How VCs Can Overcome the “Winner’s Curse”

The winner pays more than the target is worth when many investors bid on a start-up. Winning can become more of a curse than a blessing. In this article, the authors explain the dynamics of the winner's curse and suggest that investors should consider a contingent contract, which allows them to bet on what they want.

Business people often make overly rosy predictions of their chances of success. Entrepreneurs who give overly optimistic forecasts end up disappointed. Entrepreneurs can be encouraged to be optimistic by investors. Entrepreneurs are often pushed to set big, hairy, audacious goals. When potential investors want a promise of great revenues in five years, founders often agree.