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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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    3. Kaplan, Andreas M. & Haenlein, Michael, 2010. "Users of the world, unite! The challenges and opportunities of Social Media," Business Horizons, Elsevier, Elsevier, vol. 53(1), pages 59-68, January.
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    7. Wang, Susheng & Zhou, Hailan, 2004. "Staged financing in venture capital: moral hazard and risks," Journal of Corporate Finance, Elsevier, Elsevier, vol. 10(1), pages 131-155, January.
    8. 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.
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    17. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, American Finance Association, vol. 50(5), pages 1461-89, December.
    18. 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.
    19. Francesco D’Amuri & Juri Marcucci, 2010. "“Google it!”Forecasting the US Unemployment Rate with a Google Job Search index," Working Papers, Fondazione Eni Enrico Mattei 2010.31, Fondazione Eni Enrico Mattei.
    20. 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.
    21. Tian, Xuan, 2011. "The causes and consequences of venture capital stage financing," Journal of Financial Economics, Elsevier, Elsevier, vol. 101(1), pages 132-159, July.
    22. Andrew Metrick & Ayako Yasuda, 2010. "Venture Capital and Other Private Equity: A Survey," NBER Working Papers 16652, National Bureau of Economic Research, Inc.
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