VCs can add value to startups passively, by virtue of attaching their names to the ventures they fund
When startups attract top-tier venture capitalists who invest in them, they win an important stamp of approval, which can mitigate the uncertainty surrounding early-stage companies and facilitate recruiting
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As startup founders know all too well, attracting employees is a key challenge facing young companies. “The high risk of failure in the startup world makes job seekers reluctant to take a chance on early-stage firms,” said Darden Professor Ting Xu, an expert in entrepreneurial finance. “So, how do you convince talented employees, most of whom may already have a great job, to work for a company with little track record?”
The answer lies in their investors’ reputations. “When startups attract top-tier venture capitalists who invest in them,” said Xu, “they win an important stamp of approval, which can mitigate the uncertainty surrounding early-stage companies and facilitate recruiting.”
Recently, Xu and his collaborators — Shai Bernstein of Harvard Business School, Kunal Mehta of AngelList LLC, and Richard Townsend of the University of California, San Diego — set out to investigate whether VCs can attract talented employees to their portfolio companies simply through their reputation. They presented their findings in a working paper, “Do Startups Benefit From Their Investors’ Reputation? Evidence From a Randomized Field Experiment.”
According to Xu, the paper offers the first direct evidence that VCs can add value to startups passively, by virtue of attaching their names to the ventures they fund.
[This article has been reproduced with permission from University Of Virginia's Darden School Of Business. This piece originally appeared on Darden Ideas to Action.]