Can a startup’s social capital affect investment?
Rami Deeb is an executive at Talkwalker, a "conversational intelligence" company that delivers social media insights to help brands grow
Venture capitalists are increasingly relying on social media data to make informed decisions before funding a startup. Prior to infusing large sums of capital into a startup, venture capitalists ensure that a startup does not pose any potential reputational risk. To help mitigate such risks, venture capitalists utilise social frameworks like conversational intelligence to provide them with a holistic view on a startup’s social capital.
Conversational Intelligence offers a new lens through which venture capitalists have a holistic view of a startup’s reputation and overall sentiment. Though the approach differs from one VC to another, a startup’s social capital is increasingly playing a major role in the decision-making process before signing a deal, especially with socially aware investing, that is environmental, social, and corporate governance (ESG) investing on the rise.
Conversational intelligence, by definition, is a venture capitalist’s ability to establish a shared sense of reality with the startup, creating a consistent and relevant narrative with all members of the value chain to connect, engage and navigate the tech ecosystem. In a nutshell, conversational intelligence lies at the foundation of enhanced relationships with startups and partnerships with limited partners, which ultimately leads to becoming more agile and aware of trends. Conversational intelligence gives VCs an objective view of the state of their assets in terms of sentiment and overall reputation.
Aptly named, the social capital of a startup is defined by three key metrics: reputation (trustworthiness, credibility, safety), network (the founders and who they know), and values (what the company stands for and the problem it’s working towards solving).
Part of venture capitalist’s due diligence relies on assessing a startup’s brand, tone of voice, and social media efforts. Also, venture capitalists look at the number of followers a startup has, community growth rate, unfiltered consumer feedback, and how the startup reacts to criticism.
Financial statements and reports are the industry standard when it comes to assessing a potential venture. However, social media data adds another dimension that enables investment analysts to preempt any necessary measures, and to manage relational risks especially with limited partners.
One thing is definite, risk is an imminent part of any investment, and safeguarding a VC’s reputation pays dividends both in the short and the long run.
Before the handshake
VCs are constantly on the lookout for potential opportunities to increase their deal flow, however, sourcing those deals often comes from their personal network of former colleagues, investors, and entrepreneurs. Another key source of deals is by proactively seeking out entrepreneurs based on market research and analysis of consumer behaviour.
What this implies is that VCs are the ones who often initiate the conversation with entrepreneurs which could ultimately lead to closing a deal. Yet, for the initial outreach to occur, VCs probe a startup’s social capital, which comprises the founding management team and the brand itself.
VCs leverage conversational intelligence in order to:
- Protect their reputation from potential hazards, particularly if their long-term goal is for the startup to be merged, acquired, or have an initial public offering (IPO) exit. On the flipside, some VCs mitigate reputational risk by having modest performance expectations from the startups and working closely with the team to ensure near-term goals are met (imagine the public image of a startup that’s constantly failing to meet its goals). A venture capital’s reputation is precarious, especially if the entire portfolio of startups fails to achieve its goals.
- Foresee opportunities and anticipate consumer behaviour especially with untapped market segments where historic data does not exist. Before investing in a startup, VCs would want to know the values that the founders reflect to the public, and more importantly the overall affinity from consumers towards the company. Having this data-driven and forward-thinking mindset towards sentiment would ensure that the company would remain customer-centric, and ultimately relevant. Once an investment has been made, the value creation team will work closely with the founders to better position the company in the public eye, as well as enable the founders to meet other potential investors.
- Establish credibility and trust across borders: Before signing any deal, it is critical for a VC to know if the startup they’re considering is a cultural fit. Industry agnostic venture capital firms often have the reputation that they’re solely driven by the return on investment, however, the reality is that such VCs aim to find startup founders who are team players and are happy to become ‘brand ambassadors’. It goes without saying that financial capital attracts startup founders, whereas great startup founders attract an even more valuable asset: credibility.
Venture capitalists are in the business of making money and to sustain that bottom line for the long run. Studying the competitive advantage of a startup could easily be achieved by looking at the startup’s secret sauce, whether that is an ahead-of-its-time technology, an intellectual property, or even an innovative sales/distribution method. Understanding customer validation requires more granular data that goes beyond the early stages of beta testers (think lower churn rate, increased customer retention, and overall positive sentiment reviews).
Conversational intelligence platforms can be an indispensable tool for venture capitalists who are transitioning from a purely financial decision-making process towards an ESG-aware one.