of it) work in your favor.  The idea is this:  somehow credibly demonstrate how you are actually above average.  The key word here is “credibly”. 

So, lets say you are recruiting an exceptional individual to join the management team of your startup.  Lets assume that this individual has already decided they want to work for a startup and are considering several other offers.  (Note:  We could have easily replaced this example with you raising capital from an investor, but I’m getting tired of that example).  Now, chances are, the individual being recruited has heard the following from each of the founder/CEOs of the opportunities being considered:

1.      We have a curve-jumping, high barrier-to-entry, disruptive technology that is going to change the world.

2.      We are just two weeks away from: (pick one or more):

a.    Raising a round of venture capital

b.    Signing a big client contract

c.     Finalizing a deal with a big, strategic partnership with a Fortune 500 company

3.      The fact that nobody else of your caliber has joined the team yet is simply because we are in “stealth” mode and have not yet encountered someone as brilliant as you that really ‘gets it”

Now, the mistake here is not so much that the above statements aren’t true (they just might be), but that you are assuming that you are the only person making these kinds of statements (or variations thereof).  In reality (when reality is not distorted), you are going to be above average in some dimensions and not others.  Your goal is not just to demonstrate how great you are – but why your company amongst the others she is considering is “well above average” in specific areas of interest.  How do you do this?

1.      Get some facts:  Figure out what the real averages in your market are (compensation, size of funding, etc.)

2.      Compare yourself to the real averages and show that you are better

The above likely sounds overly simple and trite, so let me elaborate with some example statements:

Example 1:  “I read in a recent study that he VP of Marketing for startups in hi-tech companies get about 70% of their fair market value in terms of base compensation, with the remainder in equity and options.  Given how important this particular function is to us, and the fact that we have strong financial backers, we’d be willing to offer 80-85% of fair market value so you are not taking on disproportionate risk.”

Example 2:  “We recognize that most VC-backed companies would offer you above $X on average in terms of base compensation.  However, we are not VC-backed and are looking to run the company efficiently so that members of the management team can capture a significant portion of the value we create.  In order to attract exceptional talent like you, we would offer Y% of the company as equity which is significantly above the industry average of Z%.  Of course, none of this equity means anything if the company doesn’t succeed.  Let me show you why we think this is a good bet…”

Moral of the story:  Figure out a way to find what “average” really means in your context and devise credible ways to show how you are “above average” in ways that the other party actually cares about.