FinTechs Playing in the Sandbox — The Effect of Interacting Signals on Funding

Regulatory sandboxes are test environments for financial technology ventures (FinTechs) and provide these ventures with regulatory legitimacy. Yet there is no sufficient empirical evidence on the consequences of a membership in regulatory sandboxes. We use a dataset of 184 FinTechs from the regulatory sandbox in the United Kingdom and comparable FinTechs and find that by graduating from the sandbox ventures gain a costly regulatory legitimacy signal and improve their funding. However, recent signaling theory research highlights the importance of signal interactions between costly and costless signals. We show that the legitimacy signal from regulatory sandboxes interacts with the venture quality signals entrepreneurial orientation (EO) and founding experience. EO rhetoric as a costless signal contradicts with regulatory legitimacy and reduces the impact of legitimacy signaling through the sandbox. However, through an additional costly signal of founding experience, the weakening impact of EO can be mitigated