Looking The Part More Important For Securing VC Backing

With venture capitalists often investing huge sums in startups, one would assume that these investments are based on detailed assessments of the capabilities of the startups and the entrepreneurs behind them.  Alas, research from Rice University suggests that isn’t really the case.

The researchers analyzed data from nearly 4,200 new ventures and the founders behind them.  The analysis revealed that the way in which the founders present themselves plays a huge part in whether they secure funding or not, even if the image they present bears little relation to reality.

Raising capital

While it seems like entrepreneurs today are excessively focused on raising capital rather than growing their business, it is nonetheless a seemingly important part of the modern entrepreneurs’ toolkit.  The study found that how one signals one’s expertise was crucially important to whether one secured backing.

“When predicting (an acquisition or merger), actual expertise was still the strongest predictor. But when it came to raising funds, we were surprised to discover that founders’ expertise signaling was actually a more powerful predictor than their actual background and experience,” the authors explain. “Our findings have important practical implications and highlight the need for better theories of the role of the founding team in entrepreneurship and venture financing.”

Of course, such detachment from reality has been shown to have dire consequences, with famous cases such as WeWork and Theranos demonstrating the point.  Similarly, however, the authors highlight the struggles Zoom founder Eric Yuan had in attracting support, in part because he didn’t “look the part”.

“In other words, he did not fit the mold of a stereotypical young tech founder, despite his track record and extensive experience,” the authors suggest. “As a result, Zoom had to raise funds from friends and family before being able to bring VCs on board.”

What it takes

The researchers argue that success requires entrepreneurs to have a diverse set of skills, so they focused their attention on entrepreneurial, technical, and managerial expertise.

“When we looked at whether startups were acquired or went public—one of our two measures of success—we found that expertise signaling wielded a sizeable influence, even though actual expertise narrowly carried the day,” they explain. “But when we looked at how much money new ventures were able to raise, the effect of expertise signaling exceeded that of actual expertise for both the entrepreneurial and the managerial component.

“In other words, for founding teams, showing off appears to pay off to a greater degree than having the goods when it comes to raising capital, while longer-term outcomes such as acquisitions and IPOs are less sensitive to expertise signaling,” they conclude.

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