Studies on technology innovation and investment strategy of venture startups and the startup ecosystem

Abstract

Startups create new products and services based on innovative ideas and technology. Advantaging in size and speed compared to traditional companies, more and more startups are growing in various markets. Along with startups, the importance and portion of venture capitals and individual investors have also increased greatly forming a startup ecosystem to nurture and support the success of startups. In order for a startup success, support is needed from investors in financial and technological perspectives within the startup ecosystem. Startups are able to create new and innovative products and services through such support and nurturing from investors. Although the growing importance of startups and investors, former studies were not able to accurately examine the relationship due to data limitations. Former studies were carried out with limited samples and restricted methodologies. In order to fill this gap, this study examines the startup ecosystem and startup strategies based on large empirical data collected. The following three essays are each based on the perspective of startups and investors to offer insight for successful strategies and decision makings for a startup to succeed.

The first essay is focusing on the technology flow within the startup ecosystem. Startups combine and utilize existing technologies due to its characteristics. Technology convergence is critical for the growth of startups and is mostly occurred by technology transferring through various forms of collaboration. This study examines the role of investors for technology transfer and also the topology of startup collaboration in the startup ecosystem. By analyzing 843 startups and 1,068 investors through 19 years (1998-2016), we were able to find that large venture capitals carry out a role as technology intermediates within the startup ecosystem. This role of technology intermediates were amplified when the venture capital had more connections from various investments. We also were able to divide startups in to two groups that absorbed technology and provided technology. Startups in the two groups showed a different characteristic in size, location, key technology. Through this study, we were able to examine the technology flow within the IoT startup system and also find and highlight a new role as technology intermediates for investors.

The second essay intends to the effect of investments due to social connections between startup founders and investors. Angel investment in the early stages is important and essential to the survival and growth of a startup. However, decision for investments in this stage involves high risk in the investor’s perspective due to limited information of startups. Rather than an accurate due diligence, investors rely on other factors such as the background of the founders and social connections to evaluate the potential of the startup. This essay studies the effect of homophily investment, that is, we study the effect of investment when the founder and investor are from the same school, race, location and gender. Results for 632 angel investments show that homophily investments are negative in the early stage of startups. School relationships show a great significant but negative result for hosting post investment or raising a higher amount of money. This effect is found to be greater among top schools rather than other universities. Based on such findings, investors should not invest due social connections or trust the reputation of the founder’s university but conduct a strong due diligence for successful investments.

The final essay looks in the relationship between startups and celebrities. Celebrities have been connected with companies traditionally as a channel for advertisement. Companies used the reputation and social capital of celebrities to advertise and higher their brand and products while celebrities were compensated with financial earnings. Celebrity endorsement in startups show a different form from the traditional relationship between firms and celebrities. Celebrity endorsement occurs through direct investment in startups by celebrities whom voluntarily uses their reputation and social fame to support and backup the startups they are related with. Based on such phenomena, we compared the performance of startups that were invested by celebrities and those that were not. As a result, celebrity endorsement was found to be positive for startup performances in the early stages and was amplified when the celebrity had an active and larger follower based social networking account. This research was able to reveal the effect of celebrity endorsement in the startup industry expanding from traditional research. By analyzing startups and the startup ecosystem, this study offers meaningful findings such as the following. First, this research was able to conduct an empirical research based on real data to overcome the previous limitations. Second, this research not only provides a micro perspective on startups but also a macro perspective by analyzing the startup ecosystem. Third, meaningful findings on external factors such as social relationships or the education level of founders that were not studied in previous researches were examined and measured. Forth, various methodologies were used including the OLS regression method, keyword analysis method and network analysis method to provide a new framework for startup research. Based on such findings, we expect this study to provide meaningful insights for not only entrepreneurs and investors, but also startup policies and strategies to contribute on forming a better startup ecosystem.