Market mechanisms and funding dynamics in equity crowdfunding

Lars Hornuf,Armin Schwienbacher

doi:10.1016/j.jcorpfin.2017.08.009

Abstract

Equity crowdfunding is a new form of entrepreneurial finance, in which investors do not receive perks or engage in pre-purchase of the product, but rather participate in the future cash flows of a firm. In this paper, we analyze what determines individual investment decisions in this new financial market. One important factor that may influence the behavior of investors is the way the portal allocates securities. We use unique data from four German equity crowdfunding portals to examine how the allocation mechanism affects funding dynamics. In contrast with the crowdfunding campaigns on Kickstarter, on which the typical pattern of project support is U shaped, we find that equity crowdfunding dynamics are L shaped under a first-come, first-served mechanism and U shaped under a second-price auction. The evidence also shows that investors base their decisions on information provided by the entrepreneur in the form of updates as well as by the investment behavior and comments of other crowd investors.

Highlights

In recent years, crowdfunding has become a mainstream source of funding for early-stage firms
In contrast with the crowdfunding campaigns on Kickstarter, on which the typical pattern of project support is U shaped, we find that the mechanism used to allocate securities affects equity crowdfunding dynamics
To identify the drivers of investment decisions, we examine the number of investments in an equity crowdfunding campaign on a given day

Summary

Introduction

In recent years, crowdfunding has become a mainstream source of funding for early-stage firms. ☆ We thank Massimo Colombo, Douglas Cumming, Alexander Groh, Tobin Hanspal, Dietmar Harhoff, Mingfeng Lin, Jay Ritter, Denis Schweizer, Elisabeth Schulte, Oscar Stolper, and the participants in the MACIE Research Seminar (Marburg University), the 7th Economic Workshop (University of Trier), the Law and Economics Forum (London School of Economics), the Workshop of Entrepreneurship and Innovation (University of Trier), the Annual Meeting of the Verein für Socialpolitik (University of Münster), the 3rd International Conference on the Dynamics of Entrepreneurship (Mannheim University/Centre for European Economic Research), the ENTFIN Conference Lyon 2016 (EM Lyon), seminars at the University of Bonn, Schulich School of Business (York University), John Molson School of Business (Concordia University), SKEMA Business School, the Max Planck Institute for Innovation and Competition, GREQAM at Aix-Marseille School of Economics, Montpellier Business School, and the Jean Monnet Inter-University Centre of Excellence (University of Rijeka) for their thoughtful comments and suggestions.

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Conclusion