Pitching Power: Increasing Alternatives Through Signals in New Venture Funding

Abstract

New firms face challenging financing markets due to their liabilities of newness (Stinchcombe & March, 1965). As a result, entrepreneurs must seek out alternative financing avenues (Berger & Udell, 1998) and surrender equity to investors to receive funds needed for growth. Entrepreneurs use the business pitch as their primary tool to present their value proposition to investors through a combination of storytelling and sensegiving (Lounsbury & Glynn, 2001). The content of a business pitch can be crafted in a way that delivers a favorable impression of the opportunity and the entrepreneurial team (Pollack et al., 2012). What has not been investigated is whether signals sent through the business pitch can improve an entrepreneur's negotiating position. This analysis builds on prior research relating to entrepreneurial pitching behaviors and decision making (Thompson, 2014; Ellsberg, 1961) by focusing on the unexplored relationship between an entrepreneur's signals and deal structure. At the stage of a business pitch, the entrepreneur must selectively communicate information (in a finite amount of time) about themselves and the opportunity as there is asymmetric information about the opportunity (signaling theory) in a way that makes their opportunity attractive to investors, potentially creating more than one investor alternative for the entrepreneur to select reducing dependency on a single investor and their proposed deal terms (power-dependence theory). The determinants of venture quality (human capital, social capital, intellectual capital, and financial capital) were theorized to increase the quantity of investor alternatives, and subsequently improve the negotiating position of the entrepreneur. In addition, the relationship between high venture quality signals and the number of investor alternatives was theorized to be moderated by the signal characteristics of cost and honesty. Though support was not found for these hypotheses based on the selected dataset used in the empirical portion of the study, qualitative responses obtained by entrepreneurs and limitations that came to light when analyzing the dataset create the need for further research on the topic. The computer-aided text analysis linguistic dictionaries and framework established for this investigation provide a model to be utilized in these future studies.