Social Is the New Financial: How Startup Social Media Activity Influences Funding Outcomes

Abstract

Early stage firms increasingly use social media to communicate with their target stakeholders, such as customers and investors. In this study, we investigate whether the use of social media is associated with increased success in raising venture capital financing. We argue that social media can improve startup funding success through two channels: 1) enabling investor discovery of potential investment opportunities through reduction of search costs and 2) providing additional information to investors for a better evaluation of the quality of the ventures. Using social media activities on Twitter and venture financing data from CrunchBase, we find that an active social media presence and strong Twitter influence (followers, mentions, impressions, and sentiment) increase the likelihood a startup will close the round, the amount raised, and the breadth of the investor pool. In addition, we find that startup social media activity is associated with more investment from investors with less information channels (e.g., angels) and making less industry specialized investments in particular, consistent with the hypothesis that social media improves an investor’s ability to discover potential investments. Also, the effect size of social media is stronger for startups where quality information is less available, such as firms outside geographic venture capital clusters or where later investors do not have network relationships with early investors, consistent with social media acting as an additional information channel to inform startup quality evaluation.