Putting money where the mouths are

The relation between venture financing and electronic Word-of-Mouth

Rohit Aggarwal, Ram Gopal, Alok Gupta, Harpreet Singh

Research output: Contribution to journalArticle

65 Citations (Scopus)

Abstract

External financing is critical to ventures that do not have a revenue source but need to recruit employees, develop products, pay suppliers, and market their products/services. There is an increasing belief among entrepreneurs that electronic word-of-mouth (eWOM), specifically blog coverage, can aid in achieving venture capital financing. Conflicting findings reported by past studies examining eWOM make it unclear what to make of such beliefs of entrepreneurs. Even if there were generally agreed-upon results, a stream of literature indicates that because of the differences in traits between the prior investigated contexts and venture capital financing, the findings from the prior studies cannot be generalized to venture capital financing. Extant studies also fall short in examining the role of time and the status of entities generating eWOM in determining the influence of eWOM on decision making. To address this dearth of literature in a context that attracts billions of dollars every year, we investigate the effect of eWOM on venture capital financing. This study entails the challenging task of gathering data from hundreds of ventures along with other sources including VentureXpert, surveys, Google Blogsearch, Lexis-Nexis, and Archive.org. The key findings of our econometric analysis are that the impact of negative eWOM is greater than is the impact of positive eWOM and that the effect of eWOM on financing decreases with the progress through the financing stages. We also find that the eWOM of popular bloggers helps ventures in getting higher funding amounts and valuations. The empirical model used in this work accounts for inherent selection biases of entrepreneurs and venture capitalists, and we conduct numerous robustness checks for potential issues of endogeneity, selection bias, nonlinearities, and popularity cutoff for blogs. The findings have important implications for entrepreneurs and suggest ways by which entrepreneurs can take advantage of eWOM.

Original languageEnglish (US)
Pages (from-to)976-992
Number of pages17
JournalInformation Systems Research
Volume23
Issue number3 PART 2
DOIs
StatePublished - Jan 1 2012

Fingerprint

Blogs
money
electronics
venture capital
entrepreneur
Decision making
Personnel
weblog
outside financing
Venture capital financing
Electronic word-of-mouth
trend
search engine
supplier
dollar
econometrics
popularity
revenue
coverage
funding

Keywords

  • Blogs
  • Electronic word-of-mouth
  • VC funding
  • Venture funding

Cite this

Putting money where the mouths are : The relation between venture financing and electronic Word-of-Mouth. / Aggarwal, Rohit; Gopal, Ram; Gupta, Alok; Singh, Harpreet.

In: Information Systems Research, Vol. 23, No. 3 PART 2, 01.01.2012, p. 976-992.

Research output: Contribution to journalArticle

Aggarwal, Rohit ; Gopal, Ram ; Gupta, Alok ; Singh, Harpreet. / Putting money where the mouths are : The relation between venture financing and electronic Word-of-Mouth. In: Information Systems Research. 2012 ; Vol. 23, No. 3 PART 2. pp. 976-992.
@article{c549c0942de74518a4446d3f97b4e7ad,
title = "Putting money where the mouths are: The relation between venture financing and electronic Word-of-Mouth",
abstract = "External financing is critical to ventures that do not have a revenue source but need to recruit employees, develop products, pay suppliers, and market their products/services. There is an increasing belief among entrepreneurs that electronic word-of-mouth (eWOM), specifically blog coverage, can aid in achieving venture capital financing. Conflicting findings reported by past studies examining eWOM make it unclear what to make of such beliefs of entrepreneurs. Even if there were generally agreed-upon results, a stream of literature indicates that because of the differences in traits between the prior investigated contexts and venture capital financing, the findings from the prior studies cannot be generalized to venture capital financing. Extant studies also fall short in examining the role of time and the status of entities generating eWOM in determining the influence of eWOM on decision making. To address this dearth of literature in a context that attracts billions of dollars every year, we investigate the effect of eWOM on venture capital financing. This study entails the challenging task of gathering data from hundreds of ventures along with other sources including VentureXpert, surveys, Google Blogsearch, Lexis-Nexis, and Archive.org. The key findings of our econometric analysis are that the impact of negative eWOM is greater than is the impact of positive eWOM and that the effect of eWOM on financing decreases with the progress through the financing stages. We also find that the eWOM of popular bloggers helps ventures in getting higher funding amounts and valuations. The empirical model used in this work accounts for inherent selection biases of entrepreneurs and venture capitalists, and we conduct numerous robustness checks for potential issues of endogeneity, selection bias, nonlinearities, and popularity cutoff for blogs. The findings have important implications for entrepreneurs and suggest ways by which entrepreneurs can take advantage of eWOM.",
keywords = "Blogs, Electronic word-of-mouth, VC funding, Venture funding",
author = "Rohit Aggarwal and Ram Gopal and Alok Gupta and Harpreet Singh",
year = "2012",
month = "1",
day = "1",
doi = "10.1287/isre.1110.0402",
language = "English (US)",
volume = "23",
pages = "976--992",
journal = "Information Systems Research",
issn = "1047-7047",
publisher = "INFORMS Inst.for Operations Res.and the Management Sciences",
number = "3 PART 2",

