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

Abstract

E xternal 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.

Investigating the consequences of word of mouth from a WOM sender’s perspective in the services context

“…purchase decision) and firm level (e.g. sales) (Aggarwal, Gopal, Gupta & Singh, 2012;Arndt, 1967;Chevalier & Mayzlin, 2006;Mizerski, 1982).…”

The Impact of Gamification on Word-of-Mouth Effectiveness: Evidence from Foursquare

“…Dellarocas [17,20]. A lot of research has proven that WOM has a strong impact on sales, however, in terms of whether it is coming from positive reviews or negative ones, the findings are mixed [2,10]. Aggarwal et al show that the impact of negative eWOM is stronger than the positive ones in the venture capital financing industry [2].…”

“…A lot of research has proven that WOM has a strong impact on sales, however, in terms of whether it is coming from positive reviews or negative ones, the findings are mixed [2,10]. Aggarwal et al show that the impact of negative eWOM is stronger than the positive ones in the venture capital financing industry [2]. This stream of research has focused on the valence and the volume of reviews and missed another important component of review, which is the review textual content.…”

“…Defined as using game-design elements in non-gaming contexts [16,38], gamification has shown its great potential in learning, skill acquisition, attitude and behavior change. When it comes to business domain, it has been found that (1) gamification can be applied in enterprise to engage employees and increase the job performance [28,34]; (2) with the advent of web 2.0, gamification has evolved as a promising technique to increase customer engagement over the web [5]. Game-like elements, such as badges and mayorships, provide consumers a fun and playful way to keep track of their shopping activity and shopping experience, enjoying the sense of accomplishment and also create a friendly competition among friends.…”

Seeking Variety: A Dynamic Model of Employee Blog Reading Behavior

“…Several aspects of blogs have been studied by researchers over the years. These studies have contributed to our understanding by systematically analyzing how blogs affect products sales (Goldstone 2006, Mishne andGlance 2006), outcome of important events Glance 2005, Farrell andDrezner 2004), new venture funding (Aggarwal et al 2010), perceptions about the firm (Aggarwal et al 2009), and culture (Blood and Rodzvilla 2007).…”