Signaling Effects of Crowdfunding on Venture Investors’ Decision Making

Abstract

The seed funding gap is still a major obstacle for the initiation of new ventures and the diffusion of innovation. Crowdfunding – an innovation in the market for start-up finance – could offer a new market-based means of partly closing this gap. However, crowdfunding cannot be regarded as a perfect substitute for venture capital funding, e.g., since it is not likely to fully finance a technology-based venture over time and because professional venture investors provide crucial resources besides capital. It therefore appears important to study the interaction between crowdfunding and more traditional forms of start-up finance. We examine the impact and signaling effects that crowdfunding has on subsequent venture capital funding rounds. Drawing on a choice experimental design and data on 5,280 decisions of 120 venture investors, our results indicate that “the crowd” generally is a negative signal for professional venture investors, but that they do not ignore positive signals sent by the crowd. We find cau...