Do Disruptive Visions Pay Off? The Impact of Disruptive Entrepreneurial Visions on Venture Funding

• DOI: http://doi.org/10.1111/joms.12390
• Published date: 01 March 2019
• Date: 01 March 2019
• Author: Murat Tarakci,Ashish Sood,Timo Balen

© 2018 The Authors

Journal of Ma nagement Studies publi shed by John Wiley & Sons L td and

Society for the A dvancement of Management S tudies

Do Disruptive Visions Pay Off? The Impact of

Disruptive Entrepreneurial Visions on Venture

Funding

Timo van Balen, Murat Tarakci and Ashish Sood

Rotterdam Sch ool of Management , Erasmus Universit y; University of Ca lifornia Riversi de

ABST RACT Entrepreneurs often ar ticulate a vision for their venture that pu rports to fundamen-

tally cha nge, disturb, or re-order the ways in which org anizations, markets, and ecosy stems

operate. We call these v isions disruptive visions. Neglected i n both the disruption and the

impression management literat ure, disruptive visions ar e widespread in business practice. We

integrate real opt ions and impression management theories to hypothes ize that articulati ng a

disruptive v ision increases the likelihoo d of the venture receiving funding but reduce s the

amount of funding obta ined. A novel dataset of Israeli star t-ups shows that a stand ard devia-

tion increase in d isruptive vision communication inc reases the odds of receiving a f irst round

of funding by 22 per cent, but reduces a mounts of funds received by 24 per cent. A ra ndomized

online exper iment corroborates these finding s and further demonstrates that the ex pectation

of extraordin ary returns is the key mechan ism driving investors’ sensema king.

Keywo rds: disrupt ion, disrupt ive vision, entrepreneur, impression management, venture

funding, vision communication

Disruption has become a hot topic in recent years both in resea rch (Hopp et al., 2018)

and in practice (Christensen et a l., 2015) – from practitioners citing list s of successful

disruptors (Howard, 2013), encouraging ventures to develop disr uptive business mod-

els (e.g., Berry, 2012), appointing ‘Chief Disruption Officers’ (Carr, 2013), to naming

an entire entrepreneur trade show (e.g., TechCrunch Disrupt). While there is disagree-

ment over how to define and identify disrupt ive innovations in both academic litera-

ture (Christensen et al., 2015; Danneels, 2004; King and Baatartogtok h, 2015) and the

business press (Lepore, 2014; The Economist, 2015), there is general consensus on the

outcome of disruption being a fundamental change, disturbance, or re-ordering of the

ways in which organizat ions, markets, and ecosystems operate. For disruption to occur,

Journal of Man agement Studi es 56:2 March 2019

do i:10 .1111/ jom s.1 23 90

Address for re prints: Ti mo van Balen, PhD c andidate in In novation Management, Rot terdam School of

Management, P.O. Box 1738 DR, Rotterdam, the Net herlands (vanbalen@rsm.n l).

This is an op en access article under the ter ms of the Creative Commons Att ribution License, which per-

mits use, dis tribution and reproduction in a ny medium, provided the orig inal work is properly cited.

304 T. van Balen et al.

© 2018 The Authors

Journal of Ma nagement Studies publ ished by John Wiley & Sons L td and

Society for the A dvancement of Management S tudies

the entrepreneur’s communications are crucial in per suading ecosystem members to

embrace the new venture and its innovation (Ansa ri et al., 2016; Gurses and Ozcan,

2015). Communications by entrepreneurs can motivate potentia l customers to try new

products, encourage suppliers and incumbents to collaborate, and, above all, convince

investors to fund the venture. For example, investors often rely on the entrepreneur’s

communications to make sense of the new venture, especially in early-stage invest ments

where the uncertainty surrounding a venture’s viability is highest (e.g., Busenitz et al.,

2005; Lounsbury a nd Glynn, 2001; Martens et al., 2007; Navis and Glynn, 2011).

As documented by prior research into disruption and impression management,

entrepreneurs follow impression management strategies (e.g., Ansari et al., 2016; Gurses

and Ozcan, 2015; Lounsbury and Glynn, 2001; Martens et al., 2007; Navis and Glynn,

2011; Wry et al., 2011; Zott and Huy, 2007) that showcase high-status affiliations (Burton

et al., 2002), industry leadership (Martens et al., 2007), entrepreneurial track record, and

the venture’s resource base (Bernstein et al., 2017; Lounsbury and Glynn, 2001) in order

to shape investors’ sensemaking of the venture. However, these impression management

strategies are backward-looking entrepreneurial communications, describing ‘who the

entrepreneurs are’ and ‘what the venture does’. Although Garud et al. (2014) have re-

cently recognized the importance of future-oriented communications that promote ‘what

the venture will become’ and ‘what the entrepreneurs will achieve’, there is little research

on the extent to which forward-looking communications influence investor perceptions

of a venture. Gaining insight into the entrepreneur’s future-oriented communications is

vital as it enables scholars in entrepreneurship, disruption and impression management

fields to obtain a better understanding of the relationship between the entrepreneur’s

activities and disruption, which is essentially a future event that the entrepreneurs may

aim to achieve.

