Save the origin story — investors want to back the product, not the person
Origin stories might be the way to people’s hearts, but not to investors’ wallets.
Kitchen table startup stories are part of business folklore. Steve Jobs and Steve Wozniak creating Apple in the garage, Jeff Bezos doing the same with Amazon, and Melanie Perkins and Cliff Obrecht launching Canva from the living room.
But the grim reality is that being a user entrepreneur can be tough. Not only are you faced with a steep learning curve, but you also have investment odds stacked against you, as new research has shown.
In a randomised controlled experiment, researchers tested whether investors in a crowdfunded equity environment discriminated between the type of entrepreneur behind a product for musicians.
Some investors were made aware that the firm’s founder was a musician (a user entrepreneur), while other investors were unaware of this. They instead believed it was a traditional producer firm.
The distinction between entrepreneurial types is important because it infers both the motivation for getting into business and the acumen of those involved.
Where user entrepreneurs usually come up with a product idea to serve their own needs before realising it may have greater appeal, producer entrepreneurs are in it for the commercial application all along.
It turns out that crowdfunded investors prefer to back traditional producer entrepreneurs over user entrepreneurs.
Why?
“Investors infer lower future performance from user entrepreneurship”, and “investors associate user entrepreneurship with smaller markets and lower founders’ ability to grow the firm”.
All’s not lost, however. The researchers suggest that user entrepreneurs can overcome investor bias by “displaying signals of quality such as about firm growth and broad product appeal”.
But what else you can do?
What’s your story?
This research throws up some interesting questions for start-ups seeking funding through platforms like Kickstarter. Origin stories might be the way to people’s hearts, but not their wallets.
At the startup stage, it suggests we should rely less on ‘founder fervour’ and more on commercial outcomes.
In an era of founder worship, this is key. Marketers and media might encourage you to grow your personal brand as a way to build your product, but investors are likely to see this as a risk.
They want to back the product, not the person, so save your origin story for your TED talk.
It’s the product
Another study by the same researcher (which we covered here), gave more clues about what to emphasise when seeking to secure investment. In a pitch, investors are looking for ways to trust you. The best way to do that is to focus on how the product does what it says it will do, using third-party testimonials and advocacy to prove that.
Taken together, the research suggests a clear hierarchy of what’s important to focus on when you are sitting at your kitchen table or out in the garage.
Product before personality. The world will love to hear how you made it happen, but make it happen, first.
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