For startups seeking capital, the name is no game

Careful what you say: The names entrepreneurs choose for their startups go a long way toward determining investor interest, according to a new SBU/Drexel/Villanova study.
By GREGORY ZELLER //

What’s in a name? Maybe everything, if you’re a startup in need of early-stage capital.

A new study by researchers from Stony Brook University, Drexel University and Villanova University explores the effects of “name fluency” on investors – that is, the familiarity, uniqueness and phonetic influence of a company name, and how venture capitalists tend to react.

By exploring “the two ways you can evaluate a name, two kinds of fluency,” the study aims to be a resource to entrepreneurs and investors alike, according to co-author Richard Chan, an assistant professor in SBU’s College of Business who conducted the research with Drexel professor Haemin Park and Villanova professor Pankaj Patel.

Richard Chan: Name it.

“You can evaluate on phonetics – how easily you can pronounce each phonetic segment, what you would refer to as ‘pronounceability,’” Chan told Innovate LI. “And you can evaluate on linguistic fluidity – how easily you can recognize a word, whether it appears frequently in English literature. What you may refer to as ‘uniqueness.’”

The study, “The Effect of Company Name Fluency on Venture Investment Decisions and IPO Underpricing,” examined 131 crowdfunded projects and 1,681 initial public offerings.

Among its key findings: Phonetics rule, as companies with easy-to-pronounce names performed better with seed-stage investors and on fundraising throughout the business-formation stages.

That’s not to say entrepreneurs who choose unique names for their enterprises can’t score with investors – though, in the long run, being too clever can cost you, according to Chan.

“[Uniqueness] is a bonus in the very early stages of venture investment,” the professor noted. “What we found is that uniqueness has a positive effect when it comes to getting the early funding, but in the late stages – like, an IPO – the uniqueness has no effect.”

But that’s not the case for the phonetically focused, according to the study, which shows that the easy-to-say have an easier time up and down the capital-investment line.

“The pronounceability has a positive effect for both early and late-stage investors,” Chan said. “Early-stage investors prefer to invest in companies whose names are fluent or pronounceable.”

The study does not examine the influence of company names on target markets, instead positioning itself as a resource for factions on both sides of the startup-capital coin.

“We were mainly interested in determining how entrepreneurs can get better funding,” Chan noted. “That’s why we looked at investment decisions across different stages.”

The study, coming soon in its entirety to the academic finance journal Venture Capital, is not the first collaboration for Chan, Park and Patel, who shared an office as PhD candidates at the University of Washington.

Park, Patel: The psychology of business.

And it’s not their last: The team is again combining the resources of the Villanova, Drexel and SBU business schools, this time examining the “determinants” influencing online crowdfunding efforts.

Basically, the researchers will consider the project, the entrepreneur(s), the geographic location and the year of the crowdfunding campaign – no two are the same – for a “macro level” look at how these factors contribute to the campaign’s performance, according to Chan.

Like their study exploring the influence of startup names on pre-venture and early-stage financing, the researchers see the crowdfunding research as another tool – potentially, a critical one – in an innovation economy built on new business formation.

“We believe people can be both rational and irrational at the same time,” Chan said. “They tend to be influenced by both important information and less-relevant information.

“By exploring how informational cues and non-informational cues could influence a business decision, we’re trying to help the entrepreneurs and the investors,” he added. “Entrepreneurs can better prepare when they pitch their ideas to investors, and investors can improve the way they make their decisions, to be more effective and efficient.

“Those are our ultimate goals.”

 

 


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