Investor Connect Podcast

Base Rate Fallacy

Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

The base rate fallacy is a cognitive bias defined by Wikipedia as the tendency to ignore base rate information (generic, general information) and focus on specific information (information only pertaining to a certain case).

One-off sales to specific companies while helpful do not define the startup's growth forecast. 

Investors should look at the core systems of a startup to understand their acquisition, conversion, and revenue.

Consulting work and other non-recurring revenue models make it difficult to predict revenue.

Recurring revenue becomes a strong indicator of future revenue growth.

To overcome the base rate fallacy look for metrics across a broader range of customers and not select ones. 

The presence of metrics is a good sign.  

The absence of metrics is a bad sign.

Focus on recurring revenue metrics to understand the acquisition, activation, and retention rates.

Hockey stick projections should be avoided as it assumes something will occur outside the normal operations of the business to take the company’s revenue higher.


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Direct download: Base_rate_fallacy.mp3
Category:general -- posted at: 5:00am CDT