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

Author List: Aggarwal, Rohit; Gopal, Ram D.; Gupta, Alok; Singh, Harpreet;

Information Systems Research, 2012, Volume 23, Issue 3, Page 976-992.

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

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#241	0.330	information stage stages venture policies ewom paper crowdfunding second influence revelation funding cost important investigation ventures session studied electronic multiple
#220	0.172	research study different context findings types prior results focused studies empirical examine work previous little knowledge sources implications specifically provide
#262	0.112	impact data effect set propensity potential unique increase matching use selection score results self-selection heterogeneity evidence measure associated estimate leads
#166	0.104	negative positive effect findings results effects blog suggest role blogs posts examined period relationship employees research employee bloggers reveal companies
#242	0.070	market competition competitive network markets firms products competing competitor differentiation advantage competitors presence dominant structure share using incumbent make important
#227	0.056	commitment need practitioners studies potential role consider difficult models result importance influence researchers established conduct investigated establishing appear clearly determining