Are Entrepreneurs Delusional? The Overconfidence Factor in Startup Success
One of the most consistent personality traits I’ve observed in entrepreneurs over the years is a tendency to live in denial. They don’t seem to perceive the inherent risks of their ventures like the rest of us. Contrary to what the legendary VC Arthur Rock said, they don’t see things as they are but as they want to be. My research and experience show that more than delusion, the trait dominating Founders is overconfidence, which is both a cornerstone of the entrepreneurial mindset but also a double-edged sword.
In This Article
The Fintech Founder Who Defied Reality
Over a decade ago, I worked with a fintech entrepreneur whose story has stayed with me. It ultimately inspired my doctoral research into the psychology of entrepreneurs.
His startup faced a dire situation: an oversized funding ask had scared off potential Investors, there was almost no cash left in the bank, and employees risked not getting paid. To add to the pressure, a personal friend of the Founder had recently invested a significant amount in the last funding round.
Most people would have folded. The stress factors alone would paralyze any “normal” person. But this Founder didn’t give up. Instead, he found a way to sell the company to a prominent market player who believed in the product and injected the cash needed to develop it further.
As a close advisor during discussions with one of the two suitors, I was in unique a position to observe the Founder closely during the sale process, and shared his inner thoughts. We’d talk several times per day and travelled often together to meet potential acquirers. The Founder’s deep conviction that he could succeed in helping his company survive struck me. I wasn’t as optimistic as he was.
At the time, I believed his ability to ignore the grim reality of the situation saved the company. What seemed like denial—or even delusion—proved to be an advantage. With the benefit of my research these past few years, I now believe there is another psychological dimension to consider: overconfidence.
Read: How VCs Help Founders Optimize Seed & Series A Funding Rounds
Overconfidence: The Entrepreneurs’ Double-Edged Sword
Through my research, I’ve come to see this trait not as simple denial but as a form of overconfidence. Overconfidence, often coupled with self-efficacy (the belief in one’s ability to perform tasks successfully), is a defining characteristic of entrepreneurs.
To be sure, overconfidence can be a liability. Entrepreneurs prone to it often make costly mistakes, such as entering the wrong market or believing a market exists where none does. Lack of market demand is the leading cause of startup failure.
Yet, overconfidence also enables entrepreneurs to attempt what others would consider impossible. It’s this belief that drives entrepreneurial intention and persistence. In many cases, overconfidence may even overshadow risk appetite as the key motivator. Founders don’t necessarily perceive a venture as risky because they trust their ability to overcome challenges.
One predominant explanation for entrepreneurs’ optimism is overconfidence in their knowledge, ability to predict the future, and general personal abilities.
Barbosa, Fayolle, & Smith (2019)
Most successful entrepreneurs possess high levels of psychological capital, a mix of hope, optimism, self-efficacy, and resilience.
Read: Resilience Matters More Than Grit In Entrepreneurs’ Success
Key Findings From Studies on Entrepreneurs’ Overconfidence
Research on overconfidence highlights its dual role in entrepreneurship, both as a catalyst for innovation and a source of potential pitfalls.
A recent analysis showed that overconfidence is not a single construct but takes three forms: overestimation (believing in one’s superior abilities), overplacement (seeing oneself as better than peers), and overprecision (excessive certainty in judgments). Each form uniquely impacts entrepreneurial behavior, influencing both the creation of ventures and their risk of failure.
For example, overestimation often drives entrepreneurs to initiate ventures by overvaluing their skills and underestimating challenges. Overplacement may push them into competitive markets with limited differentiation and low barriers to entry. Overprecision makes them prone to ignoring alternative strategies (pivots) or dismissing critical feedback during venture development.
Overconfidence is often confused with optimism, but they are distinct. Overconfidence involves overestimating one’s abilities or the likelihood of success, while optimism reflects underestimating task difficulty. Both biases can lead to misjudgments in entrepreneurial decision-making, yet each operates through different mechanisms.
Narcissism has both bright and dark sides to entrepreneurial activities.
