More complex language in start-up pitches raises likelihood of investment

Keep it simple? Start-up entrepreneurs often hear that simplicity is the key to success if they want to convince investors. In a new study, researchers from TU Dortmund University, the University of Passau and the Technical University of Munich challenge this guidance and show instead that cognitively complex language leads to greater success when it comes to securing finance. They have now published their findings in the journal Entrepreneurship Theory and Practice.

The study describes cognitively complex language as language that involves nuance, differentiation and comparison, expressed through words such as “could”, “possibly”, “however”, “except”, “more difficult”, “better” or “more”. With the aid of computer-assisted analysis, the researchers evaluated the language used in 547 actual start-up pitches given during the prestigious “Startup Battlefield” competitions at TechCrunch Disrupt events, which have resulted in companies already receiving over 8.8 billion dollars in investments. They also conducted a randomized experiment with 240 professionals that simulated their decision-making process in pitch scenarios. The decision-makers were given short text vignettes that replicated a start-up pitch and whose content was always the same, while the entrepreneurs’ language varied, with some using a low level of cognitively complex language and others a high one. The study participants were then asked to rate the probability of their investing in the start-up.

Sophisticated language demonstrates competence

The result was that start-up entrepreneurs who used cognitively more complex language were able to secure far more capital compared to their rivals. On average, an increase in linguistic complexity by one standard deviation leads to an increase in funding of 7.25 percent, or approximately 125,000 dollars in additional investment. Those who employ differentiated language not only distinguish themselves from the rest but are also perceived by investors as more competent in managing complex situations, which in turn influences the latter’s financing decisions. Start-up entrepreneurs from an elite university particularly benefit from using cognitively complex language, as their educational background lends them additional credibility. At a very high level, however, the positive effects of language use decrease. Excessive linguistic complexity can make it difficult for investors to process information or create the impression that the person giving the pitch is uncertain.

“The study shows how important it is to go beyond all too simplistic advice when it comes to entrepreneurial communication,” says Lorenz Graf-Vlachy, Professor for Strategic Management and Leadership at TU Dortmund University and one of the authors of the study. “Investors value entrepreneurs with the ability to think critically and manage complexities, as these are important qualities for mastering the challenges involved in setting up a successful company.” One start-up whose owners gave pitch presentations that were particularly cognitively complex and were able to attract very high levels of investment is the fintech company N26: “The start-up raised over 10 million dollars in the twelve months following its pitch,” reports Graf-Vlachy.