Does Venture Capital Affect Sponsors’ Decision? Evidence from Reward-Based Crowdfunding

Abstract

Our paper enhances the understanding of how venture capital (VC) affects sponsors’ decision in reward-based crowdfunding. Reward-based crowdfunding is a unique method that enables startups to raise capital and grow a diversified customer base at the same time. Sponsors (also known as backers) exhibit the traits of consumers by pledging their money in the crowdfunding process and choosing a variety of exclusive rewards. Sponsors behave like consumers, rather than investors, and are willing to substitute short-term rewards for long-term equity ownership in VC-backed firms. The objective of our paper is to examine whether crowdfunding campaigns supported by VC are more successful than those campaigns not supported by VC. Based on FINDIT Database at https://findit.org.tw/, we identify 522 entrepreneurial firms that launches 274,835 crowdfunding projects through Kickstarter, one of the most well-known crowdfunding websites. We pair 274,835 projects with 92 projects supported by VC and leverage a logit model to estimate the effect of VC’s presence on the probability of successful crowdfunding. The result of the logit model shows that the endorsement of VC on the early stage of company development does not increase the success rate of crowdfunding perhaps because backers focus more on rewards than equity stakes that VC invests in startups. Market demand, measured by the number of backers and reward proposals, and information transparency, proxied by the number of videos, comments, pictures and updates on projects, have a positive significant impact on the odds of successful fundraising activities. The experience of fundraisers is positively associated with the chance of successful crowdfunding. The longer duration of funding campaign and the higher the funding goal, the less successful the crowdfunding project is. By running regression models, we investigate the relationship between VC and crowdfunding performance represented by such dependent variables as the number of backers and the amount of proceeds obtained through crowdfunding. VC-related explanatory variables, the existence of VC and the amount of seed capital from VC, have a significant positive impact on attracting backers and raising capital. The regression results lend support to endowment effect that expertise and network of VC partners assist start-up companies in reaching out to financial markets. Our finding is important for practitioners as endowment effect also holds in reward-based crowdfunding. From the viewpoint of entrepreneurs and VC firms, not only is crowdfunding a round of financing, but also a means of expanding prospective online clients. Eventually, in light of our result, resources such as network, funds, and management experience through VCs essentially assist entrepreneurial firms to secure more proceeds and attract more consumers.