Disruptive Startups Get Funding More Easily, but Less of It
A study of 918 startups in Israel seeking a first round of funding found that whether entrepreneurs emphasized the disruptive nature of their business influenced the funding they received. Specifically, the results showed that talking about a venture’s disruptive vision by one standard deviation improved the odds of that venture receiving early funding by 22%. But the venture would also very likely find that the amounts it would raise went down by 24% — for a typical Israeli venture that would mean getting $87,000 less in the Seed round, and $361,000 less in the series A round.
In the start-up world, the disruptor is the cool kid on the block, the one who’ll change the world — or at least the products you’ll buy and how you buy them. She takes on the grown-ups in suits and shows us all how dumb they are. Customers love her because she makes them feel like rebels (with a cause), suppliers love her because she makes them look smart, and — most importantly — investors love her because she makes them feel they’re putting money into tomorrow’s big player.
That, at least, is what the hype around disruption would have you believe. A new product or technology sells better to all stakeholders if people can be persuaded that it will disrupt the status quo. But does the evidence bear out this belief? Specifically, does presenting yourself as a disruptor really make it more likely that your startup will get the backing it needs?
To answer this question, we studied 918 startups in Israel seeking a first round of funding. Israel is a cradle of entrepreneurship, with more high-tech startups per capita than any other country. They’ve spawned many unicorns, such as Waze (the driving navigation app acquired in 2013 by Google for $1.3 billion), NDS (the video software provider scooped by Cisco in 2012 for $5 billion), Playtika (the gaming platform bought by Giant Interactive for $4.4 billion in 2016), and Mobileye (the software and chip provider for autonomous vehicles acquired by Intel for $15.3 billion in 2017).
Here’s how we did it. We obtained data from the Startup Nation Central(SNC)—a private non-profit organization that tracks the Israeli startup ecosystem and offers an exhaustive platform for investors to scout for promising startups. Two coders manually assessed if a startup’s profiles did or did not articulate a vision to fundamentally change its industry, disrupt the industry’s existing power structures, or alter the way the industry operates. Each yes answer was accorded one point and each no was assigned a zero value. The total score for each was averaged across the coders, giving the scores a range of between 0 and 3 with 0.5 increments.
And what did we find? Unfortunately, what we got was a yes but rather than a resounding confirmation or refutation. The results showed that, yes, increasing our measure of a venture’s disruptive vision communication by one standard deviation (0.78) improved the odds of that venture receiving early funding by 22%. But the venture would also very likely find that the amounts it would raise went down by 24% — for a typical Israeli venture that would mean getting $87,000 less in the Seed round, and $361,000 less in the series A round.
That raised an interesting question: Why would investors be more willing to invest and less generous at the same time?To answer this question, we recruited 203 participants with previous investment experiences for an online experiment. We randomly split them into two experimental conditions in which we presented them with an investment opportunity into a venture. The venture was taken from our Israeli sample and was identical in both experimental conditions. The only difference was that we manipulated the venture’s description to present the venture as a disruptor or not. We then asked participants to assess the upside potential of the venture, and to decide whether and how much they’d invest in the venture.
What the experiment revealed was that investors treated disruptive ventures like options. They wanted the chance to be part of “the next big thing”— a venture that has the potential for extraordinary returns. But they didn’t want too many eggs in any one basket at once. By investing less in a self-claimed disruptor, investors don’t so much fund the venture as pay for the right to make further investments in the venture in the future, when the risks and uncertainties are better understood and more easily quantified.
Where does this leave the entrepreneur? It all depends on the risks and uncertainties of your venture. If your venture is a high-risk proposition that might struggle to acquire an investment, then you should have a compelling story that will help convince investors. Screaming disruption everywhere you can will help in that case. But if you feel the venture’s main risks are less in the idea than in its execution — then maybe you should try to avoid making disruption your narrative and talk more about your experience and capabilities. You’re more likely to get the amount you need.
Timo Van Balen is aPhD candidate at the Rotterdam School of Management in the Netherlands
Murat Tarakci is a professor at the Rotterdam School of Management in the Netherlands
Ashish Sood is a professor at the University of California Riverside in the USA
Disruptive Startups Get Funding More Easily, but Less of It
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