Abstract
How does equity crowdfunding affect venture capital firms’ investment decisions? VCs may be attracted to the new market opportunities identified by crowdfunding investors and thus diversify their investments. VCs may also seek to differentiate from the crowd by positioning as dedicated experts, and thus become more specialized in their investments. I test these competing explanations by examining VC investments following the legalization of equity-based crowdfunding in more than twenty states during 2009-2017. I find that VCs make more specialized investments after the crowdfunding policy shocks in their home states, but the effect is attenuated when VCs and crowdfunding investors share similar investment focus. Mechanism tests show that specialization is driven by a crowding-out effect, while diversification is explained by a lead-in effect.
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