The CEO of the start-up was conducting due diligence on a potential acquisition target. The Board (including him) had prepared a list of questions they wanted detailed responses to. These answers would then need to be cross-verified by appropriate experts, lawyers and accountants. The founders of the potential acquisition target were known to the CEO for several years and they had done business together as well. The CEO believed that the acquisition would benefit his company and desperately wanted to make the acquisition happen as he believed it would double the size of his company, enhance offerings and customers and, of course, provide some bragging rights since an acquisition tends to (at least initially) be an ego-booster. As the diligence process began, it started becoming apparent that the financial position of the target company wasn?t as healthy as had been conveyed or imagined. In addition, the customer base and sales pipeline, too, didn?t look as attractive. The Board started having second thoughts on the deal. The CEO aggressively pushed for the acquisition, so much so that he started rationalising the deficiencies and gaps thrown up by the diligence. He also downplayed ?bad news? (eg. loss of a customer) or kept the information only with him. The Board wanted the CEO to look for other targets and options as well but having invested so much time and energy (emotional and otherwise) in trying to make this acquisition happen, the CEO wasn?t in a mood to listen.

The VC and the entrepreneur knew each other since ten years. They had high regard and respect for each other. They had worked together at the same firm for over seven years. Over the past ten years, they had kept in touch socially. Both were well known professionals and who occasionally sounded each other out. Now the entrepreneur was raising money for his start-up and the first VC he called was his former colleague. The VC wanted to do the deal as the team was high profile and the proposition, though risky, looked attractive. He was excited since this would be a proprietary deal without any other VC being aware of the opportunity. It would be a coup. He was very eager to close the deal at the earliest; the entrepreneur, too, given his public standing, wanted to get the deal done quickly. Both had already laid out the PR release and the inevitable press conference that would follow the announcement of this high profile deal. The VC pushed the deal through his partnership, convincing them that there wasn?t any reason to do a detailed diligence as the team was well known to him, the proposition was attractive and that the terms of investment were attractive.

The acquisition didn?t take place since the Board couldn?t reach a consensus. As more details of the target emerged, it became apparent that there wasn?t much business sense in an acquisition; in fact, there would be a serious financial hit that the acquiring start-up would have to take. The CEO, who was adamant about consummating the deal, and the Board had an acrimonious relationship thereafter, one which took a long time to heal. In the second instance, the high profile deal quickly soured as the VC?s friend just wasn?t cut out to be the CEO of a start-up. There was a huge mismatch in expectations and styles of working. The high profile start-up blew up, leaving bruised egos all around.

Why do such things happen? It was important for the acquiring CEO and the VC to remain dispassionate and detached so that they could take decisions in the best interests of their respective firms. However, they allowed their biases and preconceptions to overwhelm their usual decision-making process. In fact, in such cases, it is not unusual at all for a person to actively seek out information that reinforces these biases and preconceptions (eg. by selectively recalling anecdotes) and ignore or overlook alternative viewpoints. This is ?confirmation bias?. Companies, too, suffer from this bias. They believe their own PR and marketing hype and ignore dissonant customers and negative market feedback until it is too late. They don?t hear the little boy who shouts about the lack of clothes on the emperor.

All of us are guilty of this bias. But, what are we doing about it?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member and mentor. He?s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD Business School. He can be reached at sanjay@jumpstartup.net. These are his personal views