When launching a new business venture, entrepreneurs often focus solely on highlighting its viability and potential for success to create a positive impression with potential investors. However, conveying authenticity is also important for securing initial investment. Campaign narratives that demonstrate authenticity must communicate the potential risks of the venture without negatively affecting the impression created on investors.
A recent study published in the Strategic Entrepreneurship Journal has found that disclosing risk along with positive information may establish authenticity and be an effective impression management strategy for crowdfunding campaigns.
In the study, researchers analyzed the narratives employed when communicating risks and challenges from 300 crowdfunding campaigns. They found that combining risk disclosures with positive information — a strategy the researchers call “compensation” — was associated with superior crowdfunding outcomes. “We find that crowdfunding performance is superior for campaign creators who strategically invoke compensation,” explains Mark Bolinger, the lead author of the study, who serves as Assistant Professor in the Department of Management at in Appalachian State University. “For example,” Bolinger notes, “one creator stated, ‘…to mitigate this risk, we have already built and continue to build security features that prevent common attack vectors.’” In contrast, the authors point out that creators who do not engage in compensation, with statements such as, ‘To be honest, there is no risk…,’ are less likely to reach funding goals, and attract less financing.
Bolinger, along with co-authors Katrina Brownell of Virginia Polytechnic Institute and Jeffrey Covin of the University of Wyoming, conducted two follow-up experiments to further examine how the compensation strategy influences the perceptions of potential investors. In these experiments, the researchers statistically analyzed several factors that could impact the strategy’s success. They found that the effectiveness of the compensation strategy depends on investors’ perceptions of authenticity and project quality. Additionally, the researchers discovered that the entrepreneur’s gender significantly influences the strategy’s success.
“We show that the effectiveness of compensation is dependent on perceptions of authenticity and quality and articulate the boundaries of compensation by revealing critical differences between male and female campaign creators,” note the authors. “We found that the benefit of this tactic appears to be even greater for female entrepreneurs than male entrepreneurs.”
While entrepreneurs may be reluctant to disclose potential risks in their ventures, the findings of this study reveal that compensation can be a viable impression management strategy to establish perceptions of authenticity without sowing doubts among potential investors about a venture’s prospects for success. “Our research suggests that compensation is an effective tactic for campaign creators, particularly for women, as explained by audience perceptions of authenticity and product quality,” explain the authors. “Overall, our research shows that entrepreneurs should disclose risk, but should take care to do so in a specific manner.”
