Entrepreneurial Uncertainty and Expert Evaluation: An Empirical Analysis

Abstract

This paper empirically examines the evaluations of 537 ventures in high-growth industries performed by 251 experienced entrepreneurs, investors, and executives. These experts evaluated ventures by reading succinct summaries of the ventures without meeting the founding teams, and their evaluations were not disclosed to the entrepreneurs. We find that experts can differentiate among early-stage ventures on grounds of quality beyond the explicit venture and entrepreneur characteristics contained in the written summaries. They can only do so effectively, however, for ventures in the hardware, energy, life sciences, and medical devices sectors; they cannot do so for ventures in the consumer products, consumer web and mobile, and enterprise software sectors. Our results highlight sector-specific heterogeneity in the information needed to effectively screen ventures, a finding that has implications for the design of optimal investment strategies. This paper was accepted by Gustavo Manso, finance.

Patenting and business outcomes for cleantech startups funded by the Advanced Research Projects Agency-Energy

“…Predicting research outcomes and success of technical projects is notoriously difficult, even for industry experts or venture capitalists. 51 Although many ARPA-E startups had private funding prior to their award, those investors may not have been willing to support the particular R&D projects funded by ARPA-E-projects with transformative potential but greater risk. In a report from the U.S. Government Accountability Office, investment firms stated that they "generally do not fund projects that rely on unproven technologies."…”

Certification or Cash Prize: The Heterogeneous Effect of Venture Competitions

“…This is exactly what we observe, as we will discuss in Section 7. This varying ability that judges display in evaluating startups from different technology types that both Scott et al (2020) and our paper highlight merits further study. It would be interesting, for example, to discover whether science-based startups are indeed intrinsically easier to assess, as we argue, or if this phenomenon reflects something else (e.g.…”

“…Our analysis suggests that venture competitions' effect depends on the quality of judges' screening and startups' running costs. We observe that judges are better at identifying the best science startups than they are at picking out the best ICT ventures, presumably because the technological and market viability of science-based ventures can be assessed more objectively (Scott et al, 2020). The certification provided by venture competitions is, therefore, too noisy a signal of quality for ICT startups.…”

“…Both our data (see Figure 2) and the literature back this assumption. Indeed, Scott et al (2020) find that experts can effectively differentiate among early-stage ventures on grounds of quality in the hardware, energy, life sciences, and medical devices sectors but cannot do so for ventures in the consumer products, consumer web and mobile, and enterprise software sectors. A possible explanation for this difference is that the success of science-based startups depends on elements that are more 'objective' compared to consumers products or ICT startup (i.e., hard evidence of a technological advance).…”

“…Regarding certification, the competition's judges provide useful information about the value and potential of participating startups (Scott et al, 2020). This is important because information acquisition is crucial in the investment decision of early-stage investors (Bernstein et al, 2017).…”