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A new study in the Journal of Marketing explores how startups can tailor their pitches to attract investors in a highly competitive venture capital (VC) landscape. Researchers examined over 5,300 new ventures, uncovering how the interplay between costly signals (tangible achievements) and costless signals (verbal cues) influences investor decision-making.

The study, "Business-to-Investor (B2I) Marketing: The Interplay of Costly and Costless Signals," authored by Greg Nyilasy (University of Melbourne), Shangwen Yi (University of British Columbia), Dennis Herhausen (Vrije Universiteit Amsterdam), Stephan Ludwig (Monash University), and Darren W. Dahl (University of British Columbia), offers actionable insights for startups and investors alike.

"Our findings reveal that both costly and costless signals matter, but their effectiveness depends on how they are combined," says Nyilasy. "Startups must carefully craft their pitches, balancing substance and style to resonate with potential investors."

Key findings

The study identifies two categories of signals startups use to appeal to investors:

1. Costly signals: Tangible indicators of a startup's potential, including:
   • Financial capital: Existing investments in the business.
   • Human capital: Founders' education and experience.
   • Social capital: Business and institutional connections.
   • Intellectual Capital: Patents and intellectual property.
2. Costless Signals: Verbal cues that influence investor perception, such as:
   • Passion: Enthusiasm and emotional intensity in the pitch.
   • Concreteness: Specificity and detail in communication.

Surprising dynamics

• Costly signals: While a moderate level improves funding likelihood, excessive costly signals may deter investors by suggesting overvaluation or limiting their involvement.
• Passion: Contrary to popular belief, excessive passion often backfires unless backed by strong costly signals.
• Concreteness: Detailed communication helps startups with limited costly signals but can appear rigid when paired with strong costly signals.

"Our study highlights the inverted-U effect," explains Ludwig. "More isn't always better—startups need a Goldilocks approach to their signals."

Implications for startups and investors

Startups:

• If lacking tangible achievements (costly signals), startups should avoid overusing passionate language because it may come across as compensatory. Instead, focus on clear and moderately concrete messaging.
• For startups with robust costly signals, showcasing passion can enhance investor confidence, but overly detailed pitches might reduce perceived flexibility.

Investors:

• Be cautious when evaluating pitches that rely heavily on passion without substantive backing.
• Recognize the value of concreteness in startups with fewer credentials but look for a balance in those with strong achievements.

Yi emphasizes, "this research equips both startups and investors with strategies to optimize the pitch process, ensuring better alignment and outcomes."

The findings carry important implications for the startup ecosystem. Startups must fine-tune their pitches, combining the right levels of passion, detail, and achievements to stand out. Investors, on the other hand, should assess pitches holistically, weighing both tangible and intangible signals to identify high-potential ventures.

"We hope this study reshapes how entrepreneurs present themselves and how investors evaluate startups," concludes Dahl. "It's about fostering better matches in the venture capital world."