Posted on February 12, 2019 by staff

Investors prefer ‘disruptive’ start-ups, but give them less money


Entrepreneurs pitching ‘disruptive’ start-ups are 22 per cent more likely to get funding, but receive 24 per cent less investment than less risky ventures.

These are the results of new research from Timo van Balen, a researcher at RSM from the Rotterdam School of Management, Erasmus University (RSM).

Van Balen analysed data of 918 start-ups from Start-Up Nation Central, a private non-profit organisation that has collected data on all Israeli start-ups since 2013.

Alongside fellow researchers, Murat Tarakci of RSM and Ashish Sood of the University of California Riverside, he discovered that increasing the communication of a start-up’s disruptive vision improved the odds of receiving funding by an average of 22 per cent.

But it cut the amount invested. In real terms, the 24 per cent declice equated to receiving $87,000 less in the first investment round and $361,000 less in the second investment round.

“Entrepreneurs increasingly talk about ‘disruption’, framing their products, technologies and ventures in this way to secure financial capital,” said Van Balen.

“We found that emphasising this image of a venture’s potential market disruption does increase the odds of receiving first-round funding.

“This is because the promise of being a ‘game-changer’ fosters investors’ expectations of extraordinary returns on their money. However, a highly disruptive venture’s future success is often uncertain, which deters investors from making large speculative investments into it.”

The research suggests that entrepreneurs can craft the communication of their vision to help achieve their funding goals.

“If getting an investment of any size is very important, pitching a highly disruptive vision might be key to grabbing the right people’s attention.

But if it’s more important to attract bigger investments, it might be smart to avoid communicating a disruptive vision of the effect of your start-up.”