How Does a Startup Venture Attract Early-Stage Investors?

How do new business ideas attract early-stage investors? When a startup venture is brand new, there’s little to base a prediction of future success on, so what sways investors?

“With such huge uncertainty and so little information, it’s important for both the startups and the investment community to know what investors are really paying attention to,” says Shai Bernstein, a finance professor at Stanford GSB.

New research from Bernstein suggests that the makeup of the team behind a new startup venture is the most important piece of information to early-stage investors – and more important than the level of traction it can offer in a given market or the interest already shown by other investors.

The Stanford GSB professor worked with Arthur Korteweg of USC Marshall School of Business and Kevin Laws from AngelList – an online platform dedicated to putting early-stage investors in touch with promising startups – in reaching this conclusion.

‘Attracting Early Stage Investors’ saw the team utilize the system of emails sent out by AngelList to subscribing investors. These emails commonly contain brief details about a startup venture – the profile of the founding team, the existing market traction (say, funds already raised through crowdfunding or the website traffic generated) and the names of any investors already on board. All the team had to do was to play with these emails, be selective in the type of information they showed 5,000 participating investors and then wait for the results – in the form of email clicks to access further information and any subsequent decisions to invest.

Team profile trumps all else in research led by Stanford GSB

In the ensuing analysis, the Stanford GSB professor and his team found that information about a startup venture’s founding team was often the only factor to which investors responded – unless the investor in question was less experienced. “While experienced and successful investors react only to the team information, inexperienced investors also react to information about the firm’s traction and current investors,” concludes the study.      

The implication is that early-stage investors regard the profile of those behind a new startup venture as the most reliable indicator of an idea’s strength. One often hears MBA alumni entrepreneurs speak of the credibility they gained with investors through their time at business school and these results certainly seem to support this benefit, as a team’s educational background will invariably be mentioned in their profile.  

Stanford GSB’s Bernstein says that the team itself is central even when the startup idea is one that will operate in a field that is well known to the investor.

“If they are experts in the area they can judge the underlying idea for themselves, yet these kinds of investors responded to the quality of the team as strongly as everyone else. Even if they can judge the quality of the business’s idea on their own, they aren’t the ones that will execute it. They need the right team for that”, Bernstein says.