The fear of missing out is a well known phenomenon in retail circles, but might it also apply to the heavily hyped world of the startup?  That was the question posed by a recent study from the Rotterdam School of Management.

There tends to be considerable hype attached to so called disruptive startups that typically operate in new and unproven fields.  This can create a significant fear of missing out on the next Google or Facebook, but the risk of failure is high.  As such, investors are more likely to invest in disruptive startups to avoid missing out, but they tend to hedge their bets by investing a smaller amount than in less risky ventures.

Selling the venture

For the entrepreneurs themselves, two main strategies emerged in how they sold their startups to investors.  The first of these revolved around the entrepreneurs themselves and their track record of achievement.  This was then embellished with any success the startup has achieved to date, or any unique resources they have access to.  The second strategy would see them pitch the venture in terms of what it will become.  This second strategy is generally what is used by disruptive startups.

Disruptive innovation is loved by a startup world typified by entrepreneurs like Elon Musk, but the researchers wanted to explore if investors were similarly enamoured.  To find out, the researchers studied over 900 Israeli startups who were looking for a first round of funding.

When the data was analyzed, it emerged that playing up the disruptiveness of a venture increased the odds of securing funding by 22%, but these investments tended to be smaller in nature, with disruptive startups securing $87,000 less than their less disruptive peers.

“Why might investors be so positively biased toward disruptive visions, yet opt for investing for so little?” the authors say. “Our research reveals that talking about disruption can be a double-edged sword.”

Hedging bets

The researchers followed up by talking to a few hundred investors from a range of backgrounds to assess a couple of fictitious vision statements.  The two statements were identical except for the degree of disruptiveness expressed within them.  The participants were split in two, with each group receiving one of the statements, before being asked a series of questions as to the type of investment decision they would probably make.

This qualitative analysis supported the quantitative analysis performed previously, in that investors backed disruptive startups more often, but did so with less money.  When quizzed, the investors were lured by the prospect of making extraordinary returns, with investors four times more likely to support a disruptive venture.  They are all too well aware of the risks however, so hedge the risk by pumping less money in.

The researchers hope that their findings will help entrepreneurs to better pitch their startups depending on the kind of results they want to achieve in terms of finance.

“For entrepreneurs seeking early stage investments, we have the following simple but important advice: carefully craft your message,” the authors conclude. “If you are looking to acquire large sums of money, perhaps you should keep your disruptive plans quiet.”