Can you attract resources before you’ve proved your worth? Yes, you can!

  • It’s not only hard claims that count. Soft claims help young businesses capture the attention of their stakeholders and attract funding.
  • Media coverage strengthens the effect of soft claims.
  • The study focused on private equity firms, but the conclusions also apply to start-ups and young businesses in general. 

Start-ups and young businesses aiming for growth need resources - funding, staff, material, customers and so on. But why would anyone provide resources to a small business that has nothing concrete to show for it yet? How can you convince others if you haven’t yet proved your worth? A study by Professor Sophie Manigart and her colleagues show that what are known as ‘soft signals’ can be very useful in this situation.

“In our research we focused on young private equity firms that had already set up a first fund but needed money at some point for a second one (see text box below)”, Sophie says. “Just like start-ups, private equity firms need to convince investors, which is easier if they can present concrete results from their first fund, such as profitable exits.”
But what if you can’t present these concrete results yet? What do you do if you need to attract money before you have managed to secure an exit? Or, if you are a start-up, what do you do if you have no fixed contracts with customers and therefore no market validation, and for example no patents yet either?

Soft signals are also picked up

“Our study shows that third parties also respond to ‘soft signals’ and decide whether or not to provide resources”, Sophie explains. “Soft signals are signals that are not validated by a third party, like financial markets, patent offices or customers. Soft signals are statements issued by the business itself, such as: the companies in our portfolio are doing well, they are rising in value, or: we do not have any patents yet, but our research looks promising, or: we do not have any customers yet, but we do have good contacts. In a nutshell, these are soft claims about achievements that have not been made yet, but are expected.”

On the radar

That finding is somewhat surprising. Before Sophie’s research was published, it was assumed that only hard claims counted and that soft claims – or soft signals – were irrelevant. “A lot of existing research into private equity showed that portfolio companies are systematically overvalued in communication about setting up a new fund”, she explains. “So, the literature suggested, why should those soft signals – statements on the yet to be achieved value of portfolio companies – be relevant or useful if everyone knows that valuations are exaggerated?”

“Well,” she continues, “you can overestimate a valuation, but not endlessly – you can’t turn 50 into 100, for example, but you can turn 80 into 100.” It goes without saying that the parties providing the resources will first carry out a due diligence assessment to ascertain whether or not all those claims are valid. They are not naive; they do assume that things are presented in a rosier light than they really are. However, if you cannot boost your figures to levels that garner attention, you’re out.”

So that is the role of those soft signals: a potential investor, partner or customer has so many companies to choose from. Why should they focus on any one in particular? A company looking to attract resources, needs to put itself on the radar, and soft signals help it to do exactly that. If further analysis shows that the claims are unfounded, potential investors, partners or customers will not provide the required resources, but at least they will have taken the trouble to have a closer look at the company or fund in question. After all, they cannot do due diligence for every single company or fund in need of resources.

No substitute

“Our study was the first to show that soft claims actually help young companies grab the attention of their stakeholders and, at a later stage, get the resources they need”, Sophie says.

“We also proved this mainly applies to sectors where it is difficult for young businesses to come up with hard claims,” she adds, but she has a warning too: “It’s important to stress that those soft claims are not a substitute for hard claims. If a young company still has no customers ten years down the line, it’s hard to hang on to your credibility. Likewise, you will no longer be taken seriously you keep saying you are getting patents, but it has still not happened after years of research.”

Media coverage pays off

In sectors where soft claims are important, media coverage also plays a key role. Sophie explains, “Those soft claims do not work automatically. They become more effective when combined with media coverage, which ensures that the young business gets easier access to parties willing to provide financial resources. For hard claims, media coverage is less important, but it does increase exposure.”

Work on your brand awareness!

Although our study focused on private equity firms, the conclusions also apply to start-ups and young businesses in general. “We’ve uncovered a fairly fundamental mechanism and there is no reason to believe that it does not apply in other contexts”, Sophie explains. Her advice for young start-ups is: work on those soft claims too, and promote them. “Even if you do not have a track record yet, you can broadcast all kinds of soft signals with media coverage.”

Moreover, media coverage should not be limited to the traditional press channels. “You should communicate through the channels used by your main stakeholders. However, if you’re looking to attract investors from outside your specific niche, then mainstream media are important. Of course it can be difficult to control media attention, but you could showcase your business at conferences and events to put yourself in the spotlight. Aside from this study: when it comes to your company’s commercial activities, it is not only soft claims that count. Just make sure your name is out there”, she concludes.

Young private equity firms as a model for start-ups

The study was based on a data set of 205 young private equity firms that set up their first fund between 1999 and 2007. Data was gathered on these companies and funds up to December 2017. All the data was retrieved from the Preqin database.

“Private equity firms and their funds are easier to study than random young businesses. Their data is not only readily available, it is also very pure”, Sophie explains. “We know whether or not there has been an exit, and each exit provides us with additional information. It is also easy to verify whether a private equity firm has managed to secure the resources it needed, since private equity funds generally have a fixed term, usually of ten years. If a private equity firm fails to attract new financial resources for a new fund, that’s it. In other young businesses the timing to attract new resources is a bit more flexible, which makes it harder for researchers to study them. If, as a start-up, you want to attract more people and you don’t succeed straight away, you can still say, “Oh well, hopefully it will work out by next year”. In the meantime, you just try to get by with the team you do have.”

Source: The paper ‘Signal strength, media attention, and resource mobilization: evidence from new private equity firms’ was published in the Academy of Management Journal. You can also request a copy from the authors.

About the authors
Tom Vanacker is an associate professor at Ghent University and a research professor at the University of Exeter Business School (UK). Daniel P. Forbes is an associate professor in strategic management & entrepreneurship at the Carlson School of Management of the University of Minnesota (US). Mirjam Knockaert is an associate professor in entrepreneurship at Ghent University and a visiting professor at the Technical University of Munich (DE). Sophie Manigart is a full professor at Vlerick Business School and Ghent University and faculty dean at Vlerick Business School.

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