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Putting Money Where the Mouths Are: The Relation Between Venture Financing and Electronic Word-of-Mouth

Author

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  • Rohit Aggarwal

    (Operations and Information Systems, David Eccles School of Business, University of Utah, Salt Lake City, Utah 84113)

  • Ram Gopal

    (Department of Operations and Information Management, School of Business, University of Connecticut, Storrs, Connecticut 06269)

  • Alok Gupta

    (Department of Information and Decision Sciences, Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455)

  • Harpreet Singh

    (Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080, USA)

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.

Suggested Citation

  • Rohit Aggarwal & Ram Gopal & Alok Gupta & Harpreet Singh, 2012. "Putting Money Where the Mouths Are: The Relation Between Venture Financing and Electronic Word-of-Mouth," Information Systems Research, INFORMS, vol. 23(3-part-2), pages 976-992, September.
    • Handle: RePEc:inm:orisre:v:23:y:2012:i:3-part-2:p:976-992
    DOI: 10.1287/isre.1110.0402
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    References listed on IDEAS

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