Default Effect

The Default effect is defined by Wikipedia as when given a choice between several options, the tendency to favor the default one.

It’s also called the Status Quo bias in which people choose the default option because it’s less risky.

Startups should position their deal as the default so that in case of a tie, the investor will choose their startup over others.

To make your deal the default, consider the following:

In many investment groups, the favorite pitch is the one investors choose to invest in even if diligence shows other deals to be stronger. 

Some investors favor deals that are similar to past investments and so choose them because they consider the deal to be the current standard.

So make your deal the favored pitch by presenting it as a standard deal.

Align your deal with past investments by the investors to position it as the “default”.

Startups that are outside the norm are considered riskier.

Show how other investors are already in the deal and why they invested.

Position your deal as the ‘safe’ choice because the risks have been mitigated and other investors have ‘set the standard’.

It’s often the case that the investor fails to grasp the pitch because there are too many key points missing from the presentation.

Make sure you include in the pitch all the values in the deal.

 

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

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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.