Do top venture capital firms add value to startups simply by attaching their names?
If attracting talent is any measure, they sure do. New research finds that job seekers are two-thirds more likely to apply to a startup if they know it is backed by a top venture capital (VC) investor, according to a new study coauthored by Harvard Business School Professor Shai Bernstein.
“One of the key challenges for startups is convincing employees to join and get the company off the ground,” says Bernstein, the Marvin Bower Associate Professor in the Entrepreneurial Management Unit at HBS. “At the earliest stages, you have no reputation, no brand name, and you’re facing significant uncertainty and risk with respect to your prospects and future success. How would you convince others to join your company?”
Attracting high-quality talent is an important challenge for any young firm, and it’s critical to establishing reputation and growth. Simply publicizing a well-known venture capital firm as a funding source boosts a nascent company’s ability to bring in job applicants, says a recent working paper. Bernstein collaborated on the research with Kunal Mehta of Stripe; Richard Townsend from the University of California, San Diego; and Ting Xu from the University of Virginia’s Darden School of Business.
The findings carry big implications for founders, startup managers, and VCs.
“Whom you take money from has broader implications beyond just the capitalization of the company,” Bernstein says. “It also holds reputation consequences. We show that it affects your ability to attract talent.”
The key challenge in identifying whether top investor affiliation matters for job seekers is endogeneity. It may not be surprising that high-quality startups may be able to attract top investors such as Sequoia or Accel Partners on the one hand, and top engineers on the other. However, is it the case that the engineers will join the startups because of Sequoia specifically?
To test if the name of a top investor makes a difference in luring applicants, the researchers collaborated with AngelList Talent, an online recruitment platform, to conduct a randomized experiment on the platform.
In 2020, AngelList added graphic “badges” to job postings on the platform designed to highlight information about each startup. The researchers studied two badges. The first badge informed job seekers if a startup was funded by a top-tier VC firm—for example, a badge for startups funded by Kleiner Perkins or Accel Partners. A second badge simply showed if the firm had been recently funded.
The experimental design randomly exposed job seekers to the two badges, while recording their decisions of whether to submit a job application, comparing the actions of those observing the badges with those who didn’t.
The researchers found that exposure to information that a startup is backed by top VC investors increased job applications dramatically—by 67 percent. That second badge detailing recent company funding? It had “no effect” compared with a search that didn’t include the badge, the authors write.
“The same startup receives significantly more interest from potential employees when it is represented with the top investor badge than when it is not,” they write.
While information about top investors increased the volume of applications, there was no evidence that the quality of applying candidates has deteriorated. In fact, the quality of the talent pool remained, on average, the same, as measured by the amount of experience job seekers had and the quality of their academic institutions.
Early stage startups, which the authors define as those in a stage before “series B” round funding, benefitted the most from the VC badge, Bernstein notes. That’s when startups typically suffer most from a “cold start” problem—the difficulty of convincing people to work with a firm at the stages in which there is no track record or reputation yet.
“Later-stage companies in series B and C already developed their own reputation,” says Bernstein, “and, as such, may be less dependent on the reputation of their investors.” Indeed, job seekers were less responsive to top investor badges for these kinds of companies.
For entrepreneurs, the study’s implications may go beyond attracting capital and even, as the paper shows, talent. A VC’s endorsement may also help a startup attract more customers or suppliers, Bernstein speculates.
More broadly, “It begs the question: If you have the opportunity to raise money from more reputable investors, would you be willing to agree to lower valuations in order to be affiliated with reputable investors? Our results suggest that the reputation of investors is important to get off the ground,” says Bernstein.
For job seekers, the VC connection might encourage them to apply to companies they’ve never heard of—even with the knowledge that most startups fail.
“It is worth noting that being backed by top investors does not necessarily guarantee success,” Bernstein cautions.
However, a well-known and reputable investor may enhance the promise that the investment succeeds—just by attracting higher quality stakeholders.
“If a company is backed by these top investors, and better talent is attracted, it improves the probability of the company to succeed,” says Bernstein. “But it’s still important to remember that there’s no secret sauce here. Startups are still incredibly risky ventures to join.”
Feedback or ideas to share? Email the Working Knowledge team at firstname.lastname@example.org.