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The evolution and adoption of equity crowdfunding: entrepreneur and investor entry into a new market

Published on Aug 1, 2018in Small Business Economics3.56
· DOI :10.1007/s11187-018-0009-5
Saul Estrin43
Estimated H-index: 43
(LSE: London School of Economics and Political Science),
Daniel Gozman3
Estimated H-index: 3
(University of Reading),
Susanna Khavul14
Estimated H-index: 14
(SJSU: San Jose State University)
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Abstract
Equity crowdfunding (ECF) offers entrepreneurs an online social media marketplace where they can access numerous potential investors who, in exchange for an ownership stake, may supply them with finance. In this paper, we describe the evolution of this market in the UK. Using an inductive qualitative longitudinal research design, we analyse the emerging views of entrepreneurs and investors towards ECF. Our interviewees include large and small-scale investors, as well as market participants who have chosen not to invest or raise funds via ECF. We find that the large financial flows to entrepreneurs in the UK via the ECF platforms, nearly half a billion GBP since 2011, have probably been largely incremental to traditional sources of early stage entrepreneurial finance. Moreover, our research indicates that for the most part, investors appear to understand and appropriately evaluate the risks that they are bearing; ECF investments are perceived as a high risk, high return component within individuals’ portfolios. Investors also use their communication with peers and entrepreneurs via the ECF platform as a learning tool. On the entrepreneurs’ side, ECF allows them to test their products, to develop their brand, to build a loyal customer base and to turn customers into investors. We conclude that policymakers, with the support of a locally appropriate regulatory framework, could support equity crowdfunding as one of the market choices available for entrepreneurs looking to start or grow their ventures.
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  • References (50)
  • Citations (12)
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References50
Newest
Published on Mar 3, 2019in Financial Management1.54
Douglas J. Cumming44
Estimated H-index: 44
(FAU: Florida Atlantic University),
Gaël Leboeuf2
Estimated H-index: 2
,
Armin Schwienbacher23
Estimated H-index: 23
(Skema Business School)
Reward-based crowdfunding campaigns are commonly offered in one of two models. The “Keep-It-All” (KIA) model involves the entrepreneurial firm setting a fundraising goal and keeping the entire amount raised, regardless of whether or not they meet their goal, thereby allocating the risk to the crowd when an underfunded project goes ahead. The “All-Or-Nothing” (AON) model involves the entrepreneurial firm setting a fundraising goal and keeping nothing unless the goal is achieved, thereby shifting ...
Published on Feb 1, 2018in Small Business Economics3.56
Christina Gunther4
Estimated H-index: 4
(WHU - Otto Beisheim School of Management),
Sofia Johan23
Estimated H-index: 23
(York University),
Denis Schweizer12
Estimated H-index: 12
(Concordia University)
This paper presents the first evidence of the influence of geographic distance among retail, accredited, and overseas investors and venture location in an equity crowdfunding context. By analyzing investment decisions, we show that geographic distance is negatively correlated with investment probability for all home country investors. Our comparison of home country and overseas investors reveals that overseas investors are not sensitive to distance. However, when comparing only home country inve...
Published on Feb 1, 2018in Small Business Economics3.56
Friedemann Polzin8
Estimated H-index: 8
(UU: Utrecht University),
Helen Toxopeus1
Estimated H-index: 1
,
Erik Stam25
Estimated H-index: 25
(UU: Utrecht University)
Crowdfunding has enabled large crowds to fund innovative projects. This type of funding might tap into the wisdom of crowds who were previously disconnected from the funding process. We distinguish between in-crowd and out-crowd funders (with and without ties to project creators) in order to test for heterogeneity in their information use. Based on the analysis of a large-scale survey amongst project funders, this paper shows that in-crowd investors rely more on information about the project cre...
Published on Oct 1, 2017in Small Business Economics3.56
Lars Hornuf11
Estimated H-index: 11
(University of Trier),
Armin Schwienbacher23
Estimated H-index: 23
(Skema Business School)
In this paper, we show that too strong investor protection may harm small firms and entrepreneurial initiatives, which contrasts with the traditional “law and finance” view that stronger investor protection is better. This situation is particularly relevant in equity crowdfunding, which refers to a recent financial innovation originating on the Internet that targets small and innovative firms. In many jurisdictions, securities regulation offers exemptions to prospectus and registration requireme...
