Twitter plays an increasingly potent role in spreading the word about all manner of things, from politics to Covid (miss)information.  It’s perhaps no surprise, therefore, that it can also play a crucial role in the growth of startups.

That’s the finding of a new study from Johannes Gutenberg University Mainz (JGU) in Germany, which suggests that Twitter can help startups raise money from the venture capital community, even if the signals Twitter gives off aren’t all that reliable in terms of the long-term success of the startup.

Judging prospects

The researchers hypothesized that because information about the prospects of a fledgling business is often hard to come by, Twitter buzz could prove a useful signal as to the quality of the startup.

“Young start-up companies are particularly difficult to value when they have just been launched, as nothing has yet been produced or sold. This means that there is a huge amount of uncertainty involved when venture capitalists decide whether to invest in tech start-ups,” the researchers explain.

They analyzed around 400,000 English-language tweets about 37 different technologies and over 4,600 venture capital funding rounds from 2008 to 2017.

“This gives us an objective indicator of Twitter sentiment and how people are talking about a particular technology,” the researchers explain.

Creating a buzz

Over 4,000 US companies were included in the study, with the average age of the companies being five years.  The valuations placed on each venture by the VC were assessed via something known as the pre-money valuation, while the long-term success of each venture was measured by the exit for the firm, whether via acquisition or IPO.

The results suggest that Twitter provides a much weaker signal than other aspects of the business, such as the number and quality of patents the business has.  Despite this, Twitter activity did influence the VC investments.

“Twitter sentiment is a comparatively novel signal in venture capital financing, and it is at the same time only a weak signal in comparison to patents,” the authors say.

So while creating some buzz on Twitter may be beneficial for founders as it can help them to secure investment, it’s perhaps not the best idea for investors to heed too much from any online chatter they observe about a business as there are more reliable signals as to the inherent value of the firm than social media.