Magical Thinking in Startups (Dangerous)

Magical thinking in startups is dangerous. You need realistic optimism to succeed. Here's how to tell the difference between the two, and make sure you're not drinking your own Kool Aid.

I know you think you don't do it. But you do. We all do. Magical thinking is when you tell yourself that if you can just get the product launched it will take off like wildfire. No marketing required.

Magical thinking is when an investor tells you that he knows you'll be profitable in one year, and you agree with him. Magical thinking is when you run the financial models, and rerun them until they have that nice hocky-stick shape because everyone knows that's the magical shape for a wildly successful startup.

Magical thinking is when someone tells you your tech is “disruptive” and “beyond innovative” and that you're going to be wildly wealthy one day, and you believe them. Magical thinking is drinking the Kool Aid, which we all know not to do. But we all do it.

Magical Thinking Works Great Until it Stops Working

The problem is, everyone wants to believe the fairy tale. But when you're relying entirely on faith and pixie dust, when something goes wrong (not “if” but “when”) you won't know what to do about it. Then down, down, down you go on that roller coaster, with the bottom dropping out of your stomach. Unbridled optimism, unsupported by data, is by its nature unprepared for setbacks. When you rely entirely on really, really wanting something to happen…and then it doesn't, there's no where to go. You can't wish harder, or believe more sincerely. You feel powerless. And you are.

Use Data to Make the Right Pivots

When startups run into trouble, they commonly have to change directions. Sometimes fast and frequently. We call that pivoting. To pivot is a good thing. It means you're paying attention to the market. You're making changes when things aren't working as expected.

But pivots are not spinning around in circles, going in one direction and then another, and hoping to hit on a solution. Pivots should be informed decisions. The only way to make an informed decision and change course is to look at the data. You must see what went wrong to do something differently the right way.

If you're offering your users a paid subscription, and almost no one is buying, then maybe a free subscription is what's required. Or maybe you need to market to them better. Or perhaps the user experience is so bad that your customers try it once and give up. If you don't know which of these is your problem, then you don't know which to change.

But you can't examine the data if you didn't use data to begin with. If you don't know what you did right and what you did wrong, then you can't fix the wrong things and keep doing the right things. That's when magical thinkers realize that they were never in control of their own company, they were just trusting to luck.

That, my friends, is no way to live your life.

So stop with the wild-eyed dreaming and stay real. This is a business. A business should be like a well-oiled machine. Your job is to figure out how that machine works, and then get it working that way. You're a mechanic, not a magician.

Hey, you may be saying, I need to have faith in myself and my ideas. I need to think a little magic now and then. This, I will admit, is required if you want to found your own company. At least in the very beginning, faith is all there is. So my formula is for slightly flavored fizzy water–rather than the syrupy-sweet Kool Aid of magical thinking.

Realistic Optimism is Flavored Fizzy Water (Not Kool Aid)

When you've done the research, gathered your data, held your assumptions up to friends and advisers for their examination, and come to a plan for moving ahead with your business–and you're optimistic of your success–you have achieved Realistic Optimism. Less sweet, fewer calories, better for you, realistic optimism will keep you energized and keep you motivated.

You're optimistic because it's a plan based on analysis. You checked out the competition and know their weaknesses. You met with a financial gal and she ran numbers that look like a bunny slope up, rather than a hockey stick. You made revenue targets for the next quarter, six months, and a year, so you know if you're meeting those goals or if something is going wrong long before the company crashes and burns. You're not taking wild amounts of funding with the promise that you'll return ten time on their investments in five years (what VCs usually look for). Instead, you're bootstrapping, using all the free services you can find, scrimping and saving and launching an MVP to test the market before you spend too much time or money on this new business.

  • Your psychic did not tell you you were destined to be rich.
  • You don't know if mercury is in retrograde and you don't care.
  • Nobody has used the word “disruptive” within your hearing.

These are the hallmarks of realistic optimism.

Processes Keep Us Sane

Business processes, such as understanding your competition, beta-testing with your users, running conservative financial models, and ignoring the crazy talk, are what keep the roller coaster fairly level. Unfortunately, most founders of startups don't follow processes. They may have no idea of what those processes are. In fact, they often just have an idea for a product and they run at it pell-mell, imagining they'll deal with the problems as they arrive. This usually doesn't work.

We all imagine our technology will be the next Foursquare, or our eCommerce site will be the next Nasty Gal. But it's important to remember that those founders weren't overnight successes. They didn't jump into the project believing they'd be disruptive, or win contests, or get rich quick. Sophia Amoruso, founded Nasty Gal in 2006, running everything out of an eBay shopping site and finding and photographing the clothing herself. She started small and focused on the basics: selling a product. Amoruso claims to have made revenue the very first day, and it was years before she took any outside funding at all.

This is a good process and realistic optimism.

So if you find yourself browsing the Corcoran mobile app for the $5MM mansion you're going to buy when you're rich (yes, I have done that), or you spend a lot of time playing with your Excel sheets trying to make your financial model “look right” (done that too) or you've proudly listened while people called you brilliant, ingenious, amazing (y'uh huh, I listened) then it's time to give yourself a reality check.

You don't have to be a downer. You don't need to talk yourself out of the dream. But do make sure that you're thinking about process, steps and goals for the next month, quarter and year in order to achieve that dream. And not about where you'll retire after you've sold the company for one billion dollars (Paris, the Left Bank).

7 Laws of Magical Thinking

Okay, now that I've slapped you back to reality, as a treat you can read this book and learn why magical thinking has been so useful to us that it's hardwired into our brains. Just remember while you're reading it (and planing the next 5 years of your business, step-by-step) that magical thinking must be balanced with realistic optimism. We can call it magical-optimistic-real-thinking. Or MOR Thinking. I do love a good acronym!

But then, I didn't have to tell any of you this–you're all bootstrappers.