Signaling Shaped by the Context: Early-Stage Funding in the Turkish Startup Ecosystem

Abstract

Providers of early-stage financing tend to be highly selective due to significant uncertainty surrounding the future potential of new businesses. Since these ventures typically lack established performance records, potential investors focus on observable qualities of the founder as signals of the venture's viability and chances for success in the market. Despite extensive research on new venture signaling and financing, the impact of context on investors' decision-making has not been thoroughly explored. This oversight is significant because both firm performance and investor decision-making are influenced by economic, social, and institutional contexts. This study aims to address this gap in the literature by identifying sector-level, entrepreneurial ecosystem-level, and economy-level factors that serve as contextual influences on new venture signaling. We examine early-stage angel and venture capital investments in Turkey, which is an emerging economy with a thriving entrepreneurial ecosystem. Our results on the sample of 2,231 startups show that returnee founders are more likely to obtain early-stage financing than local entrepreneurs, and investors tend to hold particularly favorable views of returnee entrepreneurs in high-tech industries. Moreover, the likelihood of securing investment increases with the diversity of the founder's prior work experience, a trend that has been amplified during the heightened turbulence caused by the COVID-19 pandemic. Finally, investors' evaluations of female entrepreneurs slightly improve as women-led startups become more prevalent in the ecosystem and gain legitimacy. These findings indicate that finance providers have a significantly broad attention span for context-specific influences, and their decisions are shaped by both rational and socio-cognitive processes.