Founder-Funder Network Effects

How do education connections swing VC funding decisions? While earlier literature remains ambiguous about the impact of the education network on business, there is no existing research to understand the impact of these connections.

This research measures the impact of educational network position on entrepreneurial finance’ Extant research suggests that educational connections make for market-outperforming mutual fund managers and incisive financial analysts. Research also says that dyadic similarities, e.g. of educational institutes, enforce trust and provide social capital in entrepreneurial finance. Yet, some studies also surmise that educational connection-based financing decisions can influence judgement. It may lead to worsening of corporate governance and weakening of intensity of board monitoring. Understanding the impact of network effects on entrepreneurial finance is most vital for VCs.

Prior studies indicate that VCs are overconfident and are prone to making judgement errors while making decisions under high uncertainty and time constraint. Under such circumstances, it is important to understand the impact of basing decisions on connections from the same school. The study uses data of VC financing deals of over 11,000 startups based in U.S, data of their financiers and founders’ history. The research constructs yearly education networks between startups and VC/PE firms.

The study has some important findings so far on how VCs closer to start-ups in education networks performed relatively lower than similar VCs far in the network. The research project is currently incorporating sophisticated matching techniques and machine learning methods for robustness checks as well as more nuanced insights from the collected data.