Start-up founders are always on the prowl for funding. They approach friends and family, seed funds, angel funds, incubators, venture capital and any other type of investor who they hear of.
Now some of the challenges of traditional funding can be alleviated with social media, finds a new study conducted by Wharton School of Business. Social media activity and the ability to obtain funding are positively correlated. And here’s how:
- Social media enables startups to broadcast information about themselves to a wide audience.
- As startups gain followers, their activities can attract attention of angel investors who are looking for opportunities, but who often lack the organizational structure to research them.
- According to the study, 60% of startups use Twitter to spread awareness; 47% use Facebook; and 36% use LinkedIn.
The Wharton study focused specifically on how startups leverage Twitter and their success rate in acquiring angel investment funding as a result.
They concluded
- 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, 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. - 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
Social media presences/activities do indeed influence ability to find and close better funding rounds. There are some important caveats though:
- Simply being present on Twitter does not automatically guarantee more funding for a startup.
- The number of tweets shared by startups does not significantly affect the funding outcomes. In fact, being too active can actually hurt your venture – posting more than 580 tweets per year could actually hurt your company.
Social media presence does promote a positive brand image, draw in larger following and get more followers to retweet the startup’s messages. All of these things attract a larger pool of investors who are looking for opportunities. For instance, the researchers estimated that a one standard deviation increase in the Twitter Influence measure lead to extra $1.5 million in 2nd round funding for researched startups.
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