Imperfect information

Imperfect information infiltrates every decision-making scenario. Healthcare professionals know this all-to-well, because Medicine isn't an exact science. Entrepreneurs know it too because business decisions are often a hybrid of known-knowns, assumed-unknowns, and blatant guesses. Let's look at some of the reasons for imperfect information in the entrepreneurial setting.

Response-answer mismatch

Not every response to a question is an answer to said question. Investors can ask questions and receive truthful responses, but those responses don't answer the question asked. In these cases the investor can misinterpret the response as an answer to his/her question, when the response is answering some other question.

For example, investors who ask about profit margins will receive a response from the founders that could be the gross margin, operating margin, net margin, or contribution margin. All four responses are margins, but only one truly answers the investor's question. If the investor is thinking of one type of margin, and the founder is thinking another, there will be a response-answer mismatch. 

Assumptions

Entrepreneurs make assumptions in order to predict future events. Assumptions for future demand, returns, sales, and costs are needed to estimate where one's venture is headed. Those assumptions may start with imperfect information, resulting in even more imperfect predictions. 

The accuracy of a prediction is predicated on the accuracy of the data that form its foundation. If the foundation is imperfect, those imperfections will be magnified in the prediction. 

Impaired data collection

Improperly collecting data for your business means any subsequent analyses will be imperfect from the start. Sometimes, well-intentioned policies, meant to streamline your business operations or maintain high quality, result in the wrong data collected or an incomplete collection of the right data. The resulting analyses and interpretations are imprecise or inaccurate and can lead both you and your investors astray.

Fraud

While rare, there are enough instances of intentional deception to keep investors at high alert. Deceptive individuals can fabricate nearly any business or financial metric. And while there is no sure way of spotting all instances of fraud, a systematic due diligence protocol can help lower the probability of being duped.

Due diligence

Due diligent protocols vary depending on the industry you're in, the thresholds you have, and the availability of information. Some entrepreneurs require a lot of information, such as years of balance sheets and the most recent income statement, while others need less, and others want an independent audit. In the future we'll review some DIY due diligence protocols that you can implement to offset the misdirection that imperfect information can cause.