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September 19, 2004
Overestimating Equity
Topic: 3) Ventures
In a number of different discussions I have been having regarding bringing technologies to market, hiring new executives in early-stage ventures, and determining the proper capital structure for a business, I run into situations that remind me of a classical finding in the organizational behavior field of study that I learned while attending the University of Chicago business school. For example, when a husband and wife are asked individually "what percentage of the housework do you perform in your family?" a general finding is that the two numbers significantly sum to more than 100% (e.g., husband says he does 70%, wife says she does 80%).

I find the same type of overestimation tendencies occur in start-ups and with new inventions, where quantifiable value in dollars may be very hard to pin down to a single number or even a narrow range. This value discrepancy can occur throughout all assets in the business between insiders, outsiders, classes of investors, functional roles, etc. People tend to overestimate themselves and underestimate others. While there are external ways to mitigate the counterproductive aspects of overestimating oneself (e.g., use of Board processes, benchmarking), one should be cognizant of complex costs imposed on early-stage ventures to resolve these differences. Sometimes external controls may not be the only thing to look at.

Steve Shu
Managing Director
S4 Management Group

Posted by sshu-s4 (c) S4 Management Group LLC at 9:21 PM CDT
Updated: September 20, 2004 9:54 PM CDT
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