U of U study examines how blogs impact venture capital

Oct 30 2012 - 6:34am

SALT LAKE CITY -- For years, researchers have scoured the Internet for evidence of how bloggers and social media affect consumer decisions like choosing what movie to see or which book to buy. Never has there been a similar look at how the blogosphere affects larger financial decisions-particularly new venture financing decisions in which every choice is worth millions of dollars-until now.

A new study published in the journal Information Systems Research and led by Rohit Aggarwal, an Operations and Information Systems professor at the University of Utah's David Eccles School of Business, finds that bloggers can have a massive effect on both the funding amount and valuations of startups. More interestingly, Aggarwal's findings have something to say about whether one should pursue 10 posts from popular blogs versus 1,000 posts from not so popular blogs. Guess what?

Not all blogs are created equal.

While desperate entrepreneurs, in order to create buzz about their products or services, may try to wow a large audience of bloggers, this may not be necessary. When it comes to venture financing, entrepreneurs would be better served focusing on few popular blogs because those are more likely to catch the attention of venture capitalists. "I talked to VCs from many top VC groups, and VCs in general rely on few popular blogs such as TechCrunch, GigaOm, and Venturebeat. Given their reading behavior, these findings totally make sense," Aggarwal said, discussing the study's resulting paper titled "Putting Money Where The Mouths Are: The Relation Between Venture Financing and Electronic Word-of-Mouth."

Besides the fact most venture capitalists only have time to read so many blogs, the research shows that negative coverage of a startup venture has more of an effect than positive coverage. In other words, a venture capitalist is more likely to take notice of a negative blog post about a potential investment than take notice of a positive post. "After all it is more of a rejection process than a selection process," Aggarwal said. "VCs want to sift through the pile of startup plans on their desks quickly, and are essentially looking for a reason to reject a plan and move on."

The study also examines how the influence of blogs may change with the progress of a project's funding rounds. The findings indicate that the effect of blog coverage is strong at the earlier funding rounds, but then it starts to decrease in subsequent funding rounds. "This makes sense, because in the early stages, all they may have is a dream of what they could be," Aggarwal said. "As time passes, users, usage, and other accounting measures start to give a better signal about their actual potential."

Successful companies like Microsoft, Apple, Google and Amazon all started as ventures solely aided by private equity funding during their early years. Entrepreneurs still rely on such funding to support companies that don't have revenue yet, but need to recruit employees, develop their products, pay suppliers and market their idea. During the dot-com boom, startups garnered more than $135 billion from venture capitalists in a single year, and even though that dot-com bubble burst, VC funding of new ventures has remained at over $25 billion per year annually since 2000, most of that money going to IT startups. Hence, this study is quite valuable for studying the role of social media on such an important business domain.

Aggarwal's co-authors of the paper are Harpreet Singh of the University of Texas-Dallas, Ram Gopal of the University of Connecticut and Alok Gupta of the University of Minnesota. To read the complete journal article, visit: http://rohitaggarwal.files.wordpress.com/2012/09/puttingmoneywheremouths...

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