Entrepreneurs may want to think twice before selecting founders and investors for their businesses. New entrepreneurship research from Professor Alexander McKelvie of Syracuse University’s Martin J. Whitman School of Management and Professor Eun-Jeong Ko ’17 Ph.D. of Silberman College of Business at Fairleigh Dickinson University, finds that the company entrepreneurs keep affects the amount of money raised during different fundraising stages.
“Prior research on entrepreneurs and fundraising tends to focus on the first-round of funding or at IPO and uses public datasets,” explained McKelvie. “However, our study is a multi-stage examination of funding rounds using unique data collected by my co-author, Eun-Jeong.”
Utilizing signaling theory, researchers examined the signals from founders’ human capital (e.g., education, industry experience and founding experience) and investor prominence of 235 new ventures in the internet advertising sector. The researchers also combined data from sites such as Crunchbase and VentureXpert, as well as company websites, newspapers and social media feeds.
“There are certain observable signals – tangible things or acts – that trigger responses in investors upon interpretation,” said Professor McKelvie. “For instance, if someone has more experience or an education in a certain area we assume they know more. Our use of signaling theory shows that, at really early stages of new venture development, these signals matter. In addition, what is unique in that we show a more ‘dynamic’ approach where the impact of the signals changes over time.”
According to the results, having prominent investors and founders with high levels of education and previous entrepreneurial experience puts businesses in optimal positions to not only procure substantial sums of first-round funding but to obtain future invests.
“We found that founders’ previous founding experience and education have the greatest effects for acquiring first-round financing,” explained McKelvie. “Entrepreneurs lacking track records have a much more difficult time raising substantial amounts of money and new ventures are better off being run by experienced and educated team members.”
In later stages, the founders’ experience plays less of a role in procuring funding, while the founders’ education and endorsements from prominent investors become more important. This is important as it shows that how prolific the investors early on really affects the next stages of development. Other investors assume that if a well-known investor is backing a new venture, it must have high potential. McKelvie encourages entrepreneurs to build a team and select investors around all these factors, if they want to focus on raising lots of capital.
“Choose the company you keep carefully,” said McKelvie. “Surround yourself with people who can help not only you succeed but your business as well.”
The study is forthcoming in the Journal of Business Venturing.
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