Disruptive start-ups get funding more easily, but less of it

By Timo van Balen & Murat Tarakci

In the start-up world, the disrupter 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. Customers love her because she makes them feel like rebels (with a cause), suppliers love her because she makes them look smart, and—most important—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. Does presenting yourself as a disrupter really make it more likely that your start-up will get the backing it needs?

To answer this question, we studied 918 start-ups in Israel seeking a first round of funding. We obtained data from a private nonprofit organization that tracks the Israeli startup ecosystem and offers an exhaustive platform for investors to scout for promising startups.

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 a venture’s communication of a disruptive vision improved the odds of that venture receiving early funding by 22 percent. However, the venture would also very likely find that the amounts it raised went down by 24 percent.

That raised an interesting question: Why would investors be more willing to invest and less generous at the same time? We found that investors treated disruptive ventures like options. They wanted the chance to be part of “the next big thing,” a venture that had the potential for extraordinary returns. But they didn’t want too many eggs in one basket. By investing less in a self-proclaimed disrupter, investors don’t so much fund the venture as pay for the right to make further investments in the future.

Where does this leave the entrepreneur? If your venture is a high-risk proposition that might struggle to acquire an investment, you should have a compelling disruption story that will help convince investors. But if you feel the venture’s main risks are less in the idea and more in its execution, perhaps you should talk more about your experience and your capabilities. You’re more likely to get the amount you need.

Timo van Balen is a PhD candidate at the Rotterdam School of Management in the Netherlands. Murat Tarakci is a professor at the Rotterdam School of Management.



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