Fear of missing out is strong but risk-aversity remains
Many investors want to make an early bet on startups with a disruptive vision but they do so cautiously.
Fear of missing out is a key driver of early investments in disruptors according to a new study, but while those startups may attract attention, they may not raise as much, as keen investors are less inclined to back them with large sums.
Ashish Sood, an associate professor of marketing at the UC Riverside School of Business teamed up with colleagues at the Rotterdam School of Management to ask a fundamental question.
"Why might investors be so positively biased toward disruptive visions, yet opt for investing for so little?" Sood said. "Our research reveals that talking about disruption can be a double-edged sword."
Ashish Sood
They found that investors can be enthused about backing a startup by claims of disruption.
In their first study, a disruptive vision was found to increase the chance of first-round investment from more than 900 investors by 22%. However, the amount raised was 24% lower than less-threatening ventures.
A second study of more than 200 experienced investors also found that disruptive startups were funded eagerly but less generously.
The researchers also discovered that only a small increase in the amount of extraordinary returns that investors expected made them four times more likely to invest.
The amount invested is likely to remain low though, as investors may consider a small investment as a ‘buy-in’ with the option to increase their holding once initial risk lessens.
"For entrepreneurs seeking early stage investments, we have the following simple but important advice: carefully craft your message," Sood said. "If you are looking to acquire large sums of money, perhaps you should keep your disruptive plans quiet."
The full study is published in the Journal of Management Studies.
