The ambiguity effect is a bias defined by Wikipedia as the tendency to avoid options for which the probability of a favorable outcome is unknown.
Startups are risky and make proposals about the outcome of their deal.
Investors avoid engaging with startups when they do not have confidence in the proposed outcome.
Startups should make clear what is currently known about the business and the potential prospects of the deal.
By clarifying the risks associated with the deal the startup makes it easier for investors to evaluate it.
For each risk in the deal, the startup should identify it and make clear how they will mitigate it.
If there are too many risks and they are not clearly articulated then investors will not engage with the deal.
Missing information often leads investors to the ambiguity effect.
Startups should cover all the basic elements of the business including the team, the market, the business model, and current traction.
Startups pitching their deal must convince the investor that the proposed outcome is certain to happen.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.