What are the factors that effect an investor’s propensity to invest? Is there a magical combination of language that impacts their willingness to open up their wallets and purses and entices them to write a check?
According to the report from the Journal of Business Venturing language in proposals and pitches can have just that effect. The report “…suggest[s] that business angels prefer investment proposals characterized by the moderate use of positive language, moderate levels of promotion of innovation, supplication and blasting of competition, and high levels of opinion conformity.”
Dont Brag An Entrepreneurs Guide to Getting Capital
by Scott Palmquist
Bottom Line: For young firms seeking outside funding, making a positive first impression on investors counts for a lot. They should refrain from bashing the competition and acknowledge they have room for improvement.
Entrepreneurs attempting to secure early-stage funding should strike a delicate balance between confidence and restraint when spelling out their business plan, according to a newstudy. Although investors appreciate an entrepreneur’s bold vision, they frown upon overly bombastic claims about a venture’s certainty of success or the competition’s shortcomings. And in a counterintuitive twist, the study adds that entrepreneurs can actually improve their prospects of receiving funding by revealing some of their flaws and downplaying the uniqueness of their business model; these are moves that investors regard as responsible and mature rather than as signs of weakness.
Because early-stage ventures usually revolve around untried technologies, novel products and services, and uncertain levels of market demand, investors can’t base their bets on the firm’s proven track record. Instead, they must weigh the promises and assertions made by entrepreneurs. As a result, one of the most important tasks confronting fledgling companies is to engage in what researchers call impression management, by presenting their business plan in a cogent, captivating manner that appeals to investors.
The authors analyzed all 595 entrepreneurial firms that sought financing from a prominent network of New York City angel investors during a recent three-year period. Angel investors typically put up their own money, either individually or in small groups, to back early-stage ventures that have high growth potential and a product either entering the marketplace or in the testing phase. (This approach contrasts with venture capitalists—whole firms that tend to fund more established or proven businesses.)
The angel network studied reflected the typical portfolio of similar groups in the U.S., seeking to reap a 10- to 30-fold return on its investments within two to seven years. The average firm seeking funding in the sample was three years old, employed seven people, had raised US$850,000, and was seeking another $1.7 million in first-round funding.
The investors based most of their initial judgments on a one-page application submitted by entrepreneurial companies. In it, entrepreneurs provide information on their firm’s finances, prior investors, and management team; they also describe their business model, rivals, marketing plan, and any competitive advantages they might have. Because the applications were all the same length and covered the same topics, the authors could isolate …
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