Reputational impact on startup accelerator’s information disclosure and performance

Abstract

          This study examines the implications of reputational concerns on a startup accelerator’s decisions towards effort exertion in the venture assessment process and strategic adoption of information revelation policies. In our model, the startup accelerator charges an equity share of the venture admitted into her acceleration program in exchange for the resources provided to help nurture and prepare the venture for fundraising from the investor.

          The accelerator can choose how much effort to exert in the accelerating process, which in turn determines how accurately the accelerator can learn about the quality of the venture. At the end of the acceleration program, the accelerator can then decide whether to reveal this quality information to the investor consistently with (full disclosure regime) or contrastingly to (biased disclosure regime) what has actually been observed. The accelerator’s reputation will be negatively affected if the venture’s performance does not match with what the accelerator previously announced to the investor. Our findings show that the accelerator is motivated to exert a high level of effort in learning about the venture’s quality and fully disclose the credible quality information to the investor when the severity of the reputational loss is sufficiently high. Otherwise, if the impact of the reputational loss is too small, the accelerator would exert no effort in assessing the venture’s quality and announce information about the venture based primarily on the market information, which may or may not match with what she has actually observed during the acceleration program. Furthermore, we show that a larger equity share makes the accelerator more sensitive to the reputational loss, and hence, the accelerator is better incentivized to exert significant effort to improve the accuracy of the venture’s quality information and adopt the full disclosure regime.

Key words: Startup accelerators, acceleration program, venture investment, information Revelation

• Share
• Link Copied!