In today’s challenging venture capital (VC) landscape, where only standout startups secure funding, a new Journal of Marketing study provides key insights for entrepreneurs and investors. With a “two-speed” economy favoring AI-focused ventures while leaving others struggling, startups must strategically craft their pitches to attract investors. Our research team explored this dynamic by examining over 5,300 new ventures, uncovering actionable strategies to optimize investor pitches.
We discover that a startup’s ability to combine costly signals (tangible achievements like financial capital, intellectual property, and team credentials) with costless signals (verbal cues like passion and concreteness) can significantly influence funding outcomes. However, the effectiveness of these signals isn’t straightforward—more isn’t always better.
Costly Signals: The Power of Tangible Achievements
Costly signals—substantial markers of a startup’s credibility—include:
- Financial Capital: Investments already made in the business.
- Human Capital: The founders’ education and experience.
- Social Capital: Business and institutional connections.
- Intellectual Capital: Patents and intellectual property.
These signals create confidence among investors by showcasing real progress and potential. However, our study found an “inverted U-shape” effect: while a moderate level of costly signals increases funding likelihood, excessive emphasis on these achievements can deter investors. Why? Too many costly signals might suggest overvaluation, leaving little room for investors to add value or signaling rigidity in the startup’s approach.
Costless Signals: The Subtle Art of Communication
Costless signals—intangible, verbal elements—also play a critical role in pitches:
- Passion: Expressing enthusiasm and emotional intensity.
- Concreteness: Using specific, detailed language.
While passion can enhance investor perception when paired with strong costly signals, it can backfire if used excessively, particularly by startups lacking substantial achievements. In such cases, passion might appear as “cheap talk,” undermining credibility.
Concreteness, on the other hand, provides clarity and specificity, which are crucial for startups with fewer tangible assets. However, overly concrete communication from startups with strong credentials can seem rigid, signaling a lack of strategic flexibility or long-term vision.
Key Insights for Startups
Our findings reveal that costly and costless signals don’t operate in isolation but interact in complex ways:
- Startups with fewer costly signals should focus on moderate concreteness to provide clear, detailed information about goals and achievements. Passion should be used sparingly to avoid seeming compensatory.
- Startups with strong costly signals should confidently showcase passion because it signals commitment and enthusiasm. However, they should avoid being overly concrete, which might make their approach seem inflexible or uninspired.
Lessons for Investors
For investors, decoding these signals is critical to identifying high-potential ventures:
- Look beyond flashy pitches that rely heavily on passion without backing it up with tangible credentials.
- Recognize that concreteness can enhance trust in startups with fewer achievements but may indicate a lack of strategic foresight when combined with strong costly signals.
Practical Applications for Stakeholders
This research underscores the importance of balance in business-to-investor (B2I) marketing. Startups must carefully craft their pitches, combining tangible achievements with just the right level of enthusiasm and detail. Policymakers and VC firms can also leverage these findings to design tools and frameworks that help entrepreneurs refine their pitches, ensuring a healthier startup ecosystem.
The art of the pitch lies in balance. Startups that combine credibility with clarity while avoiding overcompensation are better positioned to win investor trust. Similarly, investors who assess both tangible and intangible signals holistically can uncover promising ventures.
Read the Full Study for Complete Details
Source: Greg Nyilasy, Shangwen Yi, Stephen Ludwig, and Darren W. Dahl, “Business-to-Investor (B2I) Marketing: The Interplay of Costly and Costless Signals,” Journal of Marketing.
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Greg Nyilasy is Associate Professor of Management and Marketing, University of Melbourne, Australia.
Shangwen Yi is a Doctoral Candidate of Marketing, University of British Columbia, Canada.
Dennis Herhausen is Associate Professor of Marketing, Vrije Universiteit Amsterdam, The Netherlands.
Stephan Ludwig is Professor of Marketing, Monash University, Australia.
Darren W. Dahl is Professor of Marketing, University of British Columbia, Canada.