Invest Passion Properly in Investor Appeals

An excellent business concept withers away quickly without adequate funding to see it through to success. How should entrepreneurs verbalize their arguments for adequate funding in proposals to early-stage investors? asked a research team from University of Melbourne, Hong Kong Polytechnic University, Vrije Universiteit Amsterdam, Monash University, and University of British Columbia.
     Key to developing an answer was recognition of the distinctively high risk the early-stage investors would be accepting. The researchers report past studies which indicate such investors want to fund only business concepts with promise of very high payoffs—home runs—and they freely use educated hunches—gut feeling—in their decision making.
     The researchers augment this formulation by positing that early-stage investors are influenced by the ways in which the entrepreneur uses language in the proposal. Of particular importance were the passion in the phrasing and the preponderance of concrete words versus abstract words in the exposition.
     The substance of a proposal consists of statements of the financial, social, human resources, and intellectual capital investments in the business concept which the entrepreneurs have made themselves. The researchers refer to this substance as costly signals, since they involve expenditures by the entrepreneur.
     Importantly, costly and costless signals interact in their effect on investor acceptance. On the basis of interviewing a set of venture capitalists and analyzing investor acceptance or rejection of more than 5,300 written proposals from startups, the researchers developed these recommendations: 

• When there are many costly signals in the presentation, high use of passion helps achieve investor financing. If costly signals are low, stay aware of the danger of expressions of passion so strong that they’re viewed as indicating lying or naiveté. 
• When there are few costly signals, high use of concreteness helps. If costly signals are high however, the danger of concreteness is that it’s viewed as indicating a lack of cognitive flexibility and long-term perspective.

     The researchers caution that the study attended to written text proposals and how there are other considerations for investor acceptance when the entrepreneur’s pitch is face-to-face with nonverbal signaling or in a proposal with the visual design of images.
     Also note these suggestions are specifically intended for an entrepreneur soliciting startup funding. The suggestions might not fully apply with other types of investment or loan requests. There, other red flags apply. In one study, loan defaults were more likely when God or family was mentioned in the loan application.

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Image at top of post based on photo by SpaceX from Pexels