Today’s entrepreneurs will be interested in knowing the blogosphere has opened up their chances of obtaining venture capital funding. A recent study, lead by David Eccles Professor Rohit Aggarwal, was published in the journal of Information Systems Research discussing the importance that social media platforms play in launching a business.
The study, which began around 2004, explored how influential a blog could be when it came to small ticket items such as books, videos, or movie tickets. Aggarwal’s study took the investigation further by looking at multi-million dollar decisions to fund startup companies. The findings were in line with the previous studies with the exception of two things.
First, Aggarwal found though blogs can influence decision makers, it’s only a handful of blogs that yield this type of power. By 2008, the blogosphere had more people adding content, writing so-called expert opinions, and flooding the cyber world with posts about infinite topics.
Organically, in the entrepreneur arena, a few blogs such as TechCrunch, GigaOm and Venturebeat, have proven themselves successful in providing credible information. Because of this, VCs don’t have to scour the internet looking for feedback, but can quickly review 5-10 posts. Overtime, Aggarwal says, these players might change out and new ones step in, but overall it will be a set number that will help direct VCs in their funding decisions.
Second, these few blogs helped VCs filter and reject plans rather than help them in the selection process. Aggarwal concludes that the main reason is “because they (VCs) have so many business plans come across their desks, decision makers need a way to weed out poor plans efficiently.”
The VCs often look to blogs to validate their assumptions when they are questioning the viability of a business. Aggarwal says, “It’s imperative for startups to watch the internet and address any negative reviews, which might be written about their business or product.” Since the blogs are being looked at to help decide which plans have flaws, if a startup is unaware or doesn’t counter a negative review, they could jeopardize potential funding.
The blogosphere has changed the playing field when it comes to funding new businesses. Traditionally, an entrepreneur would need to know someone to get a recommendation to a funder. Today, it can be a simple as getting a positive review on the internet. Now there are more companies receiving funding than before because of the ease of access to information. Of course, for the bloggers themselves, that can be an intense amount of pressure from businessmen and women looking to launch their life-long dreams into reality.
Aggarwal’s study shows that in the early stages of a business, the viral world of blogging can and does help determine if a business will be funded. But as time goes by, VCs look to hard data to determine any future funding. This means if you have a great idea you could make it to the initial stages of starting a business, but if the idea doesn’t show results, you may not have funding to continue growing the company. VCs depend on traditional numbers such as costs, competition, and revenue generated and less towards bloggers to help them determine if they’ll invest further into company.
Dr. Rohit Aggarwal, Assistant Professor of Information Systems at the David Eccles School of Business
