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.