Do Knowledge Signals Predict Startups’ Exit and Failure?

Abstract

This research examines how startup founders’ academic knowledge, and knowledge gained through startup founding experience, signal investors and attract investments. We further examine, for both financed and non-financed startups, whether these signals are associated with the startup’s down-the-road exit and failure. Using a unique and comprehensive database that includes successful and financed startups, as well as failing startups and startups not backed by investors, we analyze 9,193 technological startups established by 13,778 founders active in Israel from 1990-2014. We find that founders’ knowledge is largely positively associated with the probability of funding. However, further analysis shows that these signals may be misleading, as they are not always associated with down-the-road higher exit or lower failure probabilities, rendering such investments suboptimal.

Keywords: Startup exit; Startup failure; Founders’ knowledge; Investments

JEL Classification: G24, G32, L26, M13