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How to disclose risk without losing investor confidence

Entrepreneurs often face the dilemma of whether to disclose risks associated with their ventures. While transparency can enhance credibility, it may also deter investors. A study published in the explores how entrepreneurs can strategically disclose risk without deterring investors.

Conducted by Mark T. Bolinger of Appalachian State University), Katrina M. Brownell (Virginia Polytechnic Institute), and Jeffrey G. Covin (University of Wyoming), the research introduces a novel impression management tactic known as "compensation," which enhances financing outcomes for early-stage entrepreneurs.

The study, spanning three comprehensive experiments, demonstrates that entrepreneurs who acknowledge risks while simultaneously highlighting mitigating factors increase their perceived authenticity and project quality, leading to improved crowdfunding success.

Key findings include:

• Strategic Risk Disclosure Works: Entrepreneurs who use the compensation tactic—framing risks alongside positive information—experience higher funding success compared to those who either downplay risks or present them without a mitigating context.
• Authenticity Boosts Investor Confidence: The perception of honesty fosters trust among investors, making them more likely to support ventures that openly address potential challenges.
• Gender Differences Matter: The research finds that female entrepreneurs benefit more from the compensation strategy than their male counterparts, potentially countering biases in entrepreneurial finance.

Implications for entrepreneurs and investors

The study provides actionable insights for entrepreneurs seeking funding through crowdfunding platforms, venture capital, or other investor-driven models. By strategically integrating risk disclosure with positive framing, entrepreneurs can establish credibility without jeopardizing investor confidence.

"Our findings show that honesty about risks doesn't have to scare investors away," said lead author Mark T. Bolinger. "Instead, pairing transparency with evidence of preparedness can strengthen investor trust and improve funding outcomes."

The study analyzed real-world crowdfunding campaigns and conducted experimental trials to assess investor reactions to various risk disclosure strategies. It builds on impression management theory to provide a practical framework for startup founders navigating the complexities of funding communications.