Signaling shaped by the context: Early-stage funding in the Turkish startup ecosystem

Entrepreneurial ventures play a vital role in economic systems as they stimulate innovation, foster technological progress, and contribute to economic development. Due to their resource constraints, particularly in the early stages, attracting external finance is crucial for survival and market success (Soto‐Simeone et al., 2020). Early-stage funding provides greater opportunities to validate business ideas, develop new products, and execute market strategies (Block & Colombo, 2006). Concurrently, it helps to commercialize innovations and fosters firm growth (Engel & Keilbach, 2007).

Potential investors, however, tend to be highly selective due to the significant uncertainty surrounding the viability and market outcomes of new businesses (Islam et al., 2018; Miloud et al., 2012). Due to the absence of past achievements indicative of unobserved quality, such as verified demand for the product or service, investors often rely on signals such as third-party endorsements or founder characteristics to draw conclusions about the future potential of new ventures (Colombo et al., 2023; Vazirani & Bhattacharjee, 2021).

The role of signals in new venture financing has been extensively studied in the literature (Colombo, 2021; Svetek, 2022). An important concept developed by this body of work is signal strength (or signaling effectiveness), defined as the influence of signals on receivers’ behaviors (Connelly et al., 2011; Gulati & Higgins, 2003; Lampel & Shamsie, 2000). Variations in signal strength may relate to the characteristics of the sender, signal, receiver, and environment (Colombo, 2021). Among these, the environment is perhaps the least investigated factor. To the best of our knowledge, available research has only examined how the level of noise in the financing platform can change signaling effectiveness (Drover et al., 2017; Steigenberger & Wilhelm, 2018). Despite this limited attention, the environmental context in which signaling occurs is critical, as the performance of new ventures is influenced by various temporal and spatial factors (Debrulle et al., 2023; Ferrati & Muffatto, 2021; Soto‐Simeone et al., 2020), and investors’ decision-making may be impacted by economic, social, and institutional contexts (Berger & Köhn, 2020; Colombo, 2021). Therefore, existing research falls short of providing a comprehensive understanding of how new ventures access early-stage finance, which has significant implications for their survival and market performance. To address this gap in the literature, we examine how new venture signaling and financing are shaped by the environmental context. More specifically, we analyze founders’ background, experience, and gender as signals of human capital and propose sector-, entrepreneurial ecosystem-, and economy-level factors that can moderate the effect of these signals on the likelihood of obtaining early-stage finance.

Our study focuses on startups and investment activity in the Turkish startup ecosystem from 2010 to 2023. İstanbul, the central hub of this ecosystem, had the most robust early-stage funding activity among the top 100 emerging ecosystems in 2023 (Startups.watch, 2024). We examine angel and venture capital investments during the early stages, where signals have a greater significance in financing decisions due to higher information asymmetry between investors and entrepreneurs, as well as greater uncertainty regarding future projections of the venture (Colombo, 2021; Connelly et al., 2011).

The remainder of this work is structured as follows. Section 2 proposes a theoretical framework for contextual influences on new venture signaling, with a focus on emerging economy dynamics. In Section 3, we describe the empirical setting of the study and the methodology. Section 4 presents the empirical analyses and results. Finally, in Section 5, we discuss the findings and outline their theoretical implications.

The early stages of a venture can be very challenging due to several liabilities of newness (Hannan & Freeman, 1984; Stinchcombe, 1965), and initial resources to support business operations are typically supplied by founders, their families, and close contacts (Ostgaard & Birley, 1996; Shepherd et al., 2021). Attracting external finance, especially in these early stages, is vital for developing the business and acts as a buffer against emerging challenges (Debrulle et al., 2023; Linder et al., 2020). This funding is particularly important for startups aiming for fast growth with innovative products and services, as it enables them to experiment with new ideas and support marketing activities (Block & Colombo, 2006).

Since new ventures lack established performance records (e.g., proven products, services, and technologies), providers of early-stage finance, such as banks, venture capital firms, and angel investors, face significant uncertainty about the underlying quality of these ventures. They accordingly rely on certain signals that could inform them about the venture’s prospects (Cumming et al., 2023; Ferrati & Muffatto, 2021). Observable traits of the founder, like education and experience, are strong indicators of human capital and signal a new venture’s potential success to external investors⁽¹⁾ (Colombo, 2021; Vazirani & Bhattacharjee, 2021).

