Entrepreneurs are often the face of their ventures. The communication of their “vision” is crucial to recruiting potential customers, engaging suppliers to collaborate, and convincing investors to invest. Recently, more and more entrepreneurs are employing what many refer to as the “disruptive vision.” A venture that is framed as disruptive purports to fundamentally change, disturb, or reorder the ways in which markets, organizations, and ecosystems operate.
In an effort to understand how presenting this type of vision impacts venture funding, researchers Timo van Balen, Murat Tarakci, and Ashish Sood conducted two different analyses of Israeli startups. In the first analysis, they studied a sample of roughly 1000 startups founded since 2013 and used their vision statements to identify whether they communicated a disruptive vision, comparing this to whether they raised venture capital and how much they raised.
In the second analysis, they conducted a randomized online experiment where they asked users whether, how much, and importantly, why they would invest in startups that articulated specific vision statements. Here is what they found.
- Articulating a ‘disruptive’ vision increases the likelihood of receiving funding, but reduces the amount of funding obtained.
The study found that communicating a disruptive vision increased the odds of receiving a first round of funding by 22 percent, but reduced the funding amount by 24 percent. This amounted to a $87,000 drop for a typical venture in the Seed round, and a $361,000 reduction in the Series A funding round. The randomized experiment provided more insight into the rationale of investors. Companies that claimed to be disruptive were perceived as having the potential for extraordinary returns, which encouraged participants in the study to invest, but this came with impressions of high-risk and uncertainty, which reduced the amount they were willing to invest.
- The way entrepreneurs communicate their vision can have a tangible impact on investment decisions.
Communication and impression management are key here. As the authors point out, not all potentially disruptive innovations are actually ‘disrupting’ at the time they raise capital. Communicating what the company will do in the future is equally important to investors as communicating past and current achievements. The content that entrepreneurs communicate to investors, for example, in their vision statements, can influence whether or not they are perceived as ‘disruptive’ regardless of the company’s performance, and regardless of how the vision is communicated. This alone can have tangible effects on investment decisions.
The full report can be found here.
Contributed by Ariadne Xenopoulos