New players in entrepreneurial finance and why they are there

Block, Joern; Colombo, Massimo G.; Cumming, Douglas J.; Vismara, Silvio

doi:10.1007/s11187-016-9826-6

Cited by 494 publications

(365 citation statements)

References 53 publications

(40 reference statements)

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“…Making the factors that contribute to the success and failure of ECF more salient not only benefits various investor types but also helps stabilize and establish a new market segment of entrepreneurial finance. In this way, our results more generally add to the recent literature in entrepreneurial finance (Block, Colombo, Cumming, & Vismara, ; Block, Fisch, & van Praag, ). Moreover, follow‐up funding and especially firm survival are important factors that help policy makers evaluate whether ECF is an efficient and worthwhile form of financing.…”

Section: Introductionsupporting

confidence: 86%

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

Hornuf

Schmitt

Stenzhorn

2018

Corporate Governance

112

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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

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Section: Introductionsupporting

confidence: 86%

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

Hornuf

Schmitt

Stenzhorn

2018

Corporate Governance

112

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“…In particular, we contribute to research on the selection criteria of early-stage investors looking at a new type of investor-the crowd. It has been found that specific information, such as education of the entrepreneurial team, protection of intellectual property rights, the venture's network, and firm alliances, are important drivers for the investment decisions of professional early-stage investors such as venture capital funds (Audretsch et al 2012;Baum and Silverman 2004;Block et al 2014Block et al , 2017aBusenitz et al 2005;Franke et al 2008;Jell et al 2011). It has also been shown that start-ups use this information to signal their value to investors (Audretsch et al 2012;Block et al 2014;Connelly et al 2011).…”

Section: Introductionmentioning

confidence: 99%

Which updates during an equity crowdfunding campaign increase crowd participation?

2017

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Start-ups often post updates during equity crowdfunding campaigns. However, little is known about the effects of such updates on crowd participation. We investigate this question by using hand-collected data from 71 funding campaigns and 39,399 investment decisions on two German equity crowdfunding portals. Using a combination of different empirical research techniques, we find that posting an update has a significant positive effect on the number of investments made by the crowd and the investment amount collected by the start-up. This effect does not occur immediately in its entirety; rather, it lags the update by a few days. Furthermore, the effect of updates loses statistical significance with the number of updates posted during a campaign. We also find that an easier language used in updates increases crowd participation, whereas the length of updates has no effects. With respect to the update's content, we find that the positive effect can be attributed to updates about new developments of the start-up such as campaign developments, new funding, business developments, and cooperation projects. Updates on the start-up team, business model, product developments, and promotional campaigns do not have meaningful effects. Our paper contributes to the literature on the effects of information disclosure on equity crowdfunding participation. Furthermore, our results have practical implications for start-ups and their investor communication during equity crowdfunding campaigns.

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“…For example, while traditional outside equity investors often rely on detailed due diligence to reduce adverse selection issues, equity crowdfunding relies on the wisdom of the crowd (Schwienbacher & Larralde, 2012). Moreover, while outside equity investors are often actively involved in their portfolio firms to reduce potential moral hazard issues and to add value, equity crowd investors are more passive within the firms they finance (Block, Colombo, et al, 2018). Still, equity crowd investors may provide valuable feedback and become brand ambassadors for the firm and its products (Schwienbacher & Larralde, 2012).…”

Section: Introductionmentioning

confidence: 99%

Equity crowdfunding, shareholder structures, and firm performance

Walthoff-Borm

Vanacker

Collewaert

2018

Corporate Governance

121

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Research question/issue This paper provides a first‐time glimpse into the postcampaign financial and innovative performance of equity‐crowdfunded (ECF) and matched nonequity‐crowdfunded (NECF) firms. We further investigate how direct and nominee shareholder structures in ECF firms are associated with firm performance. Research findings/insights We find that ECF firms have 8.5 times higher failure rates than matched NECF firms. However, 3.4 times more ECF firms have patent applications than matched NECF firms. Within the group of ECF firms, we find that ECF firms financed through a nominee structure make smaller losses, whereas ECF firms financed through a direct shareholder structure have more new patent applications, including foreign patent applications. Theoretical/academic implications Our findings suggest that there are important adverse selection issues on equity crowdfunding platforms, although these platforms also serve as a catalyst for innovative activities. Moreover, our findings suggest that there is a more complex relationship between dispersed versus concentrated crowd shareholders and firm performance than currently assumed in the literature. Practitioner/policy implications For policy makers and crowdfunding platforms, investor protection against adverse selection will be important to ensure the sustainability of equity crowdfunding markets. For entrepreneurs and crowd investors, our study highlights how equity crowdfunding and the adopted shareholder structure relate to short‐term firm performance.

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New players in entrepreneurial finance and why they are there

Cited by 494 publications

References 53 publications

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

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

Which updates during an equity crowdfunding campaign increase crowd participation?

Equity crowdfunding, shareholder structures, and firm performance

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