Unraveling the Benefits of Inter-organizational Endorsements for Startups: The Role of Government Research Grants in Venture Capital Financing
2015-12-22 09:44:34
by Mazhar Islam, Tulane University

Wednesday, December 23, 2015 | 2:00pm-3:30pm | Room 335, HSBC Business School Building


Earlier studies document the value of inter-organizational endorsements to startups, but do not adequately disentangle the value of the initial certification that comes at selection from post-selection support. We develop a theoretical framework that assesses the impact of the certificate element of the endorsement process and investigates the conditions under which the initial certification is likely to enhance startups ability to secure venture capital funding. We test the framework on government research grants that are awarded to startups in the clean energy sector, a context that enables us to isolate the value of selection from the value of post-selection support. In comparison to a matched sample of startups without grants, we find that startups with grants were 14.41 percent more likely to acquire subsequent VC funding. However, this result only holds for the two quarters following the announcement, demonstrating that the value of certification rapidly decays without additional post-selection support. Of great importance is that we also find that the value of certification is greater for startups with fewer patents and lesser accumulated prior VC funding. Together these results highlight that inter-organizational endorsements are not universally valuable when they lack post selection support and that startups should be aware of the opportunity costs of seeking endorsements from government grants given the selectivity in their benefits. These results are robust to alternative explanations that consider government grants as similar to more traditional forms of inter-organizational endorsement.