‘Disruptive startups’, or disruption overall, has become a hot topic in recent years both in research and in practice, with ventures developing disruptive business models, appointing ‘Chief Disruption Officers’ and entrepreneur trade shows such as TechCrunch Disrupt being named after the trend. Disruptive startups will often break away from existing products, services and offers high risks and rewards; if it does not fail it can become the dominant player in its market.
“Pitching a disruptive vision makes startup founders 22% more likely to get funding.”
Entrepreneurs increasingly incorporate this type of language into their pitches, framing their products, technologies and ventures in this way to secure financial capital. This is a break away from the more traditional approach of relying on backward-looking metrics like the past performances of team members, market success or advantages like technologies, patents or prototypes. Instead, these pitches focus on what the company will become and what the entrepreneurs can achieve.
Entrepreneurs should beware, however, because pitching a disruptive vision is a double-edged sword.
On the one hand, you are more likely to win funding. Our recent study, published in the Journal of Management Studies, found that emphasising a venture’s potential market disruption increases the odds of receiving first-round funding. In fact, pitching this sort of image makes startup founders 22% more likely to get funding from early-stage investors. This is because the promise of being a ‘game-changer’ fosters their expectations of extraordinary returns on their money, as well as the fear of missing out on the next big change in the market. As a result, disruptive startups stand out amongst a portfolio of similar investment opportunities.
But you are likely to get less money. Investors are less likely to make large speculative investments into a company with an uncertain future.
Disruptive startups experience a 24% ‘disruption’ discount
Alongside my fellow researchers, Murat Tarakci of Rotterdam School of Management, Erasmus University (RSM) and Ashish Sood of the University of California Riverside, I analysed the data of 918 startups from Start-Up Nation Central, a private non-profit organisation that has collected data on all Israeli startups since 2013. Israel is internationally recognised for its strong entrepreneurship culture, having the most high-tech startups per capita and a vibrant venture capital scene.
We compared the characteristics of each startup’s vision statement, published on Start-Up Nation Central’s platform, with how much funding the venture secured. We discovered that increasing the communication of a startup’s disruptive vision improved the odds of receiving funding by an average of 22%. But it cut the amount invested by an average of 24%. This amounted to $87,000 less in ventures that had a first round of Seed investment and $361,000 less for ventures that had a first round which was A series.
“But [a disruptive vision] cut the amount invested by an average of 24%”
To do this, we specifically looked for three characteristics in the vision statement; whether it promoted drastic change in the future, identified and improved upon deficiencies in the current market or included ideas or plans to achieve a conventional objective in a completely different manner. Phrases like ‘transforming the way’, ‘changing the paradigm’, ‘doing things differently’ and ‘revolutionising’ indicated that these entrepreneurs were framing their startups as disruptive. We also looked at the ways vision statements promoted the achievements of the people involved, the ventures themselves and their resources.
Disruptive startups need to craft their pitch carefully
All young ventures are risky. Just over half of all small businesses in the US fail in the first four years, according to new data from Small Business Trends, a hub of more than 2m entrepreneurs, business owners, influencers and experts. Only 40% of small businesses are profitable, 30% break even and 30% are continually losing money.
Nevertheless, the way an entrepreneur communicates their vision, can have a big impact on how a potential investor perceives risk. Describing a company’s future as highly disruptive increases uncertainty about its outcome. In fact, the more game-changing the vision, the more likely it is to diverge from specific plans and be vulnerable to bad decisions or a fatal flaw.
“Phrases like ‘changing the way’, ‘setting the standard’ and ‘revolutionary’ are highly evocative and likely to make an impact.”
Our research suggests that entrepreneurs should be careful in matching their company description to 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. Phrases like ‘changing the way’, ‘setting the standard’ and ‘revolutionary’ are highly evocative and likely to make an impact on those looking to invest in a certain area, sector or product.
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 startup. Avoid bold statements about the effect on the market or the way customers use a product. To get more money, focus more on the credentials of the team, past successes or tangible assets and products is likely to encourage more generous contributions from investors.
Timo van Balen is a lecturer at the Rotterdam School of Management, Erasmus University (RSM). His full paper can be read here.