Emerging economies like Turkey typically exhibit weaknesses in educational infrastructure and structural deficiencies, leading to poor interaction among academia, industry, and government. Consequently, these economies experience significant gaps in technical, managerial, and entrepreneurial knowledge (Aidis et al., 2008; Cao & Shi, 2021). Exposure to advanced economies through education or work experience provides access to these critical resources. This has given rise to a new category of entrepreneurs known as returnees, i.e., individuals who have work experience and/or education in a developed country and establish ventures in their home country. Access to higher-quality education, state-of-the-art technology, and managerial practices, combined with international work experience and networks, equips them with strong capabilities for market performance and global scalability (Armanios et al., 2017; Li et al., 2012). Given these strengths, potential investors may view new ventures established by returnee entrepreneurs as more likely to succeed in both local and global markets. Therefore, we formulate the following hypothesis:

Hypothesis 1 (H1): New ventures founded by returnee entrepreneurs will be more likely to obtain early-stage funding.

However, despite several advantages, returnee entrepreneurs face specific challenges when doing business in their home countries. Survival and success in an emerging market context require unique capabilities to overcome institutional voids and the ability to quickly adapt to economic and political instabilities (Khanna et al., 2015; Sadeghi et al., 2019). Due to deficiencies in formal legal and regulatory institutions in these markets, economic transactions rely heavily on informal, trust-based relationships (Cao & Shi, 2021; Puffer et al., 2010). Returnee entrepreneurs’ limited local connections and weak cognitive and social embeddedness may create barriers to business activity in their home country (Armanios et al., 2017; Li et al., 2012).

The advantages of returnee entrepreneurship may be more significant, and its limitations may be less restrictive in high-tech sectors where access to cutting-edge technology and connections in advanced economies is more crucial. Specifically, returnees can be quicker and more effective in identifying new technology trends and knowledge gaps between developed economies and their home country. Simple technology transfer and adaptation to the local context can provide a competitive advantage, especially in high-tech industries in emerging economies (Appiah-Adu et al., 2018; Yang & Maskus, 2009). Returnee entrepreneurs can also utilize their networks abroad to access high-tech markets in advanced economies where supply and demand factors are more favorable (Bai et al., 2017, 2018). Therefore, a returnee founder can serve as a stronger signal of success for new ventures operating in high-tech industries. We thus argue that:

Hypothesis 1a (H1a): The hypothesized effect in H1 will be stronger for new ventures operating in high-tech industries.

Along with superior capabilities and global reach, another reliable source of information for prospective investors is the local networks of entrepreneurs. While important to entrepreneurs everywhere (Davidsson & Honig, 2003; Florin et al., 2003), personal and professional connections can play a more significant role in addressing specific challenges within emerging market economies. Importantly, entrepreneurial resource acquisition in an emerging market context largely depends on network-based trust and norms of reciprocity (Puffer et al., 2010; Webb et al., 2020). Social networks can substitute for weak formal institutions, securing contract enforcement and intellectual property protection (Hoang & Antoncic, 2003; Peng, 2003). Firms operating in emerging market economies also face greater environmental turbulence than those in developed countries (Liu et al., 2019; Manimala & Wasdani, 2015). Continuous access to new cognitive and material resources is essential for coping with this turbulence, and this resource flow can be facilitated by a broad social network with diverse partners (Burt, 1992; Granovetter, 1973; see also Ma et al., 2009). While the connections of an entrepreneur are not directly observable to external investors, the entrepreneur’s previous work experience can serve as a strong signal. This is because social networks, especially professional connections, are primarily developed through work experiences (Felício et al., 2012; Gabrielsson & Politis, 2012). Based on these considerations, we propose that

Hypothesis 2 (H2): New ventures founded by entrepreneurs with more work experience will be more likely to obtain early-stage funding.

While broad and diverse networks of entrepreneurs developed through professional experiences provide strong capabilities to perform well in a turbulent context, maintaining and monitoring these connections can be costly (Shipilov et al., 2023). Therefore, the marginal benefit of having such networks is likely to be higher in contexts characterized by greater turbulence. Uncertainty and turbulence in economic systems have intensified globally due to the COVID-19 pandemic, a major exogenous shock in recent years. Responding to continuous change has become critical for business success in the post-pandemic environment (Krammer, 2022; Lamorgese et al., 2024). Entrepreneurs with broader and more diverse networks can be more adaptive to this environment since they have better information flow and greater flexibility (Burt, 1992; Granovetter, 1973). Therefore, we expect that the founder’s prior work experience (which serves as a signal of a broad and diverse network) will be a stronger signal of success in the post-COVID economic environment.

