6b

Impacts of Startup Founders’ Networks on Fundraising

Introduction

The social network perspective is increasingly used to understand startup strategic behavior and performance.
Founders' networks are crucial for startups with limited resources, aiding in recognizing opportunities and mobilizing resources.
These networks facilitate access to external resources and information.
Relationships between founders and investors are vital for startup survival and growth.
Prior studies often analyzed networks as a whole, lacking distinction between network types and their effects.
Limited research explains the differing impacts of personal and business networks on attracting investment and success.
Startups need financial resources at different stages: R&D, mass production, and market positioning.
Funding is complex and impacts startup success and survival.
Entrepreneurship scholars study the fundraising process, including network relationships and fundraising opportunities.
Few papers consider fundraising processes and how personal and business networks create opportunities and lead to financial resource acquisition.
The effectiveness of a founder's network depends on network type and the startup's age or growth stage.
Founders must match funding needs with their networks and consider the timing of their funding needs.
The effectiveness of different network types varies at different times.
Little research explains how the effectiveness of personal and business networks differs depending on the firm's age or growth stage.

Study Objectives

Build a path model from social networks to fundraising success through fundraising opportunities.
Test the direct and indirect effects of personal and business networks on fundraising success.
Examine differences in the total effects of the two network types on fundraising success.
Analyze how the effects of personal and business networks vary depending on firm age groups and reveal temporal changes in fundraising success over the maturity of startups.
Provide theoretical contributions and implications for the roles of different social networks in startup financing.
Extend knowledge on how founders raise funds using their networks and demonstrate the effects of personal and business networks in the fundraising process.

Theoretical Background and Hypothesis Development

Personal and Business Networks

Entrepreneurs need external resources to develop and launch new products.
Social connections affect resource and knowledge availability.
Startup founders' social networks are an important area of entrepreneurship research.
Social networks are intangible capital, increasing the chances of accessing valuable resources.
The social network impacts fundraising opportunities and success, as founders need to connect with potential investors.
Social connections of founders include both personal and business connections.
The strength and scope of these relationships affect the amount of funding secured and the likelihood of funding success.
Personal networks include relationships with family, friends, acquaintances, and neighbors with informal, private, and bonding relationships based on strong ties.
Because personal networks are strong, cohesive, and informal: They can agree with the founder’s vision and offer financial support without due diligence.
Personal connections can be more willing to invest in the early stages when the business is unproven.
For startups struggling to obtain external financing in the early stages, personal networks can be critical for survival.
Business networks are professional relationships that can be potential sources of resources and support.
These relationships are formal and professional, forming a diverse network with weak ties.
Members include financial investors, venture capitalists, mentors, advisors, industry experts, and people known through the founder's career.
Business networks provide access to capital, industry knowledge, and resources that help a startup grow and succeed.
Personal and business networks differ in their relational characteristics, strength, richness, trust, and accessibility.
The effects of social networks vary depending on the types or forms of networks.

Personal Networks and Startup Fundraising

Startup founders can obtain funding through personal connections such as friends, family, and acquaintances.
These opportunities increase when people in their network are willing to invest or provide financial support.
Personal networks help founders secure funding and raise funds for three main reasons:
- Founders can use close connections to secure funding directly from family and friends.
- People in the founder’s personal network can provide references to increase investment opportunities and credibility.
- Personal networks connect entrepreneurs with potential investors, providing financing.
Fundraising opportunities via personal networks can be less formal, requiring less due diligence.
Startup founders can use contacts to build relationships and increase business growth potential.
Access to funding through personal networks increases the likelihood of obtaining funding.
Personal networks are based on trust, so members support the business even if the model isn't strong.
Personal networks provide access to resources, information, and knowledge.
The size, prestige, and diversity of a personal network directly affect successful fundraising and indirectly affect it through the opportunities obtained.
Hypothesis 1: The startup founder's personal network directly affects the number of fundraising successes.
Hypothesis 2: The startup founder's personal network indirectly affects the number of fundraising successes through fundraising opportunities obtained via the personal network.

Business Networks and Startup Fundraising

Startup founders can receive investment and management support through business networks, including investors, venture capitalists, business accelerators, and industry experts.
Opportunities start when founders introduce their startup to members of their business network.
A founder's opportunities increase when they seek investment through their business network because of:
- Access to capital: Capital markets are always looking for opportunities.
- Enhancing reputation and credibility: These networks contribute to investor evaluation.
- Diversity of their network: Network provides information that the founder may not be aware of.
Investors consider investing in a startup if they have a relationship with the founder or are introduced through connections.
Fundraising opportunities through business networks may be formal and require due diligence compared to personal networks.
Business networks give access to investment opportunities and the resources to succeed.
Members of business networks endorse and support founders connected through these networks.
Founders can seek effective information from network members and it's easier to communicate if the investors are known through the network.
The founder's reputation and trust within the business network are advantageous when negotiating investment terms.
Larger business network means more chances to raise funds.
Hypothesis 3: The startup founder's business network directly affects the number of fundraising successes.
Hypothesis 4: The startup founder's business network indirectly affects the number of fundraising successes through fundraising opportunities obtained via the business network.

Differences Between Personal and Business Networks

Fundraising opportunities can come from both personal and business networks.
Personal networks with informal relationships increase opportunities through strong connections, and subjective, intangible information.
Personal networks might not provide more opportunities because of their smaller size.
Personal networks usually do not have connections with decision-makers that influence investment decisions.
The diversity of a personal network may not include financial intermediaries because it's mainly formed by long-term relationships.
Fundraising opportunities through the capital market are secured through competition.
Market competition needs weak connections and objective information.
Business networks with a larger size, links to investment prestige, and market-friendly weak ties increase fundraising opportunities and success.
Hypothesis 5: The total effect of a founder's business network on successful fundraising is greater than the total effect of a founder's personal network.