As a form of future-oriented impression management in the disruption process, we in-

troduce and define disruptive visions – the thematic content of vision communication that

articulates intentions to disrupt organizations, markets, and ecosystems. Vision commu-

nication aims to impart stories and images of the future of a collective (e.g., technology,

customers, or ecosystems) (Berson et al., 2001; Garud et al., 2014; House and Shamir,

1993; Van Knippenberg and Stam, 2014). Similar to the use of ‘disruptive innovation’

as a modifying label for innovations aiming to upend incumbent offerings (Christensen,

1997; Christensen et al., 2016), we use ‘disruptive vision’ as a label for an entrepreneur’s

vision to upend existing market structures. In that regard, our conceptualization of dis-

ruption and disruptive vision reflects how entrepreneurs and investors understand dis-

ruption in practice (e.g., Cosper, 2015; Rachleff, 2013; The Economist, 2015).

We examine how the communication of a disruptive vision drives the likelihood and

the amount of an initial round of funding. We argue that the more that a venture’s vision

communication portrays an image of disruption, the higher the odds of receiving first-

round funding, since the game-changing appeal of a potential disruption fosters expec-

tation of extraordinary investor returns. However, a highly disruptive vision also conveys

uncertainty regarding a venture’s potential for success, deterring investors from making

large speculative investments into the venture. We thus hypothesize that communicating

a more disruptive vision increases the likelihood of fir st-round funding (i.e., Seed funding or

Do Disruptive Visions Pay Of f? 305

© 2018 The Authors

Journal of Ma nagement Studies publ ished by John Wiley & Sons L td and

Society for the A dvancement of Management S tudies

Series A) while it shrinks the amount of capital received. We tested these hypotheses in two

complementary studies. In Study 1, we used a unique dataset of start-ups in Israel – a

well-known cradle of entrepreneurship with more high-tech start-ups per capita than

any other country (Senor and Singer, 2009). We found that increasing a venture’s dis-

ruptive vision communication by one standard deviation improved the odds of receiving

funding by 22 per cent. We also noted that one standard deviation increase in disruptive

vision communication cut the amount of funds invested by 24 per cent – amounting to

a $87,000 drop for a typical venture in the Seed round, and a $361,000 reduction in

the series A funding round. In Study 2, we replicated these results in a randomized on-

line experiment to ascertain whether investor expectation of extraordinary returns is the

mechanism driving these results.

We offer several contributions to the literature on disruption, impression management,

and entrepreneurial visions. First, in its classical formulation, the disruption process is

explained as relative performance trajectories of competing technologies (Christensen,

1997). Recent research, however, has also unearthed the role of entrepreneurs’ framing

of innovations during the disruption process (e.g., Ansari et al., 2016; Gurses and Ozcan,

2015). We introduce and provide a deeper understanding of the role entrepreneurial

visions play in acquiring resources critical to the disruption process. Second, we con-

tribute to the burgeoning stream of literature on impression management, which notes

that entrepreneurs frame communications to foster categorization and to establish their

ventures’ identities (e.g., Cornelissen and Werner, 2014; Martens et al., 2007; Navis and

Glynn, 2011; van Werven et al., 2015; Zott and Huy, 2007). Until now, there has been

limited examination of the relative impacts of future-oriented communications on out-

comes at the venture level (Garud et al., 2014). We assess the efficacy of future-oriented

communications for early-stage ventures and introduce a new category of impression

management strategies: the communication of disruptive visions. Third, we integrate

research on real options and impression management by positing how impression man-

agement affects investor evaluations of ventures as real options. We demonstrate oppos-

ing effects of impression management on the selection and endowment of investment

options. Fourth, we challenge prior research on entrepreneurial visions espousing only a

positive impact from strong vision communication (e.g., Baum and Locke, 2004; Baum

et al., 1998; Elenkov et al., 2005). Our study is the first to show that specific thematic

contents of entrepreneurial visions may damage an entrepreneur’s ability to attract large

investments. Equally important, we offer practical advice for entrepreneurial framing of

disruptive visions and highlight the consequences of following it.

THEORE TICAL F RAM EWORK

Impression Manage ment and Investor Sensema king

Prior research on disr uption and impression management has argued that entrepre-

neurs’ impression management efforts are key in t he disruption process. Ansa ri et al.

(2016) and Gurses and Ozcan (2015) have shown that framing va lue propositions as com-

plementary to incumbents has been critical for achieving disr uption in the digital video