}

TY - JOUR

T1 - Putting money where the mouths are

T2 - The relation between venture financing and electronic Word-of-Mouth

AU - Aggarwal, Rohit

AU - Gopal, Ram

AU - Gupta, Alok

AU - Singh, Harpreet

PY - 2012/1/1

Y1 - 2012/1/1

N2 - External financing is critical to ventures that do not have a revenue source but need to recruit employees, develop products, pay suppliers, and market their products/services. There is an increasing belief among entrepreneurs that electronic word-of-mouth (eWOM), specifically blog coverage, can aid in achieving venture capital financing. Conflicting findings reported by past studies examining eWOM make it unclear what to make of such beliefs of entrepreneurs. Even if there were generally agreed-upon results, a stream of literature indicates that because of the differences in traits between the prior investigated contexts and venture capital financing, the findings from the prior studies cannot be generalized to venture capital financing. Extant studies also fall short in examining the role of time and the status of entities generating eWOM in determining the influence of eWOM on decision making. To address this dearth of literature in a context that attracts billions of dollars every year, we investigate the effect of eWOM on venture capital financing. This study entails the challenging task of gathering data from hundreds of ventures along with other sources including VentureXpert, surveys, Google Blogsearch, Lexis-Nexis, and Archive.org. The key findings of our econometric analysis are that the impact of negative eWOM is greater than is the impact of positive eWOM and that the effect of eWOM on financing decreases with the progress through the financing stages. We also find that the eWOM of popular bloggers helps ventures in getting higher funding amounts and valuations. The empirical model used in this work accounts for inherent selection biases of entrepreneurs and venture capitalists, and we conduct numerous robustness checks for potential issues of endogeneity, selection bias, nonlinearities, and popularity cutoff for blogs. The findings have important implications for entrepreneurs and suggest ways by which entrepreneurs can take advantage of eWOM.

AB - External financing is critical to ventures that do not have a revenue source but need to recruit employees, develop products, pay suppliers, and market their products/services. There is an increasing belief among entrepreneurs that electronic word-of-mouth (eWOM), specifically blog coverage, can aid in achieving venture capital financing. Conflicting findings reported by past studies examining eWOM make it unclear what to make of such beliefs of entrepreneurs. Even if there were generally agreed-upon results, a stream of literature indicates that because of the differences in traits between the prior investigated contexts and venture capital financing, the findings from the prior studies cannot be generalized to venture capital financing. Extant studies also fall short in examining the role of time and the status of entities generating eWOM in determining the influence of eWOM on decision making. To address this dearth of literature in a context that attracts billions of dollars every year, we investigate the effect of eWOM on venture capital financing. This study entails the challenging task of gathering data from hundreds of ventures along with other sources including VentureXpert, surveys, Google Blogsearch, Lexis-Nexis, and Archive.org. The key findings of our econometric analysis are that the impact of negative eWOM is greater than is the impact of positive eWOM and that the effect of eWOM on financing decreases with the progress through the financing stages. We also find that the eWOM of popular bloggers helps ventures in getting higher funding amounts and valuations. The empirical model used in this work accounts for inherent selection biases of entrepreneurs and venture capitalists, and we conduct numerous robustness checks for potential issues of endogeneity, selection bias, nonlinearities, and popularity cutoff for blogs. The findings have important implications for entrepreneurs and suggest ways by which entrepreneurs can take advantage of eWOM.

KW - Blogs

KW - Electronic word-of-mouth

KW - VC funding

KW - Venture funding

UR - http://www.scopus.com/inward/record.url?scp=84871604333&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84871604333&partnerID=8YFLogxK

U2 - 10.1287/isre.1110.0402

DO - 10.1287/isre.1110.0402

M3 - Article

VL - 23

SP - 976

EP - 992

JO - Information Systems Research

JF - Information Systems Research

SN - 1047-7047

IS - 3 PART 2

ER -