Duality in User Entrepreneurs’ Prior Knowledge and Fundraising Performance: Evidence from a Randomized Field Experiment

Abstract

Equity crowdfunding broadens the pool of investors and is thus touted to democratize access to capital for non-traditional entrepreneurs such as user entrepreneurs. However, it is unclear whether investors in this context utilize user entrepreneurship information as a signal of performance and whether this signal is positive or negative. Understanding the signaling role of user entrepreneurship has implications for whether equity crowdfunding may improve access to capital for user entrepreneurs. Through two randomized field experiments and a survey of study participants, we examine whether investors in equity crowdfunding respond differently to user innovator firms relative to traditional producer firms and what may drive this relationship. In the first experiment, we find that investors are less interested in investing in user innovator firms relative to producer firms. Our second experiment indicates that investors infer lower future performance from user entrepreneurship, as a form of statistical discrimination. The survey uncovers that investors associate user entrepreneurship with smaller markets and lower founders’ ability to grow the firm. While our results imply that crowdfunding does not necessarily mitigate challenges that user entrepreneurs may face when raising funds through traditional channels, they point to strategies that may mitigate negative perceptions associated with user entrepreneurship.