Santa Clara University

The Power of the Story

Studying Its Impact on Prospective Investors

For as long as people have been able to communicate, there have been stories. The power of stories to provide legitimacy, confer meaning to events, to attract and inspire has been well documented in the humanities and sciences. Yet there has been relatively little research about the influence and effect of stories in real-world business settings.

The question has intrigued Jaume Villanueva, assistant professor of Management, who has been looking at how stories told by entrepreneurs might get at the “gut feel” investors have about a new venture.


“Most of the research in this field so far has focused on how entrepreneurs use stories to establish their legitimacy with investors: how do you get resources when you don’t have a track record and your business is not well understood,” Villanueva says. “I was trying to look at what happens when entrepreneurs use a story to make an idea more attractive or desirable, and how the investor reacts to that.

“From the investor’s standpoint the thing that stands out is that it is really difficult to know a priori whether a business idea will work, so it made sense to hypothesize that a story would affect the investor’s decision at an intuitive level. There are powerful reasons why stories should matter in a highly uncertain context in which many decision makers make intuitive decisions.”

Villanueva’s findings are reported in a working paper, currently titled “Entrepreneurial Stories: Getting at the Gut Feel of Investors.” To get at the effect of stories in this sort of entrepreneurial setting, Villanueva created four separate versions of a written presentation for a new venture opportunity and presented it to 188 “angel investors,” wealthy individuals who invest their own money.

The opportunity was presented to the investors as a non-narrative report in both basic and intense language, and as a narrative (story) report in both basic and intense language. In all four versions, the facts of the enterprise—including the nature of the market and the competence and record of the entrepreneurs—remained the same, and the investors were using the same set of investment guidelines.

What Villanueva found came as a surprise. He said that going into the project he had expected the power of the story to have a positive impact on investors. In many respects it did, but in one critical respect it didn’t, and that neutralized the other positive effects.

“Story matters in different ways,” he writes in his conclusion. “The story positively influences how investors perceive the motivation of the entrepreneur, how they identify with the entrepreneur, and the empathy they feel for the entrepreneur, which in turn positively affects their general assessment of the opportunity.

“However, the story also influences negatively how investors evaluate the competence of the entrepreneur (perhaps because it violates their assumptions about the norms of what constitutes a professional business opportunity pitch— i.e. entrepreneurs must present the business opportunity in an institutionalized manner which does not involve using the canonical elements of a story) and ultimately also how they assess the opportunity.

“In other words, stories do affect how investors think and feel about the new venture, but the positive effects of the story on global assessments are suppressed by the negative ones.”

Printer-friendly format