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Impact | Signals that work

Volume 21, Number 2
February 2015

Larry Plummer’s research on the signals that attract investors can help entrepreneurs get noticed.

plummer-impact-15.jpgHaving friends in high places can certainly increase an entrepreneur’s odds of securing investor capital, but having friends in the big city is also surprisingly important.

Ivey Assistant Professor Larry Plummer, MBA '80 Fellow in Entrepreneurship, researches the geography of entrepreneurship, which involves how location impacts a company’s long-term survival and performance. He recently joined Ivey from the University of Oklahoma’s Price College of Business where he was Assistant Professor, Management and Entrepreneurship. In a recent study undertaken at University of Oklahoma on what signals attract venture capital investment to startups in rural areas of Oklahoma, Plummer found the strongest signal of all is being endorsed by a prestigious third-party organization. In this case, the endorser is a leading venture development organization (VDO) located in Oklahoma City and Tulsa.

Although most venture capital goes to companies in Tulsa or Oklahoma City, which are the largest metropolitan areas of Oklahoma, Plummer was interested in why some startups in rural areas had received funding. He explored how they got noticed and discovered there were three signals that got investors’ attention:

  1. Having a product on the market. Doing so proves to investors that there is an appetite for the company’s goods or services. But Plummer said that may be a catch-22 situation because entrepreneurs typically need investments in order to launch their products;
  2. Being located in commercial space. Although entrepreneurs often try to reduce their costs by not renting commercial space, doing so may increase their credibility with investors; and 
  3. Having a third-party endorsement.

“Being endorsed by a reputable third party seems to have the largest effect on receiving investment,” said Plummer. “In our study, the third-party endorser is a well-known organization in Oklahoma tasked with helping entrepreneurs start high-tech ventures. The entrepreneurs complete a client application process that includes full review of the founders and their business plans. Thus, being a client of the VDO seems to send a strong endorsement signal to investors.”

Investors are more interested in the new ventures that have this third-party endorsement because the client application process involves a rigorous review. In this case, the VDO reviews the entrepreneurs’ business plans and credentials and may even go as far as doing criminal background checks on a company’s top management team. Knowing companies have passed this initial screening process may be reassuring to investors. But Plummer said the big city connection may also be a factor.

“We think a major reason why this signal is so powerful in terms of attracting investment for rural startups is because the third-party organization’s offices are located in Oklahoma’s big cities. When your company is not located downtown, it helps to have friends downtown who can talk you up to potential investors,” he said. “I liken it to someone far away jumping up and down to try and get investors’ attention. We know investors’ attention is on downtown areas, but you are jumping up and down out in the countryside saying, ‘Please, look at me.’ This third-party endorsement is a way to get that attention.”

One important learning from the research is that the effect of such signals depends on the additional costs for entrepreneurs, whether it be paying for a third-party evaluation, finding the funds to launch a product, or incurring rental fees.

“The idea is, for a signal to be effective, there has to be some cost associated with that signal, or the signal can be easily dismissed,” said Plummer.

His research also shows that it’s an investors’ market.

“It’s kind of shocking that there are investors passing over good investments because the location of the business is too isolated, but that’s the reality. There are more good companies than there is money,” he said. “If you’re not conveniently located, most investors won’t care how good you are because there are probably two or three more companies located downtown that are much easier to get to than you in your isolated area.”

Plummer’s findings have prompted further questions he’d like to explore in the future. For instance, he would like to investigate if the timing of the move to commercial real estate matters. Some entrepreneurs may want to first launch their businesses from their homes in rural areas and then later move into commercial space in the city. Plummer would like to know if entrepreneurs should invest in commercial real estate early on or just prior to seeking investor funding.

He would also like to research whether his findings hold true in other locations, such as Canada. Plummer said given that Canada is one of the largest countries in the world in terms of land mass, yet is sparsely populated in relation to that land mass, he suspects his findings will be consistent here. And this could be particularly important to entrepreneurs in Canada.

“The term ‘middle of nowhere’ has a very different meaning in Canada than it does in the U.S.,” he said.

For updates on Plummer’s research, please visit /entrepreneurship

 

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