Abstract
The growing literature on crowdfunding has mostly focused on the determinants of campaigns success, as well as on the legal and macroeconomic drivers of the crowdfunding diffusion as a mean to finance innovative projects. Still there are scant evidences on whether the returns for crowdfunders are consistent with the risk profile of crowdfunded projects. By studying 365 European clean-tech projects which raised capital via crowdfunding, we show that once the country risk has been accounted for, the returns are not consistent with the risks related to the technology adopted by the projects. Behavioral factors like bounded rationality or the cultural dimension of investors may explain this apparent mispricing of risks. While projects' returns are, on average, negatively related to risks, we find that projects offering better risk-adjusted returns attract relatively larger average contributions. Our results have important implications for understanding the drivers of crowdfunding returns and its sustainability, and particularly for its diffusion as an instrument to foster the transition to a low-carbon economy.
Highlights
Emerging as an effective alternative to traditional entrepreneurial finance, crowdfunding has the potential to transform the financial landscape for young innovative ventures (Ralcheva & Roosenboom, 2016)
Where is the internal return rates (IRR) of project i net of the country risk spread of the location where the project is expected to be realized, is a measure of the technology risk associated with project i, is the natural logarithm of the crowdfunding target for project i, is the maturity of project i, and β is a set of control variables
Considering the tenet of finance according to which, ceteris paribus, financial assets with a longer maturity horizon are riskier—and risk is typically associated with higher returns, and that energy assets such as power plants have often long lifetimes, during which several variables can change like raw materials or carbon prices, our results indicate that the risk profile of the projects as far as the maturity is concerned is not consistent with the offered net returns level
Summary
Emerging as an effective alternative to traditional entrepreneurial finance, crowdfunding has the potential to transform the financial landscape for young innovative ventures (Ralcheva & Roosenboom, 2016). Crowdfunding refers to a model in which crowdfunders invest their money in a (crowdfunding) project against a financial compensation (e.g. revenue, equity, profit-share scheme) or a nonfinancial benefit (e.g. new product acquisition, credit on an album). Crowdfunding allows entrepreneurial individuals and groups of primarily early stage initiatives and start-up to collect funding through the internet from a large crowd of investors and donators, often in exchange for future products, debt repayments or equity shares. Because of its riskier nature, the supply of this type of financing is often insufficient compared to the demand from entrepreneurs. Such capital shortage for young entrepreneurial companies is usually referred to as “equity gap”. Small crowdfunded projects can play an important in the context of the mitigation of climate change (Hawkens, 2017; Grubler, 2012; Lovins, 2011), by enabling a more widespread investment in low carbon energy technologies (e.g. wind energy, solar energy, energy efficiency) which are important to reach both the United Nations’ Sustainable Development Goals and the Paris Climate Agreement (Rockstrom et al 2017)
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