Hypothesis 2a (H2a): The hypothesized effect in H2 will be stronger in the post-COVID period.

In contrast to the positive signals previously discussed, some characteristics of entrepreneurs can be viewed as negative indicators, suggesting a lack of certain capabilities and an increased risk of failure (Colombo, 2021). One example is the perception of female entrepreneurs, which is often linked to less favorable business outcomes (Dean et al., 2019; Gupta et al., 2009). The gender gap in access to new venture financing (Balachandra, 2020; Ewens & Townsend, 2020; Leitch et al., 2018) also indicates lower trust in the credentials of female entrepreneurs. Gender discrimination tends to be higher in developing countries, where women face greater barriers in education, employment, healthcare, and legal rights (The World Bank, 2024; The World Economic Forum, 2023). Women entrepreneurs in developing economies also encounter more significant market constraints and unpredictable challenges compared to their peers in developed countries (Bastian et al., 2018; Panda, 2018).

Despite a slight increase in women’s startup activity over the last two decades, female entrepreneurship remains significantly less common than male entrepreneurship (Global Entrepreneurship Monitor, 2021). A rising number of women-led startups and the emergence of successful models can increase recognition of female entrepreneurs and enhance investor trust in them. As suggested by previous institutional research, a specific form, structure, or practice gains cognitive legitimacy as it is increasingly adopted by community members (Aldrich & Fiol, 1994; Tolbert & Zucker, 1983). Cognitive legitimacy can also be enhanced by the increased observation of successful exemplars (DiMaggio & Powell, 1983; Strang & Meyer, 1993). Female entrepreneurs can bring unique insights and business acumen, contributing to better communication and decision-making in their organizations and positively impacting venture performance (Horvatinovic et al., 2023; Lückerath-Rovers, 2013). Consequently, we argue that investors in an entrepreneurial ecosystem will evaluate the capabilities of female entrepreneurs more favorably as women-led startups become more common and female entrepreneurship gains legitimacy. The specific hypothesis is as follows:

Hypothesis 3 (H3): New ventures founded by female entrepreneurs will be more likely to obtain early-stage funding as the number of women-led startups in the ecosystem increases.

Our findings indicate that returnee entrepreneurs with better access to advanced technical and managerial knowledge receive favorable evaluations from investors in emerging market economies. This effect is particularly strong for startups in high-tech industries, while it appears to be only marginally significant for those in low-tech industries. This suggests that investors might have concerns about potential weaknesses associated with returnee entrepreneurs, viewing the situation as a double-edged sword. Consequently, investors are likely to place greater trust in a returnee entrepreneur when the advantages, such as access to advanced technology, outweigh any drawbacks, like difficulty adapting to the local business environment.

Regarding the impact of a founder’s work experience, our findings indicate that the diversity of that experience, specifically, the total number of different firms in which the entrepreneur has worked, positively influences investors’ funding decisions. A diverse work background allows entrepreneurs to build a broad and diverse social network, which investors deem essential for gaining a competitive advantage in the uncertain and turbulent environment of emerging market economies. We further observe that investors respond more positively to this signal during the heightened turbulence caused by the COVID-19 pandemic. This finding, again, indicates that investors make a holistic evaluation of the benefits and drawbacks of an entrepreneurial characteristic and can be sensitive to the shifts in the balance between the advantages and disadvantages. Managing a broad and diverse network is very costly and challenging (Shipilov et al., 2023), which can become a significant burden, especially in stable industry environments where the flexibility offered by such networks may not provide substantial benefits.

We find partial support for the argument that investors will have a more favorable view of startups founded by female entrepreneurs as the number of female entrepreneurs in the ecosystem increases. Lack of full support may be because the current level of female entrepreneurship in the ecosystem we studied has not yet reached a threshold that would grant cognitive legitimacy, despite the increasing numbers. According to the Global Entrepreneurship Monitor (2021), Turkey lags other emerging markets such as BRIC countries in terms of the ratio of female entrepreneurs to male counterparts, which may be related to very low levels of structural and cultural support that women receive to run a business. Furthermore, the persistent gender gap in obtaining new venture finance, despite the increasing prevalence of female entrepreneurs in this startup ecosystem, might have led to a biased view of female entrepreneurs and an increased threshold for legitimacy and trust. As a result, growing numbers alone may not be sufficient to block the unbalanced flow of status and resources to male entrepreneurs.