Published on Aug 1, 2017
Thomas F. Hellmann28
Estimated H-index: 28
,
Paul Schure6
Estimated H-index: 6
,
Dan Vo2
Estimated H-index: 2
Understanding an entrepreneurial finance ecosystem requires an appreciation of how different investors interact with each other. Angels and venture capitalists constitute two of the most important equity investors for start-ups. In this paper we develop and empirically test some hypotheses about the interactions between these two investor types. The focus is on the dynamics of the funding path of start-up companies. We distinguish complements and substitutes relationships between investor types,...
Published on May 1, 2017in Entrepreneurship Theory and Practice6.19
Will Drover7
Estimated H-index: 7
,
Matthew S. Wood15
Estimated H-index: 15
(SIU: Southern Illinois University Carbondale),
Andrew Zacharakis21
Estimated H-index: 21
(Babson College)
This research explores whether relationships between young firms and certain early–stage seed funders portray certification effects that influence venture capitalist (VC) screening decisions. Specifically, we analyze how varying attributes of angel and crowdfunded investments certify venture quality in the minds of VCs as they make due diligence screening decisions. Results from two experiments utilizing 104 VCs making 1,036 screening decisions demonstrate that the heterogeneous nature of the at...
Published on Mar 1, 2017in Entrepreneurship Theory and Practice6.19
Christopher Courtney1
Estimated H-index: 1
,
Supradeep Dutta1
Estimated H-index: 1
,
Yong Li14
Estimated H-index: 14
This article draws on information economics to examine when signals and endorsements obtained from multiple information sources enhance or diminish one another's effects. We propose that signals through start–up actions (use of media) and characteristics (crowdfunding experience) can mitigate information asymmetry concerns about project quality and founder credibility, enhancing the project's likelihood of attaining funding. Further, we posit that while start–up–originated signals offset each ot...
Published on Mar 1, 2017in Entrepreneurship Theory and Practice6.19
Aaron F. McKenny12
Estimated H-index: 12
,
Thomas H. Allison9
Estimated H-index: 9
+ 2 AuthorsR. Duane Ireland60
Estimated H-index: 60
The explosion of crowdfunding within entrepreneurial circles is attracting increased academic interest in the nature of crowdfunding, its antecedents, and its consequences. In an effort to help researchers concentrate their inquiry on the most promising questions and theories involving crowdfunding, we surveyed key thought leaders within the entrepreneurship field—the Entrepreneurship Theory and Practice editorial review board—regarding what inquiry they believe is needed. Their responses offer ...
Published on Aug 1, 2016in Social Science Research Network
Douglas J. Cumming44
Estimated H-index: 44
,
Yelin Zhang3
Estimated H-index: 3
Crowdfunding platform due diligence comprises background checks, site visits, credit checks, cross checks, account monitoring, and third party proof on listed projects. Based on data from over 70% of Canadian platforms over the years 2013-2016, we find that due diligence application is associated with busyness of platform employees, sophistication of platform service indicated by fee structure, and type or complexity of campaigns. We hypothesize that due diligence facilitates fund-raising by scr...
Cited By12
Newest
Simon Kleinert1
Estimated H-index: 1
,
Christine Volkmann10
Estimated H-index: 10
ABSTRACTStart-ups are increasingly using equity crowdfunding to raise necessary funding at an early stage. In this rather new form of financing, potential investors communicate with each other and the entrepreneurs typically through the discussion boards of mediating online platforms. Using a mixed-methods approach, this explorative study analyses the role of investor-initiated discussions in equity crowdfunding. First, we develop a framework and categorize 574 interactions between potential inv...
Published on Jul 1, 2019in Journal of Corporate Finance2.35
Thang Nguyen (Coventry University), Joe Cox8
Estimated H-index: 8
(Athabasca University),
Judy Rich (University of Portsmouth)
Abstract In this study, we use the options theory of investment to investigate the funding behaviour of investors in equity crowdfunding. Options theory argues that when faced with uncertainty, investors have the ‘option’ to delay their irreversible investments, although incur a cost in doing so. Demonstrating that investments in equity crowdfunding are characterised by low levels of irreversibility (i.e., they are semi-reversible), moderate costs of delay and high levels of uncertainty, we foll...
