To be innovative is not enough: the signaling value of user entrepreneurship in start-up financing

This study explores whether user entrepreneurship – the commercialization of innovations triggered by user experience – influences the initial funding of start-ups. Drawing on signaling theory, we conceptualize user experience as an unobservable underlying quality – demand-side human capital – communicated to external capital providers through observable, costly actions. However, the credibility of this signal depends critically on the type of user experience. Using original survey data from Japan, we show that firms founded by professional user entrepreneurs are more likely to raise external capital than firms founded by non-user entrepreneurs, while end-user entrepreneurs do not differ significantly from non-user entrepreneurs in this regard. Specifically, such firms tend to raise initial funding through external equity financing rather than debt. We argue that professional user experience sends a high-commitment signal to investors, reducing information asymmetry more effectively than other types of user experience. The findings suggest that merely being innovative is insufficient unless backed by a credible signal of quality based on the entrepreneur’s human capital endowment.