Startup Funding Espresso – Disposition Effect

Disposition Effect

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

Disposition effect is a cognitive bias defined by Wikipedia as the tendency to sell an asset that has accumulated in value and resist selling an asset that has declined in value.

Investors find it difficult to sell startup investments since they are no longer growing but hold the promise of “coming back.”

Investors fund many startups most of which will not return the original value.

Many investors hold onto the investment with the hope that they eventually will achieve success.  

Investors should review their portfolio of investments to determine which ones have a strong enough case to continue.

For those startups that don’t have a case, the investor should explore selling out of the deal.

In follow-on fundraises, the investor could look for someone to take their place and buy them out. 

Another path is to write redemption clauses into the investment documents so the investor has a choice about leaving the deal.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

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