Recent Research: The role of alumni networks in VC fundraising

Loyalty to alma maters matters financially beyond March Madness™ and college sports betting, it turns out — to such a degree that policy makers, venture development organizations and university seed funds hoping to attract equity investments for local innovation startups should pay considerable attention to the educational attainment section of founders’ LinkedIn profiles or resumes. Additionally, seed and VC funds organized in part for economic development goals may want to tap alumni networks from the regions’ institutions of higher education to identify potential investment partners, according to a recently released working paper from a trio of professors in Iowa, Texas and Michigan.

In Alumni Networks in Entrepreneurial Financing, researchers found that alumni connections and familiarity may play a large role in early-stage funding for founders: nearly one-third of all early-stage investments in their Pitchbook-based dataset from 2002-2020 involved founders and investors who shared alma maters. Additionally, investors are 10 percent more likely to provide funding to startups created by founders from their alma mater than comparable startups without shared alumni status.

However, the role of alumni networks remains unclear, the authors warn. For investors, familiarity with and confidence in the research, faculty, coursework, and success of other alumni from their alma mater may be "soft" information that isn’t available about other startups seeking funds with founders who attended different colleges and universities. The authors consider this a form of information asymmetry in choosing between prospective deals and posit it might be one factor in skewing investments toward founders sharing educational backgrounds.

Another finding in the paper suggests that the prestige of an institution, measured by average SAT scores, is inversely related to the influence of alumni networks on the share of founder-investor linkages associated with the institution. In other words, an investor and founder sharing an alma mater matters more to the investment decision for lower-prestige schools than for higher-prestige schools. This finding highlights for TBED practitioners across the country, particularly those outside of traditional VC hotspots, the potential positive impact of working with alumni from local institutions to source and seed successful innovation startups.

The size of the alumni network of the founder’s institution appears to be another influential factor in securing early stage-fundraising. When controlling for variables such as the physical distance between the founder and investor, the age of the venture capital fund, and other factors that impact early-stage financing, the researchers found that founders that went to schools with large alumni networks were able to raise more capital than founders who did not. Specifically, founders that went to the same institution as the investor received 19 percent more in early-stage funding than founders who did not utilize their alumni networks. These findings are contained in Alumni Networks in Entrepreneurial Financing authored by Jon A. Garfinkel, professor of finance at the University of Iowa’s Tippie College of Business, Erik J. Mayer, assistant professor of finance at Southern Methodist University, and Emmanuel Yimfor, assistant professor of finance at the University of Michigan’s Ross School of Business.

Notably, relying on alumni connections to influence investment decisions appears to work out favorably for the investors. Investments in a startup with founders from the same alma mater were about 25 percent more likely to experience an initial public offering than a non-connected deal.

The research team analyzed PitchBook data on early-stage equity investment deals between 2002 to 2020, in which at least one of the founders of the start-up or the venture capital fund attended one of the 550 largest universities in the U.S.

More information on the role of alumni networks can be found here. Alumni Networks in Entrepreneurial Financing can be found here.