Researchers have recently emphasized the need for a deeper understanding of how context affects new venture signaling processes and outcomes (Colombo et al., 2023; Cumming et al., 2023). This study addresses these calls by examining investors’ consideration of founder characteristics as signals of success shaped by contextual factors at the sector, ecosystem, and economic system levels. We provide evidence for how signal strength (Colombo, 2021; Connelly et al., 2011) can be shaped by the environmental context. Notably, our findings reveal the complex screening utilized by early-stage investors. Their attention spans a wide array of contextual factors that can affect entrepreneurial success. These include established resource dependencies, such as an emerging market’s reliance on advanced economies, particularly in high-tech industries, and exogenous shocks that disrupt the economic system, like the COVID-19 pandemic. Furthermore, investor decision-making is shaped not only by rational calculations, such as assessing the alignment between founders’ characteristics and performance requirements, but also by socio-cognitive processes within a specific entrepreneurial ecosystem, like the growing legitimacy of female entrepreneurship.

While this study focused on the characteristics of single-founder companies, it is worth noting that in companies with multiple founders, differences in their backgrounds and networks can lead to synergistic or complementary effects on the performance outcomes of new ventures (Franke et al., 2006; Gompers et al., 2020). Since many new ventures are established by teams instead of solo entrepreneurs, it is crucial to comprehend how team characteristics act as signals and how this signaling process is influenced by contextual factors (Esen et al., 2023).

One limitation of this study is the inference of investor decision-making without directly observing their cognitive processes. Utilizing surveys, interviews, and archival data to examine the criteria behind investors’ decisions may result in omitted variable bias and potential issues with reverse causality. These challenges can be addressed through experimental designs that control for potentially confounding environmental attributes. Future research may utilize techniques such as policy capturing to directly analyze how investors make decisions (Aiman-Smith et al., 2002; Priem et al., 2011).

The findings of this study should be interpreted within the context of the Turkish startup ecosystem. Similar to those in other emerging market economies, this ecosystem suffers from an underfunded educational system and knowledge gaps (Cao & Shi, 2021), putting returnee entrepreneurs from developed economies in a higher status position. Remarkably, given extremely low levels of general trust in Turkish society (Inglehart et al., 2020), economic transactions in Turkey rely heavily on network-based trust and norms of reciprocity (Çetin & Demiral, 2018; Kayaoglu, 2017). Investors in this context might attach greater importance to the network structure of the entrepreneurs in making funding decisions. Furthermore, although social and cultural support for entrepreneurship in Turkey is close to the BRIC average, this country lags in terms of the support that women receive to run a business and the prevalence of female entrepreneurship (Global Entrepreneurship Monitor, 2021). Future research on startup ecosystems in other emerging market environments will contribute to the generalizability of the insights developed here. Similarly, we did not examine whether and how signaling processes vary for investor types and different kinds of new ventures, such as startups and corporate ventures. Researchers can study these dynamics to provide a more nuanced understanding of new venture signaling and financing.

The findings of this study can guide policy in emerging market economies where obtaining external investment is challenging for new ventures (Ahlstrom & Bruton, 2006; Klonowski, 2007). Investors’ favorable evaluation of returnees compared to local entrepreneurs can facilitate reverse brain drain. Yet policymakers can take initiatives to support qualified local entrepreneurs in accessing local and global financing opportunities. This is especially important for high-tech industries where poor trust in local capabilities is more pronounced. Another suggestion is to support business partnerships between returnees and local entrepreneurs to generate positive spillover and a more convincing proposal for prospective investors.

The findings also show that entrepreneurs can increase their chances of external finance by building work experience, preferably in multiple firms or sectors, before establishing a business. In Turkey, the prevalence of early-stage entrepreneurial activity is highest among individuals aged 18–34 years (Global Entrepreneurship Monitor, 2021), who are likely to lack long and diverse work experience. People with entrepreneurial intentions may either consider starting careers earlier during their university years or establish their business while gaining industry experience.

Finally, female entrepreneurs encounter significant challenges in securing venture capital and angel investment, and these obstacles are only somewhat alleviated by their growing prevalence and acceptance. Policymakers can enhance support for female entrepreneurs by implementing targeted funding programs and offering training and mentorship opportunities. Addressing gender gaps in entrepreneurship will enhance equity and improve startups’ market and social outcomes (Berger & Kuckertz, 2016; Jennings & Brush, 2013).

Authors state no funding involved.

Başak Topaler: Conceptualization, Data Curation, Formal Analysis, Methodology, Writing – Original Draft Preparation. Hamza Khan: Data Curation, Methodology, Review & Editing. All authors read and approved the final manuscript.

Authors state no conflict of interest.