Entrepreneurs often face a tough decision:
Should they be honest about the risks of their business, or keep quiet to avoid scaring off investors?
While transparency builds trust, it can also make investors hesitant. A new study in the Strategic Entrepreneurship Journal offers a solution.
Researchers Mark T. Bolinger (Appalachian State University), Katrina M. Brownell (Virginia Polytechnic Institute), and Jeffrey G. Covin (University of Wyoming) found that entrepreneurs who disclose risks in a smart way can actually attract more investors.
The key is a strategy called “compensation.”
The power of balanced risk disclosure
The study, which involved three detailed experiments, revealed that entrepreneurs who openly discuss risks while also explaining how they will handle them gain investor confidence.
This approach makes them appear more authentic and capable, leading to better funding results.
Key findings include:
- Balance Is Key: Entrepreneurs who pair risk disclosure with solutions receive more funding than those who either avoid discussing risks or present them without any positive counterbalance.
- Honesty Builds Trust: Investors appreciate honesty. A founder who acknowledges challenges and demonstrates preparedness is seen as more trustworthy and competent.
- Women Benefit More: Female entrepreneurs, in particular, see greater advantages from this approach, possibly because it helps counter biases in investment decisions.
If you’re an entrepreneur looking to raise funds, here’s how you can use this technique:
- Acknowledge Risks: Be upfront about potential challenges your business might face.
- Present Solutions: Explain the steps you’re taking to reduce these risks and why they won’t harm your success.
- Show Confidence: Demonstrate that you have a clear plan and the skills to handle obstacles.
The study analyzed real crowdfunding campaigns and tested different ways of sharing risk-related information with investors. The results suggest that being honest about risks doesn’t push investors away—instead, it makes them more likely to invest when they see a strong plan in place.
“Our findings show that honesty about risks doesn’t have to scare investors away,” says lead author Mark T. Bolinger. “Instead, pairing transparency with evidence of preparedness can strengthen investor trust and improve funding outcomes.”
This research gives entrepreneurs a useful strategy for raising money through crowdfunding, venture capital, or other investment sources. By carefully balancing risk and solutions, startups can build credibility while still securing the support they need to grow.