Liu, Zhu, Huang, et al. (2021)
Founders are generally more overconfident than non-entrepreneurial managers, and younger ones (logically) tend to exhibit this trait more than more experienced ones. Some scholars believe overconfidence is driven by self-efficacy and optimism, as mentioned before, while others link it with narcissism, a trait that has been shown to be common in entrepreneurs.
Narcissistic individuals perceive themselves as superior to others, exhibit a grandiose view of themselves, have a sense of entitlement, pursue power, fame, and leadership positions, and show low levels of empathy and intimacy.
Narcissists also have a higher need for sustained attention and admiration from others, and more willingness to engage in self-improvement behaviors. Individuals with high levels of narcissism are more inclined to regulate themselves by adopting fast life strategies, increasing their entrepreneurial intentions.
These are not great personality traits in regular individuals but I can see how they are advantageous in the crazy ride that is entrepreneurship, where drive matters more than money. I can point, on the top of my head, to at least a dozen successful Founders I worked with over the last fifteen years with these temperamental characteristics.
Read: Is Money The Main Driver of Successful Entrepreneurs?
A Case Study in (Positive) Overconfidence: AirBnB
When Brian Chesky set out to form AirBnB (then called AirbedAndBreakfast) with his co-Founders, he didn’t perceive the risk level of his new venture the way others around him did.
Chesky famously pitched dozens of Venture Capitalists to sell them the idea that arranging for people to host total strangers in their homes was not a crazy idea fueled by ingenuity and delusion. Even elite-level VCs with a lot of success and an eye for daring ideas, such as Fred Wilson and Chris Sacca, passed on the opportunity to invest.
Wilson admitted to underestimating the team’s ability to overcome the trust issue central to their concept. As he explained, his decision was largely shaped by skepticism over whether people would truly open their homes to strangers. Wilson’s email exchange with Paul Graham of Y Combinator highlights how deeply unconventional the idea seemed at the time.
These articles are fascinating forays into the VC’s decision process, a focus on my research here at The VC Factory.
I thought someone would get raped or murdered and the blood would be on their hands. Airbnb is a $10 billion company I’m not an Investor in.
Chris Sacca (source: Startup)
Other savvy Investors, such as Chris Sacca, passed on the deal. The interesting point here is that the Founding Team appreciated the venture’s risks very differently. Chesky and his co-founders were confident that it was possible to design a system for strangers to trust one another.
I don’t think Chesky was more willing to take risks than others. Contrary to common belief, not all entrepreneurs have a high appetite for risk. Their (over)confidence in their abilities considerably moderates how they evaluate the inherent risk level of a venture. Founders often don’t perceive a new business as risky because they believe they have what it takes to overcome the challenge.
Naturally, cognitive biases also come into play. Chesky points out that he and his teammates believed people are fundamentally good—a heuristic that fueled their desire to build a robust trust system.
Direct payment was kind of a crazy idea. It almost scared us. We decided, let’s just do it.
Brian Chesky – Airbnb (Source: Greylock)
In a 2015 exchange with Reid Hoffman at Stanford, Chesky reflected on AirBnB’s early days, sharing how overconfidence played a pivotal role in their ability to move forward despite uncertainty.
Chesky highlighted that in the early iterations of Airbnb, the idea that guests could pay hosts directly on the platform was met with skepticism even within the founding team. At the time, direct payment systems between individuals were virtually unheard of, with platforms like eBay and Etsy still relying on PayPal.
This lack of precedent amplified the perceived risk. Yet Chesky and his co-Founders pushed forward, confident in their ability to design a system that would build trust between strangers. Beyond payments, focused on creating a product with essential elements like a search bar, listings, reviews, and customer service—features that made the concept viable.
Delusion? Ingenuity? A complete disregard for consequences? Chesky’s reflection illustrates that overconfidence often diminishes an entrepreneur’s perception of risk, allowing them to focus on possibilities rather than obstacles. This mindset enables entrepreneurs to see not what is, but what could be, even when the odds seem stacked against them.
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