Acting like an expert, even without experience, can help secure venture capital funding

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What matters more to venture capitalists: a polished presentation or the actual experience and expertise of the company founder?

A report by Alessandro Piazza, assistant professor of strategic management at Rice University’s Jones Graduate School of Business; Brian Chung, PhD student at Rice Business; and Daniel Reese of the University of Dortmund analyzed data from 4,190 new companies and their founders. They found that founders’ “signalling of expertise” — a presentation of themselves that might not match reality in terms of their experience, skills, or background — played an important role in the success of their businesses. .

Raising capital is usually the biggest challenge for start-ups, and building a founding team that can persuade backers to commit is increasingly seen as essential. Securing capital can trigger even more funding from other venture capitalists or even liquidity events such as a merger or acquisition.

“When predicting (an acquisition or merger), real expertise was always the strongest predictor. But when it came to fundraising, we were surprised to find that signaling founders’ expertise was actually a stronger predictor than their actual background and experience,” the authors wrote. “Our findings have important practical implications and highlight the need for better theories on the role of the founding team in entrepreneurship and venture capital funding.”

Corporate collapses caused by founders’ promises deviating significantly from what they are capable of delivering often occur, as in the cases of Theranos and WeWork.

On the other hand, there’s the case of Zoom – now a public company with a market capitalization of $88 billion – which couldn’t get early funding because its founder, Eric Yuan, didn’t “looked at the room”.

“In other words, he didn’t fit the mold of a stereotypical young tech founder, despite his background and vast experience,” the authors wrote. “As a result, Zoom had to raise funds from friends and family before it could onboard VCs.”

Because a successful business requires a diverse set of skills, the research team focused its analysis of founders on three different types of expertise: entrepreneurial, managerial, and technical.

“When we looked at whether startups had been acquired or taken public – one of our two measures of success – we found that expertise signaling had a huge influence, although actual expertise narrowly won out. “, wrote the authors. “But when we looked at how much money new ventures were able to raise, the expertise signal effect exceeded that of actual expertise for the entrepreneurial and managerial component.

“In other words, for founding teams, showing up seems to pay more than having the goods when it comes to raising capital, while longer-term outcomes such as acquisitions and IPOs stock market are less sensitive to the expertise signal,” they continued. .

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More information:
Alessandro Piazza et al, Discoveries Through Prose: Venturing Through the Gates of Perception, Management Discovery Academy (2022). DOI: 10.5465/amd.2021.0046

Provided by Rice University

Quote: Acting like an expert even without experience can help secure venture capital funding (2022, January 26) Retrieved January 26, 2022 from funding.html

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