Published on Jun 11, 2019in Small Business Economics3.56
Derek Eldridge4
Estimated H-index: 4
(University of Manchester),
Tahir M. Nisar12
Estimated H-index: 12
(University of Southampton),
Mariateresa Torchia7
Estimated H-index: 7
(International University of Monaco)
We examine the impact of equity crowdfunding on innovation and growth opportunity within small- and medium-sized enterprises. While previous studies have generally focused on the realm of crowdfunding and how it can close the financing gap for small firms, recent academic attention has turned toward assessing the outcome of equity crowdfunding, measured in terms of successes (or failures) in post-campaign firm financing. Using data from Fame BVD for small firms operating in the UK, we investigat...
Published on Jun 3, 2019in Small Business Economics3.56
Douglas J. Cumming44
Estimated H-index: 44
(FAU: Florida Atlantic University),
Michele Meoli13
Estimated H-index: 13
(University of Bergamo),
Silvio Vismara20
Estimated H-index: 20
(University of Bergamo)
This paper investigates whether gender, age, ethnicity, and geography affect the choice of equity crowdfunding offerings vs initial public offerings (IPO) on traditional stock markets and whether these characteristics increase the likelihood of a successful offering. Using 167 equity offerings in Crowdcube and 99 equity offerings on London’s Alternative Investment Market raising between £300,000 and £5 m, we find that companies with younger top management team (TMT) members are both more likely ...
Published on May 1, 2019in Journal of Economics and Business
Giuliana Borello1
Estimated H-index: 1
,
Veronica De Crescenzo1
Estimated H-index: 1
,
Flavio Pichler2
Estimated H-index: 2
Abstract This study explores success factors in European crowdinvesting campaigns. Using a unique and hand-collected dataset of 212 crowdinvesting campaigns promoted on three active European crowdinvesting platforms from July 2011 to July 2015, the paper contributes to the literature on crowdinvesting because it is the first cross-country analysis of crowdinvesting, providing a deeper understanding of equity campaign success factors. The paper finds that equity campaigns promoted by early-stage ...
Published on Apr 24, 2019in European Journal of Finance1.12
Antonella Francesca Cicchiello , Francesca Battaglia , Stefano Monferrà (UCSC: Catholic University of the Sacred Heart)
ABSTRACTSome European countries offer tax incentive schemes to investors and companies in crowdfunding. On one hand, they could be seen as a tool to reduce the system’s dependence on banks and incr...
AbstractThis article deals with the issue of the harmonization of crowdfunding regulation in Europe, which is currently the subject of debate by policymakers and regulators. For this purpose, it provides an in-depth comparative analysis of the crowdfunding regulatory frameworks in force in the UK, France, Italy, and Spain. Findings show that regulatory heterogeneity negatively affects the crowdfunding market. To overcome the barriers hampering the regulatory harmonization, European countries hav...
Published on Feb 26, 2019in Small Business Economics3.56
Aleksandrina Ralcheva1
Estimated H-index: 1
(EUR: Erasmus University Rotterdam),
Peter Roosenboom17
Estimated H-index: 17
(EUR: Erasmus University Rotterdam)
This paper analyzes a large dataset of 2171 equity crowdfunding campaigns launched between the years 2012 and 2017 on two of the world’s largest platforms Crowdcube and Seedrs. Our data shows that the equity crowdfunding market has matured: more recent campaigns tend to be launched by larger and older companies with better access to external financing. Given the market’s dynamics, we use a rolling three-year window to forecast funding success and develop a simple model based on information that ...
Published on Jan 8, 2019in Small Business Economics3.56
Michael E. Cummings4
Estimated H-index: 4
(UA: University of Arkansas),
Hans Rawhouser4
Estimated H-index: 4
(UNLV: University of Nevada, Las Vegas)
+ 1 AuthorsErin L. Hamilton1
Estimated H-index: 1
(UNLV: University of Nevada, Las Vegas)
Equity crowdfunding is a unique form of entrepreneurial finance that combines elements of private and public equity. We articulate its distinctive features, then review and qualitatively analyze a large corpus of 540 public comments submitted by stakeholders in response to new US equity crowdfunding regulations. Through a qualitative content analytic approach, we combine actor (issuer, investor, and intermediary) and perspective (relational, behavioral, and technical) dimensions to develop a tax...
View next paperInformation Cascades Among Investors in Equity Crowdfunding