Investing Network of the Startup Ecosystem in the United States

I will be taking the second module (Ying-Ju Li).

Background

Startup ecosystem plays a vital role in facilitating the innovative environment and economic prosperity in many regions. Startups can provide great economic value because they may not only have future contribution to the gross domestic product within the country, but also make a positive impact on the society through disruptive technologies, innovation, and job creation [1]. From the investors’ perspective, startups’ rapid growth and high return on investment also make early stage companies look more attractive than mature ventures. However, financing and fund raising remains a critical issue for early stage companies. Accordingly, many countries put efforts to facilitate the innovation network between investors and startups and nurture the entrepreneurial ecosystem.

From the previous SNA projects, last year a Fletcher student sought to map the connections between funders and social enterprise accelerators, with funding creating the connections [2]. By looking at the higher upstream, the fellow tried to explore whether the social enterprise network are leveraged by the accelerator. In 2013, anther Fletcher student also researched on the connections between boards of funders and social enterprises, with people creating the connections [3].

To explore the startup ecosystem and innovation clusters in the United States, I hope to map the funding network among venture capital firms and early stage companies. The investing relationships are often less transparent and rely heavily on the social ties. Therefore, SNA can be a great tool to look beyond the financial analytics and find the patterns or dynamics of early stage investments. From the network data, I also desire to analyze potential risks and opportunities of investment decisions over time.

Research Questions

Main Question: How the investing network influences the innovation? Does the innovation tend to sustain locally or split over?

1)    How did the investing network and startup ecosystem structure? 

* What did the connections between investors and startups look like over time?
* Who were the primary investors with stronger ties among different region?
* Who were the active startups with more funding ties to the investors?

2)   Does the investing network and money flow drive the innovation?

* What were the key factors that determined the investment decisions?
* Did investors tend to invest certain types of startups?
* What influenced the venture capital firms to fund the startups, ie. location, industry, educational background, professional experience, or relationships with the key investors?

3)    What are the trends and dynamics of early stage investment over time?

* Are there any potential risks or opportunities of the investment decisions?    

Hypothesis

Investors and early stage companies are the major players who actively build connections in the startup ecosystem. I hypothesize that SNA will 1) provide unique insights into how startups link to investors through the social capital accumulated in the innovation clusters and entrepreneurial ecosystem and 2) uncover the interaction dynamics and patterns of early stage investments over time.

SNA Methodology

To understand the entrepreneurial ecosystem, I will build a two-mode network (investor-startup) in different regions. I will analyze the funding network and factors of investment decisions through different attribute data, such as location of investors and startups, industry, funding year, funding round, and fund size. To identify prominent investors and active startups, I will use the centrality measures to spot the major actors with higher out-degree, betweenness, and eigenvector over time. I will also compare the investing relationships among different types of startups, especially for the industry focus and geographical focus.  

Based on the network data, I will explore how the startups are embedded into the investor network as well as the whole ecosystem and find the strong ties between the most connected actors. I will also transformed investor-startup data (2-mode) into investor-investor data (1-mode) to look at the co-investment clusters. Hence, this project will address key issues of how startups build connections or get funded and allow us to understand the due diligent process in a holistic and historical view.

Data Collection

CrunchBase is the leading platform to discover innovative companies and the people behind those companies. Through the CrunchBase, I have collected a main dataset of more than 100,000 early stage companies with detailed funding information (location, industry, investor, funding round and year, and etc.) for this SNA project. I might also interview with selected startups and investors in the Boston area through MassChallenge to explore the closer investing relationships within a smaller scale.

Conclusion

This SNA project will show the funding connections between the startups and investors embedded in the entrepreneurial ecosystem. To figure out the decision making process and potential investment issues, I will use SNA to map the patterns and dynamics of early stage investment over time and across the region. The analysis might also uncover the risks and opportunities to better project the investing networks and future trends.

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[1] Going beyond financial data – The crucial and complementary role of social network analysis (SNA) for investments in startup companies, SONEAN, October 2014

[2] http://crtunnard.blogspot.com/2014/10/funder-networks-of-social-enterprise.html

[3] http://crtunnard.blogspot.com/2013/10/a-board-member-social-network-analysis.html 

[4] Maksim Tsvetovat and Alexander Kouznetsov, Social Network Analysis for Startups, 2011