Equity crowdfunding in Germany and the United Kingdom: Follow‐up funding and firm failure

Abstract

Manuscript type Empirical Research question/issue Today, startups frequently obtain financing via the Internet through many small contributions of nonsophisticated investors. Yet, little is known whether these startups can ultimately build enduring businesses. This study investigates the determinants of follow‐up funding and firm failure after an equity crowdfunding campaign has taken place. Research findings/insights We use hand‐collected data from 13 different equity crowdfunding portals and 413 firms that ran at least one successful equity crowdfunding campaign in Germany or the United Kingdom between 2011 and 2016. Our findings show that German firms that received equity crowdfunding stood a higher chance of obtaining follow‐up funding through business angels or venture capitalists but also had a higher likelihood of failure. The number of senior managers and the number of initial venture capital investors both had a positive impact on obtaining postcampaign financing, whereas the average age of the senior management team had a negative impact. The number of initial venture capital investors and the valuation of the firm were significant predictors increasing the hazard of firm failure, whereas the number of senior managers and the amount raised during previous equity crowdfunding campaigns had a negative impact. Theoretical/academic implications This study provides some first empirical evidence regarding the firm and campaign characteristics that determine follow‐up funding and firm failure after an equity crowdfunding campaign has taken place. Given the absence of research on this topic so far, this study inevitably remains original and exploratory to some extent. The empirical findings suggest various avenues of research for human capital theory, organizational ecology, and the comparative corporate governance literature. Practitioner/policy implications Identifying influencing factors of follow‐up funding and firm survival is important to make this new and potentially welfare enhancing form of entrepreneurial finance more predictable by decreasing the risk of individual investments. Furthermore, this study offers insights to policy makers, which are currently expected to implement appropriate regulations for this new market segment. In addition, it provides important insights for portal managers as well as firms raising capital via equity crowdfunding, which may learn about their chances to build an enduring business. https://youtu.be/w_4lIfnOaQY

Active backers, product commercialisation and product quality after a crowdfunding campaign: A comparison between first-time and repeated entrepreneurs

“…Walthoff-Borm et al (2018) compare the financial performances of firms that received equity crowdfunding with matched firms that did not receive such funding; firms that received equity crowdfunding exhibit lower financial performances and have considerably higher failure rates. A similar result is shown by Hornuf et al (2018) who demonstrate that the hazard of firm failure increases with the valuation of the firm, but decreases with the amount raised during the crowdfunding campaign. Hornuf et al (2018) also found that firms who received equity crowdfunding registered a higher chance of obtaining follow-up funding through business angels or venture capitalists.…”

“…A similar result is shown by Hornuf et al (2018) who demonstrate that the hazard of firm failure increases with the valuation of the firm, but decreases with the amount raised during the crowdfunding campaign. Hornuf et al (2018) also found that firms who received equity crowdfunding registered a higher chance of obtaining follow-up funding through business angels or venture capitalists.…”

Are you part of the crowd? The role of sex and environmental characteristics for crowdfunding awareness

“…only bridge the funding gap for the entrepreneurial ventures or social projects (Polzin et al, 2018) but also build customer awareness, receive feedback, and develop credibility with other potential investors (e.g., Belleflamme et al, 2014Belleflamme et al, , 2015Colombo et al, 2015;Crosetto & Regner, 2018;Hornuf et al, 2018;Mollick, 2016;Stanko & Henard, 2017). Also, considering the burgeoning demand for crowdfunding (Crosetto & Regner, 2018;Rey-Martí et al, 2019), there is a substantial need for new backers contributing to crowdfunding campaigns.…”

Crowdfunding in Europe: Between Fragmentation and Harmonization

“…A different study examining 413 equity funded firms in Germany and the UK (Hornuf et al 2018) found that overall 77 firms (18.8%) successfully raised follow-up funding after the latest equity crowdfunding campaign, and 69 firms (16.7%) went insolvent, were liquidated, or were dissolved. Furthermore, the study showed that, in comparison to UK firms, equity crowdfunded German firms stood a higher chance of raising follow-up funding from business angels or venture capital, but also had a higher likelihood of failure.…”