Certification or Cash Prize: The Heterogeneous Effect of Venture Competitions

Abstract

Despite a rise in scholarly interest in venture competitions, there is still no consensus on exactly why they affect startups’ business success. Some scholars argue that venture competitions’ main appeal lies in the cash prize they offer. Others claim that what matters most is the certification of startup quality that comes with winning the competition. In this paper, we reconcile these results and argue that, under the right circumstances, both the certification and cash prize can improve startups’ prospects. We model and estimate the impact of venture competitions on startup performances using original data on about 1000 startups that have participated in the leading Swiss venture competition. In line with previous findings, we find that venture competitions offer substantial benefits to participating startups. However, these benefits are not distributed equally among participants. In sectors where quality can be more objectively assessed (e.g., hard sciences), startups enjoy long-term value from the certification. The information it provides accelerates the termination of low-quality startups and improves external funding opportunities for high-quality startups. In other sectors (e.g., internet and mobile), the certification proves too noisy a signal of quality. Concerning the cash prize, we find that it only increases the short-term survival of startups with low running costs, with no impact on the more capital-intensive ventures. This finding is evidence that the cash prize’s main role is to extend startups’ runway. Our results underline industry-specific heterogeneity in startups early-stage support needs, which bears implications for the design of entrepreneurial programs.

Keywords: entrepreneurial finance, venture competition, program evaluation, certification, expert evaluation

JEL Classification: D22, D80, G24, M13, 031