The Matthew effect and Pareto Distribution in Startup Funding

Περίληψη

Most early-stage startups have a hard time getting funding from investors. This also means that bright ideas coming from early-stage startups may fail to see the light of day and die even before they make a real impact on society. Careful consideration of literature has pointed to
two factors for the low investment in early startups; the Matthew effect and the Pareto Distribution.

This paper highlights how these two effects negatively impact the funding
opportunities for early-stage startups by reviewing literature that highlights how investors choose to invest in different types of startups over others. The literature has highlighted that startups with longer business traction and more connections tend to be funded the most.

In contrast, those with little business traction and minimum connections get funded the least, hence indicating the Matthew Effect. Also, literature has highlighted that investors are clustering their investments to realize maximum gains from the niche areas they choose to invest in, indicating the Pareto Distribution, or 80/20 rule. Implications from this are important for early-stage startups that wish to find leverage to maximize their chances of getting funded while in their early stages.