Entrepreneurs often grapple with whether to disclose the inherent risks in their business ventures. While honesty can bolster credibility, it also risks deterring potential investors. A significant study published in the Strategic Entrepreneurship Journal delves into this issue, offering insights on how entrepreneurs can disclose risks strategically without compromising investor confidence. This groundbreaking research was conducted by Mark T. Bolinger from Appalachian State University, Katrina M. Brownell of Virginia Polytechnic Institute, and Jeffrey G. Covin from the University of Wyoming.
The trio introduced a novel impression management tactic dubbed “compensation,” which has been shown to enhance financing outcomes for entrepreneurs in the early stages of their business. The research comprises three extensive experiments demonstrating how entrepreneurs who acknowledge risks while simultaneously highlighting mitigating factors can significantly enhance their perceived authenticity and the quality of their projects. This dual approach maintains transparency and boosts their chances of crowdfunding success.
The study highlights several key findings. Firstly, strategic risk disclosure is adequate: entrepreneurs who utilize the compensation tactic—pairing risk information with positive details—tend to achieve higher funding success than those who downplay risks or preset without mitigating context. Secondly, authenticity plays a crucial role in boosting investor confidence: investors are more likely to support ventures that openly address potential challenges, as this transparency fosters trust.
An interesting aspect of the study is its focus on gender dynamics. The research finds that female entrepreneurs benefit from the compensation strategy, potentially countering biases within entrepreneurial finance. This insight is crucial as it suggests that strategic risk disclosure can be tailored to enhance equity and inclusivity within the entrepreneurial ecosystem.
The study provides actionable insights for entrepreneurs seeking funding through platforms like crowdfunding, venture capital, or other investor-driven models. By strategically integrating risk disclosure with positive framing, entrepreneurs can establish credibility and maintain investor confidence without sacrificing transparency. The approach recommended by the study encourages a balance between openness and optimism, ensuring that potential risks are neither understated nor overly highlighted.
Lead author Mark T. Bolinger summarises the research sentiment: “Our findings show that honesty about risks doesn’t have to scare investors away. Instead, pairing transparency with evidence of preparedness can strengthen investor trust and improve funding outcomes.” This statement underscores the study’s central thesis, which is that effective communication, particularly about risks, can indeed align with business success. The research provides a practical framework for startup founders navigating the complexities of funding communications and enriches the discourse on strategic communication in entrepreneurial settings.
More information: Mark T. Bolinger et al, Keeping it real: How entrepreneurs effectivelydisclose risk, Strategic Entrepreneurship Journal. DOI: 10.1002/sej.1525
Journal information: Strategic Entrepreneurship Journal Provided by Strategic Management Society