A Matter of Trust: Maintaining Investor Confidence After a Product Failure

By Eric Hollenbeck

In the high-stakes world of venture-backed startups, nothing is more crucial than investor trust, especially when facing product development setbacks. New research from WSU’s Carson College of Business offers fresh perspectives on how technology-based startup companies can secure funding even when their product development hits roadblocks.

Understanding investor trust amid setbacks

Published in Entrepreneurship Theory and Practice, the study explores how startups can signal their continued trustworthiness to investors, even amid challenges. Researchers analyzed the product-development successes and failures of 254 venture-capital-backed biotech startups founded between 1973 and 2010. Additionally, they conducted 10 interviews with institutional and corporate venture capitalists to understand why some investors continue to fund certain companies after failures while others do not.

“Entrepreneurs are often seen as innovators pushing the boundaries of technology, but innovation inherently comes with risks,” says Amrita Lahiri, associate professor of entrepreneurship and lead author of the study. “Our study identifies how entrepreneurs can secure a ‘runway extension’ from investors by maintaining legitimacy and trust, even after a technological failure.”

Findings reveal a startup’s internal resources and competencies, such as the depth and range of skills within a team and endorsements from industry experts, play a significant role in building investor trust. This is especially true when a product experiences early-stage technical failures.

“They help reinforce your company’s social legitimacy and reassure investors the company and its team have the technological credentials and ability to overcome setbacks,” Lahiri says.

Building a foundation for long-term success

The study also found industry endorsements and corporate venture capital (CVC) become more critical as startups mature and face more significant—and costly—failures in the later stages of product development.

“Industry investors often have a better understanding of the technology and can be more patient, providing a lifeline for ventures that might otherwise lose funding,” Lahiri says.

For entrepreneurs and young startup companies, the implications are clear: build a strong, technically competent team and secure industry endorsements as early as possible. By doing so, your company can better navigate product development failures.

According to Lahiri, understanding these nuances helps biotech firms—and young startups in general—prepare for the complexities of early-stage development and improve their chances of long-term success.

The research underscores the importance of both internal quality signals and strategic communications in securing investor trust and funding. Internal quality signals include the founder’s human capital, prior success, and technical skills. Meanwhile, industry endorsements serve as external validation from domain experts, highlighting the venture’s potential and technological competence.

By effectively leveraging these signals, startups can mitigate the risks associated with product development failures.

“Entrepreneurs should not shy away from engaging with industry partners,” Lahiri says. “These relationships can provide critical support and resources, especially during challenging times.”

“When Failure is Not Fatal: Examining Venture Resource Acquisition Following Product Development Failure” is published in Entrepreneurship Theory and Practice—one of the top three scholarly journals for entrepreneurship research.