Information Frictions in New Venture Finance: Evidence from Product Hunt Rankings
45 Pages Posted: 29 Jan 2021 Last revised: 12 Nov 2021
Date Written: November 3, 2020
Computing innovations and regulatory changes led to increasing entrepreneurial entry and financing since 2013, particularly in the digital sector. Product Hunt, a crowd-based online platform, emerged to serve an information provision role, generating signals of potential product demand for new ventures by aggregating user upvotes into daily frontpage rankings. Using unexpected variation in the quantity and quality of postings shortly after the focal product is launched, I show that placing one rank higher on the frontpage improves a startup’s fundraising probability by 3.4% within a year. Frontpage rankings affect venture funding outcomes despite being highly noisy signals, highlighting the extent of information frictions between early-stage entrepreneurial firms and venture capital investors.
Keywords: entrepreneurial finance, venture capital, crowdsourcing, online platform
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