The Difference Between the Effects of Social Networks in Startups

Early-stage startups lack resources and rely on personal networks to obtain resources.
Resource providers are skeptical about uncertain startups due to the lack of economic legitimacy.
Founders possess critical information that investors do not, creating information asymmetry.
Market failure with uncertainty forces founders to rely on personal networks for financial resources.
Trust and reciprocity reduce concerns among investors.
Frequent interactions reduce information asymmetries through knowledge transfer.
Early-stage founders are unfamiliar with capital market competition.
Founders rely on personal networks when pursuing fundraising opportunities.
The difference between the effect size of personal networks and business networks is unlikely to be large in early stages.
As the startup matures, it's easier to obtain support through weak ties in business networks.
Increased ties within the business network allow for greater flexibility in finding new resources to support firm growth.
Business network ties strengthen as the startup grows, providing channels based on trust.
Personal network is unlikely to expand, making it difficult to attract investment.
Large positive effect of strong ties in old firms.
Hypothesis 6: The difference in the effect of a founder's business network and personal network on investment success in a new startup firm is smaller than the difference in effect in an old startup firm.

Data and Method

Data

Sampled founders of Korean startup firms with less than 30 employees and less than 10 years of firm age.
The sample was selected from a list of startups maintained by a leading Korean startup investment information service agency.
First-round survey in 2020, and second-round survey 6 months later.
313 samples were analyzed, excluding those with missing values and outliers.
51% of startups were in wholesale and retail trade, 26% in manufacturing, 18% in service, and 5% in biotech.

Variable

Social networks were divided into personal and business networks, constructing a composite score for each.
Personal network was defined as relationships with family, friends, alumni, and close acquaintances.
Business network was defined as business and professional relationships.
A position generator was used to measure the founders' two kinds of social networks.
The position generator measures founders' social networks in the context of startup funding that lists 15 representative occupations, including angel investors, accelerators, venture capitalists, and institutional investors.
Respondents self-reported the number of people in each occupation.
Family, friends, and private acquaintances measured the personal network.
Professional relationships measured the business network.
If there were angel investors among family, friends, the total number was used as the size of the personal network.
If there were angel investors among professional acquaintances, the total number was used as the size of the business network.
A composite score of network resources was constructed by measuring network size, occupational prestige, and network heterogeneity.
Network size refers to the resources a respondent has access to, calculated by summing the number of people they know in each occupation.
Occupational prestige was constructed by scoring how the occupation helps obtain financial resources using the three occupations considered most important for attracting investment.
Network heterogeneity was constructed by measuring the difference between the most and least occupations included in the networks.
Confirmatory factor analysis was conducted on the three network measures to verify convergence into a single construct.
Investment opportunities were divided into: Opportunities through personal networks, with family, relatives, friends, and alumni, and opportunities through business networks, with career acquaintances and professional relationships.
Success of fundraising opportunities from personal and business networks was measured by the number of successful fundraisings from both networks.
The first survey measured fundraising opportunities, and the second survey measured fundraising successes to establish causality.
Age of startup firms was used to classify startups into new, growth, and old or mature startups.
Six control variables were established: Industry sectors, the number of years of experience, startup firm size, founder's level of education, and whether the founder had prior experience.

Analysis Results

Structural equation modeling was used to analyze the structural relationship between variables.
The direct effect of personal networks on fundraising successes was $-0.070$ and not significant.
The indirect effect of personal networks on successful fundraisings through opportunities was $0.040$ and significant ( $p < 0.05$ ).
The direct effect of business networks on fundraising successes was $0.108$ and significant ( $p < 0.05$ ).
The indirect effect of business networks on fundraising successes through opportunities was $0.064$ and significant ( $p < 0.05$ ).
The difference between the total effects of personal networks and business networks was $0.202$ and significant ( $p < 0.01$ ).
Significant likelihood ratio test result ( $p < 0.001$ with chi square of $59.3$ ).
The total effects of personal networks on fundraising success were $0.100$ in age group 1, $-0.015$ in age group 2, and $-0.170$ in age group 3.
The total effects of business networks on fundraising success were $0.073$ in age group 1, $0.176$ in age group 2, and $0.271$ in age group 3.
The difference between the differences in effects of personal and business networks in age group 1 and age group 3 was significant at $p < 0.05$ .

Discussion

Theoretical Implications and Contributions

Startup founders' personal networks increase funding opportunities because personal connections are willing to invest.
More fundraising opportunities from personal networks are linked to more fundraising success.
The size, prestige, and diversity of personal networks have an indirect impact on fundraising successes.
Startup founders' business networks increase funding opportunities because investors are more likely to consider investing in the startup.
As the number of fundraising opportunities from business networks increases, the number of successful investments also increases.
Business networks have direct impacts on fundraising successes.
The total effect of business networks is greater than the total effect of personal networks.
Business connections are stronger and more useful than personal connections.
The difference in the effect of a founder's business and personal network on investment success in an old startup firm is greater than the difference in effect in a new startup firm which means startup rely on networks.
Past funding successes can allow for larger financing for growth.

Limitations of the Research

The study did not longitudinally analyze the startup's network.
It did not explicitly analyze the interaction between personal and business networks.
The study did not analyze the impact on other outcomes, such as operations or innovation.
Growth stages were determined by age, however, different insights can be gained by categorizing firms based on their degree of network embeddedness.