The Psychology of Investment: Why Skill Cues Matter More Than Prior Success in Entrepreneurship

Entrepreneurship is an exciting and challenging journey that requires a wide range of skills, including creativity, innovation, leadership, and strategic thinking. To succeed entrepreneurs need to not only possess these skills but also demonstrate their abilities to investors, customers, and other stakeholders. However, as recent research shows, the way entrepreneurs present their skills and achievements can have a significant impact on their success at attracting investment.

A recent study by Zunino et al. (2022) sheds light on the importance of skill cues in attracting investment in entrepreneurial ventures. The researchers found that entrepreneurs who were able to offer a credible skill cue, such as being nominated as a Forbes 30 under 30 or Entrepreneur Of The Year Award, were more likely to receive higher investment than those who had had prior success in another business. However, if entrepreneurs who had already achieved success offered additional evidence of their skills, it could lead to a reduction in likability and lower investment.

Why does this happen? The answer lies in the way people perceive the messages conveyed by entrepreneurs. When entrepreneurs offer a credible skill cue, such as an award or recognition, it signals to investors and other stakeholders that they have been independently validated as skilled and capable. This type of information is more persuasive than self-promotion, which can be perceived as boasting or bragging.

On the other hand, when entrepreneurs who have already achieved success offer additional evidence of their skills, it can backfire. This is because people may interpret the additional evidence as unnecessary or even as a sign of arrogance. As a result, the entrepreneur may be perceived as less likable and less trustworthy, leading to lower investment.

Entrepreneurial awards are a valuable way to recognise and celebrate the achievements of entrepreneurs. Awards like the Forbes 30 Under 30, EY Entrepreneur of the Year, and TechCrunch Disrupt Startup Battlefield are often seen as a way to validate an entrepreneur's success and provide exposure to potential investors, customers, and partners. Additionally, many of these awards have rigorous application processes and are judged by panels of experts who evaluate criteria such as innovation, financial performance, and social impact. This suggests that the awards are measuring the right things when it comes to entrepreneurial success.

On the other hand, critics argue that entrepreneurial awards may not always accurately measure an entrepreneur's success or potential. For example, some awards may focus too heavily on financial performance and growth, neglecting other important factors such as social impact or long-term sustainability. Additionally, some entrepreneurs may be more adept at self-promotion or have more resources available to them, which can skew the results of the award. Finally, the criteria used to evaluate the awards may vary widely, making it difficult to compare winners across different categories or regions.

The consequences of these findings for entrepreneurs are significant. Entrepreneurs who understand how to use skill cues effectively can gain a significant advantage in attracting investment and other resources. By leveraging credible third-party endorsements, such as awards or recognition from reputable organisations, entrepreneurs can demonstrate their skills and capabilities without appearing boastful or arrogant.

Moreover, entrepreneurs can also use these findings to tailor their communication strategies to different audiences. For example, when pitching to investors who are unfamiliar with their work, entrepreneurs can use skill cues to establish their credibility and build trust. On the other hand, when speaking to existing investors or customers who are already familiar with their work, entrepreneurs can focus on highlighting the value they have created and the impact they have had.

Overall, the key takeaway from this research is that how entrepreneurs present their skills and achievements can have a significant impact on their success. By using credible skill cues, entrepreneurs can demonstrate their abilities without appearing arrogant or boastful, which can lead to higher investment and other resources.

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References:

Zunino, D., Barley, S. R., & Khaire, M. (2022). How do investors evaluate past entrepreneurial failure? Unpacking failure due to lack of skill versus bad luck. Academy of Management Journal, 65(4), 1083-1109. doi: 10.5465/amj.2019.0555

Zunino, D., Croson, R., & Oyon, D. (2022). Success Versus Skill Cues in Entrepreneurial Pitching. Entrepreneurship Theory and Practice, doi: 10.1177/10422587211072010