A recent study published in the Journal of Marketing explores effective strategies startups can use to craft their pitches to attract investors in a highly competitive venture capital environment. The research analyzed over 5,300 new ventures, focusing on how tangible achievements (costly signals) and verbal cues (costless signals) influence investor decision-making. The paper, titled “Business-to-Investor (B2I) Marketing: The Interplay of Costly and Costless Signals,” was authored by an esteemed group of academics, including Greg Nyilasy from the University of Melbourne, Shangwen Yi from the University of British Columbia, Dennis Herhausen from Vrije Universiteit Amsterdam, Stephan Ludwig from Monash University, and Darren W. Dahl also from the University of British Columbia. Their findings provide actionable insights for startups and investors, highlighting the importance of a balanced approach in startup pitches.

The researchers categorize startups’ signals to attract investment into two main types: costly and costless. Costly signals are tangible indicators of a startup’s potential, such as financial capital (existing investments in the business), human capital (founders’ education and experience), social capital (business and institutional connections), and intellectual capital (patents and intellectual property). On the other hand, costless signals are verbal cues that influence investor perception and include elements such as passion (enthusiasm and emotional intensity in the pitch) and concreteness (specificity and detail in the communication). The study provides a detailed analysis of how these signals interact and their effects on investor decision-making.

The study also reveals some surprising dynamics between the different types of signals. While a moderate level of costly signals can enhance the likelihood of securing funding, an excess may deter investors by suggesting overvaluation or limiting their involvement. Contrarily, excessive passion, often considered a positive trait, can backfire unless strong, costly signals support it. Furthermore, while detailed communication can assist startups lacking tangible achievements, it can appear rigid and inflexible when paired with a strong portfolio of expensive signals.

The implications of these findings are significant for both startups and investors. For startups lacking tangible achievements, the study advises avoiding an overuse of passionate language, which may come across as compensatory. Instead, they should focus on transparent and moderately detailed messaging. For those with robust, costly signals, showcasing passion can enhance investor confidence, but overly detailed pitches might reduce perceived flexibility. On the investor side, the research suggests a cautious approach to evaluating pitches that rely heavily on passion without substantive backing and a balanced appreciation for detailed communication in startups with fewer tangible achievements.

The study concludes with a call to action for startups and investors, emphasizing the need to refine pitch strategies and evaluation methods. By understanding and implementing the right balance of passion, detail, and achievements, startups can better position themselves in the competitive venture capital market. Investors, in turn, should assess pitches holistically, weighing both tangible and intangible signals to identify high-potential ventures. This research equips stakeholders with valuable strategies and aims to foster better matches within the venture capital ecosystem, ultimately benefiting the broader startup community.

More information: Greg Nyilasy et al, Business-to-Investor Marketing: The Interplay of Costly and Costless Signals, Journal of Marketing. DOI: 10.1177/00222429241288464

Journal information: Journal of Marketing Provided by American Marketing Association