Microlending

NORMAN – Entrepreneurs who obtain money through microlending – a way for entrepreneurs to raise money in the form of small loans from many people, often via the Internet – use many of the same rhetorical strategies used by politicians, according to a study conducted by University of Oklahoma Price College of Business researchers.

The findings of the study by Jeremy Short, Price College Rath Chair in Strategic Management, and doctoral candidates Thomas Allison and Aaron McKenny, are detailed in a paper titled “The Effect of Entrepreneurial Rhetoric on Microlending Investment: An Examination of the Warm-Glow Effect,” which is forthcoming in the Journal of Business Venturing.

In microlending, entrepreneurs post a loan request online, which is then evaluated by lenders. Many entrepreneurs who raise money through microlending are very poor entrepreneurs based in developing countries, but needy entrepreneurs in the United States also sometimes turn to microlending as a source of financing.

In their study of more than 6,000 entrepreneurs, the OU research team found that specific types of language used by entrepreneurs affect success in generating investment.

A technique called computer-aided text analysis was utilized to understand how entrepreneurs use language to communicate ideas and emotions. The authors examined these patterns of language use to determine how successful the entrepreneurs are in raising the funds they need for their businesses. Their finding was that entrepreneurs can learn a lot from politicians when it comes to asking for funds. Specifically, the same types of rhetorical strategies that politicians use to manage constituents’ impressions also have effects on how much money an entrepreneur raises from investors.

For example, each year the president of the United States discusses the prior year’s accomplishments during the State of the Union address in an effort to unite the public and Congress behind the issues presented. Presidents typically try to present the year in the best possible light so as to secure future support. Entrepreneurs who obtain funds through microlending are most successful when they do the opposite: entrepreneurs are more successful in raising microloan funding when they spend little time discussing their achievements and accomplishments.

This research suggests that this is the case because of the “warm-glow phenomenon.” Research on giving to charities has suggested that an important reason for why people give to charities is to feel good about themselves – to feel a warm glow.

Extending that phenomenon to microlending, microloans are funded by lenders who want to feel good about helping a needy entrepreneur. If the entrepreneur uses a large amount of accomplishment rhetoric, they appear less needy, reducing the lender’s level of reward (warm glow). 

“Our research suggests that how entrepreneurs discuss themselves when requesting funding shapes whether investors feel good about helping them,” said Thomas H. Allison, the lead author of the study. “This is important because it suggests emotions are important to the process of raising funds for a new venture. How effective a developing country entrepreneur is in triggering these emotions determines funding success.”

This study also suggests some important ideas for entrepreneurs in the Western world. While entrepreneurs in the United States are typically not materially needy in the way developing country entrepreneurs are, using language that triggers an emotional response can still be an effective strategy. For example, angel investors (the name given to an investor who provides small amounts of investment to help an entrepreneur get their business started)  are thought to be driven not only by the earning a return on their investment but also by the satisfaction of helping worthy entrepreneurs. These results suggest that angel investors may be driven by a desire to obtain warm glow and that entrepreneurs may be more successful by using the language of politicians to shape how they are seen by investors.

Ranked in the top 5 percent of all U.S. undergraduate business schools based on recent ranking data, the Price College of Business is one of the nation’s premier business colleges. This year, U.S. News & World Report ranks the college’s International Business program 20^th in the nation while Entrepreneur magazine in association with The Princeton Review ranked the Entrepreneurship undergraduate program 10th and graduate program 25^th in the nation.