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The Role of Social Feedback in Financing of Technology Ventures

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  • Aleksandar Bradic
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    Abstract

    This research examines relationship between staging of Venture Capital (VC) investments and social feedback visible in publicly available data on the Web. We address the question of Venture Capital investment sensitivity to performance and prospects of new venture, given as likelihood of obtaining future financing, available exit options and duration between investment rounds. We argue that in the case of Internet companies, publicly available social feedback data, such as search trends and website traffic information, can be used as a proxy for some of company's internal metrics such as user base growth and product adoption. In order to answer questions of interest, we compile unique dataset consisting of detailed information about Venture Capital investments in the Internet Technology sector over the period from 2004 to 2012 and associated longitudinal search trend and website traffic data. By applying methods of survival analysis, we find that positive trends in search and website traffic volumes can lead to increased likelihood of future financing and shortening of duration between subsequent financing rounds. We also find evidence that social feedback only impacts company's ability to attract next round of financing or exit via IPO, while M&A exits seem relatively independent of such performance metrics and can occur at any stage of company development. Such findings provide strong evidence in support of learning hypothesis and suggest VC's ability to identify prospects of new venture early in it's development and allocate funding accordingly. Given research also provides methodological contributions to the problem of evaluating the prospects of new startup companies using only publicly available data, and as such should be of interest in applications such as new investment screening and industry-level assessments by analysts or policy makers.

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    File URL: http://arxiv.org/pdf/1301.2196
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1301.2196.

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    Date of creation: Dec 2012
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    Handle: RePEc:arx:papers:1301.2196

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    1. McLaren, Nick & Shanbhogue, Rachana, 2011. "Using internet search data as economic indicators," Bank of England Quarterly Bulletin, Bank of England, vol. 51(2), pages 134-140.
    2. Laura Bottazzi & Marco Da Rin & Thomas Hellmann, 2007. "The Importance of Trust for Investment: Evidence from Venture Capital," Working Papers 325, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Nikos Askitas & Klaus F. Zimmermann, 2009. "Google Econometrics and Unemployment Forecasting," Discussion Papers of DIW Berlin 899, DIW Berlin, German Institute for Economic Research.
    4. Cumming, Douglas J. & MacIntosh, Jeffrey G., 2001. "Venture capital investment duration in Canada and the United States," Journal of Multinational Financial Management, Elsevier, vol. 11(4-5), pages 445-463, December.
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    6. Wang, Susheng & Zhou, Hailan, 2004. "Staged financing in venture capital: moral hazard and risks," Journal of Corporate Finance, Elsevier, vol. 10(1), pages 131-155, January.
    7. Jeng, Leslie A. & Wells, Philippe C., 2000. "The determinants of venture capital funding: evidence across countries," Journal of Corporate Finance, Elsevier, vol. 6(3), pages 241-289, September.
    8. Andrew Metrick & Ayako Yasuda, 2010. "Venture Capital and Other Private Equity: A Survey," NBER Working Papers 16652, National Bureau of Economic Research, Inc.
    9. Francesco D’Amuri & Juri Marcucci, 2010. "“Google it!”Forecasting the US Unemployment Rate with a Google Job Search index," Working Papers 2010.31, Fondazione Eni Enrico Mattei.
    10. Bentley, R. Alexander & Ormerod, Paul, 2010. "A rapid method for assessing social versus independent interest in health issues: A case study of 'bird flu' and 'swine flu'," Social Science & Medicine, Elsevier, vol. 71(3), pages 482-485, August.
    11. Bhattacharya, Utpal & Galpin, Neal & Ray, Rina & Yu, Xiaoyun, 2009. "The Role of the Media in the Internet IPO Bubble," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(03), pages 657-682, June.
    12. Paul Gompers & Anna Kovner & Josh Lerner & David Scharfstein, 2005. "Venture Capital Investment Cycles: The Impact of Public Markets," NBER Working Papers 11385, National Bureau of Economic Research, Inc.
    13. Tian, Xuan, 2011. "The causes and consequences of venture capital stage financing," Journal of Financial Economics, Elsevier, vol. 101(1), pages 132-159, July.
    14. repec:ese:iserwp:2009-32 is not listed on IDEAS
    15. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-89, December.
    16. Oliver Alexy & Joern Block & Philipp Sandner & Anne Ter Wal, 2012. "Social capital of venture capitalists and start-up funding," Small Business Economics, Springer, vol. 39(4), pages 835-851, November.
    17. Kaplan, Andreas M. & Haenlein, Michael, 2010. "Users of the world, unite! The challenges and opportunities of Social Media," Business Horizons, Elsevier, vol. 53(1), pages 59-68, January.
    18. Zsuzsanna Fluck & Kedran Garrison & Stewart C. Myers, 2005. "Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance," NBER Working Papers 11624, National Bureau of Economic Research, Inc.
    19. Li, Yong, 2008. "Duration analysis of venture capital staging: A real options perspective," Journal of Business Venturing, Elsevier, vol. 23(5), pages 497-512, September.
    20. Block, Joern & Sandner, Philipp, 2009. "What is the Effect of the Current Financial Crisis on Venture Capital Financing? Empirical Evidence from US Internet Start-ups," MPRA Paper 14727, University Library of Munich, Germany.
    21. Demers, Elizabeth & Lewellen, Katharina, 2003. "The marketing role of IPOs: evidence from internet stocks," Journal of Financial Economics, Elsevier, vol. 68(3), pages 413-437, June.
    22. Tjalling van der Goot & Noud van Giersbergen & Michiel Botman, 2009. "What determines the survival of internet IPOs?," Applied Economics, Taylor & Francis Journals, vol. 41(5), pages 547-561.
    23. Paul Gompers & Josh Lerner, 2006. "The Venture Capital Cycle, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572389, December.
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