Crowd-Based Rankings and Frictions in New Venture Finance

Abstract

Using detailed data from a prominent online platform that generates noisy market traction measures for technology startup launches by aggregating user upvotes into rankings, I find that information acquisition frictions affect venture capital investors’ funding decisions. By exploiting an instrument based on the ex-ante quality and quantity of supply of other products, I identify that each exogenous shift to ranking lowers a startup’s probability of raising venture funding by 4.8% within a year, and reduces its chance of raising from brand name VCs. Consistent with theoretical predictions, higher-ranked products and startups farther away from VCs are more affected by ranking frictions.

Keywords: entrepreneurial finance, venture capital, online platform