Can you guess what the key ingredient is for small business success? I know what you’re thinking. No, it’s not funding, and it’s not a business plan. It’s confidence. A fascinating new study by Kabbage revealed that entrepreneurs, specifically small business owners, are battling underconfidence. The research shows that the majority of small businesses believe their revenue growth underperforms their peers. Specifically, 60% of respondents ranked their revenue growth below the 50th percentile of similarly sized companies. Yet, when comparing their actual cash flow and revenue data with the analysis drawn from the Kabbage Small Business Revenue Index, the information indicates that the vast majority of respondents have healthy revenue performance. The question is, why are these business owners feeling pessimistic about their company’s performance, and how is it impacting their decision making?
Why small business owners feel underconfident
According to the APA Dictionary of Psychology, underconfidence is defined as, “a cognitive bias characterized by an underestimation of one’s ability to perform a task successfully or by an underrating of one’s performance relative to that of others.” Most of the time, underconfidence leads people to avoid opportunities that could lead to small business success. Or worse, to give up. According to UC Berkeley-Haas management professor Don A. Moore, there is a reason these small business owners tend to downplay their performance. “Having studied the effects that confidence levels have on decision-making for over 20 years, I’ve found entrepreneurs are often overconfident,” Moore said. “However, this study shows the potential for small business owners to err on the side of under-placing their performance when comparing themselves to others. The likely reason for this is that people tend to rate themselves below average on difficult tasks. Simply put, people assume they’re worse than others when a task is hard. Both running a small business and benchmarking performance without solid data are difficult tasks, and respondents showed underconfidence despite sharing similar struggles.”
How underconfidence affects decision making
Underconfidence also affects decision making. Moore states that “People who demonstrate underconfidence are more likely to opt-out of or choose to exit a competition when, in fact, they would have succeeded had they persisted.” In other words, the primary distinction between those who persist and those who give up is self-confidence. The good news for small business owners is that self-confidence is something you can improve upon. All you need are focus and determination. There are additional benefits to fostering self-confidence. According to Albert Bandura’s social cognitive theory, people who exhibit more self-confidence also experience less stress, expend more effort, persevere longer on activities and are more resilient when facing adverse situations.
The cure for underconfidence
The best remedy for underconfidence isn’t overconfidence but rather seeking more accurate and dependable information. Providing small businesses with access to benchmarking systems and analysis like what is available to large companies may help them more accurately estimate their performance. “There is no question that technology advancements will empower small businesses with smarter systems to better analyze and understand their business performance,” said Kabbage Chief Revenue Officer Laura Goldberg. “What’s most exciting is the potential for technology to fuel greater confidence in entrepreneurs and their businesses and to provide the encouragement to keep growing.”
While these findings suggest that small business owners may carry unfounded self-doubt about the financial health of their businesses, the message is clear. Small businesses need appropriate resources to analyze and compare their cash-flow performance against their peers. Mix one part data, one part self-confidence and one part persistence, and you’ll get the ultimate recipe for small business success.