Investor communication in equity-based crowdfunding: a qualitative-empirical study

Abstract

Purpose -This study's aim is to investigate the role of investor communication in equity-based crowdfunding. The study explores whether and how investor communication can reduce information asymmetries between investors and new ventures in equity-based crowdfunding, thereby facilitating the crowd's investment decisions. Design/methodology/approach -This paper follows an exploratory qualitative research approach based on semi-structured interviews with 23 market participants in equity-based crowdfunding: 12 investors, 6 new ventures and 5 third parties (mostly platform operators). After analyzing, coding and categorizing the data, this paper developed a theoretical framework and presented it in a set of six propositions. Findings -The results indicate that the venture's overall impression -especially perceived sympathy, openness and trustworthiness -is important to reduce perceived information asymmetries of investors in equity-based crowdfunding. To communicate these soft facts, personal communication seems to be replaced by pseudo-personal communication over the Internet (e.g. videos, investor relations channels and social media). In addition, the communications of third parties (e.g. other crowd investors, professional and experienced investors and other external stakeholders) influence the decision-making process of investors in equity-based crowdfunding. Third-party endorsements reduce the perceived information asymmetries and lower the importance of pseudo-personal communications by the venture. Originality/value -Prior research shows that investor communication reduces information asymmetries between companies and investors. Currently, little is known about the role of investor communication in equity-based crowdfunding. This study focuses on the role of investor communication to reduce the perceived information asymmetries of investors in equity-based crowdfunding.

The wisdom of the crowd in funding: information heterogeneity and social networks of crowdfunders

“…Hornuf and Schwienbacher (2015) find that specific kinds of information, such as updates to investors, significantly drive investment as funders update their preferences in the light of project assessment. Moritz et al (2015) examined investor communication in equity crowdfunding, highlighting that perceived sympathy, openness and trustworthiness in the relationship between venture and investor reduced perceived information asymmetries. They also found that third-party communication influences the decision-making process of crowdfunders.…”

How to Convince the Crowd: An Impression Management Approach

“…Moritz, Block and Lutz [1] show for equity-based crowdfunding that pseudo-personal communication through presentation videos and visualizations in social media channels appear to be a main aspect to transmit relevant information. Thus, we add the variable Picture, which takes the value 1 for crowdfunding descriptions with illustrations and/or photos and 0 otherwise, and also the variable Video, which takes the value 1 for the use of a promotional video.…”

“…Mollick [10] uses data from the Kickstarter platform to examine the effects of network connections and quality signals of the project for the funding decision of the crowd and is indeed able to show the relevance of both factors. Furthermore, Moritz, Block and Lutz [1] use semi-structured interviews of 23 market participants to show that the perceived sympathy and trustworthiness by investors is able to reduce information asymmetries between the entrepreneur and equity investors, and, thus, affect the crowds' funding decision to the benefit of the entrepreneur. In particular, they highlight that pseudo-personal communication by the entrepreneur, e.g.…”

“…Moritz, Block and Lutz [1] find that information on platforms, particularly pseudopersonalized communication via videos and chats, increases the trustworthiness perceived by investors and affects the funding decision to the benefit of the entrepreneur. Additionally, Mitra and Gilbert [2] examine phrase structures that are used in project descriptions and find correlations with the success of crowdfunding projects.…”

A research note on entrepreneurs’ financial commitment and crowdfunding success

“…First research papers show that educational degrees (Ahlers et al 2015), network relationships (Ahlers et al 2015;Vismara 2016), quality disclosures through external credentials, update information during the campaign (Block, Hornuf, and Moritz 2018;Moritz, Block, and Lutz 2015) and the provision of financial information (Ahlers et al 2015;Lukkarinen et al 2016) can mitigate such potential informational problems and, consequently, influence funding success positively. In particular, Vismara (2016) and Ahlers et al (2015) demonstrate that the retention of equity is an effective signal to increase later campaign success.…”