Attributes of Angel and Crowdfunded Investments as Determinants of VC Screening Decisions

Abstract

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 attributes of angels and the crowd can produce highly influential certification effects.

Equity Crowdfunding in Germany and the UK: Follow-Up Funding and Firm Survival

“…The number of BAs/VCs positively influences a firm's prospects for various reasons. Drover et al (2017) show that the certification effect of prior BA investments allows for VC investors' positive assessments of the start-up. Furthermore, VCs tend to syndicate with one another (Lerner, 1994).…”

“…Colombo and Shafi (2017) provide evidence that firms with external financing before their crowdfunding campaign receive even more follow-up funding when they perform badly and deliver their product late. Drover et al (2017) investigate the impact of crowdfunding on the VC screening process. They find that a successful crowdfunding allows for certification effects and positively influences the decision of a VC to fund the start-up.…”

Institutional Seed Financing, Angel Financing, and Crowdfunding of Entrepreneurial Ventures: A Literature Review

“…Bruton et al (2015) also write that following the financial crisis, and in combination with low interest rates, the two most successful forms of crowdfunding, debt and equity, grew swiftly. Drover et al (2017) note that crowdfunding, due to its presence in the early stages of a venture, has post-investment implications for the venture as well. These implications are, however, still an under-studied part of crowdfunding and the reaction of venture capitalists and business angels on ventures previously funded through crowdfunding has not explicitly been investigated.…”

“…Literature that is dedicated to specific investment stages includes Chahine et al (2007), and Drover et al (2017. These papers focus on the pre-and/or postinvestment stages.…”

“…This presents itself through an increase, not in the rate of innovation, but in the impact of innovation as measured by a larger citation of patents under VC-backed ventures. Drover et al (2017) focuses more on the pre-investment stage. The authors note that investments which are funded by experienced business angels and angels who are members of known angel networks have a higher likelihood of being selected by VCs for entering a formal due diligence process.…”