Signaling in Venture Capitalist—New Venture Team Funding Decisions: Does it Indicate Long–Term Venture Outcomes?

Abstract

According to signaling theory, new venture teams (NVTs) can communicate to venture capitalists and other potential investors both a “value” signal and a “commitment” signal, based on the level of personal investment in a venture. Venture capitalists (VCs) typically want to know if a NVT is really committed to a venture and if its members truly believe that a venture has wealth creating potential. Team members can convey signals via their investment behavior. We test our hypotheses based on a sample of 183 VC–backed ventures that we tracked over a ten–year time period. These data indicate that the signals sent to VCs in the early stages of the funding process do not appear to have any significant relationship with long–term venture outcomes. We explore possible explanations for these findings, as well as their implications for signaling theory and future research.