Discoveries-Through-Prose: Venturing through the Doors of Perception

As anyone who has funded a startup knows from experience, a strong founding team is a prerequisite for new venture success. But are skilled founders essential because they make the business run well? Or are they needed because they impress potential investors, thus attracting more funding? To find an answer, one must distinguish the genuine skills and experience of the founding team—that is, actual expertise—from how the founding team presents itself, which we label expertise signaling. We analyze data on 4,190 new ventures drawn from CrunchBase and self-styled profiles that the founders of these companies posted on LinkedIn. Both in terms of liquidity events and amount of capital raised, we found, expertise signaling by startup founders played a significant role in company success. To be sure, when predicting a liquidity event, actual expertise was still the strongest predictor. But when it came to raising funds, we were surprised to discover that founders’ expertise signaling was actually a more powerful predictor than their actual background and experience. Our findings have important practical implications and highlight the need for better theories of the role of the founding team in entrepreneurship and venture financing.