Pitch imperfect: How investors respond to entrepreneur disclosure of personal flaws

Abstract

When entrepreneurs pitch to investors, is it wise for them to disclose their flaws or should they rather not admit any weaknesses? Combining research in entrepreneurial finance with social comparison theory, we put forth a new conceptual model about when disclosing flaws elicits psychological closeness and results in investment. We distinguish between two types of flaws (agency-excess and agency-deficit) and consider the similarity between entrepreneurs and potential investors in these flaws. A field study and several experiments generally support our model. Disclosing agency-excess flaws does not generate closeness or elicit investment, even when investors possess the same flaw. Disclosing agency-deficit flaws can generate closeness and result in investment, but only among investors who possess the same flaw. Our research contributes to the entrepreneurial finance literature by showing nuanced effects concerning how flaw disclosures relate to investments; we also show that similarities between entrepreneurs and investors do not always pay off.