Forms Of Entrepreneurial Finance Research Articles

Equity crowdfunding syndicates and fundraising performance: the effect of human capital and lead investor reputation

PurposeThis paper is about equity crowdfunding syndicates as a form of entrepreneurial finance and looks specifically at the lead investors' human capital and their ability to raise funds.Design/methodology/approachThe authors develop regressions on a unique hand-collected dataset of 178 lead investors taken from the US-based platform AngelList.FindingsResults indicate that lead investors' specialized human capital has a positive effect on their syndicate fundraising performance. However, it does not find a significant effect of general human capital. It also finds that specialized human capital is mediated by the reputation of the lead investor on the platform.Research limitations/implicationsThis study extends human capital theory in the crowdfunding context by providing a more comprehensive portrait of human capital and in doing so, shifts the focus from an entrepreneur to an investor perspective, an approach much neglected in the crowdfunding literature.Originality/valueThis study advances the current knowledge on crowdfunding as it is one of the first to understand syndicate investment as an innovative and alternative platform-based financial channel. It also contributes to the current debate on the role of human capital in crowdfunding and more generally to entrepreneurial finance.

Signalling entrepreneurs\u2019 credibility and project quality for crowdfunding success: cases from the Kickstarter and Indiegogo environments

In recent years, entrepreneurs have increasingly turned to crowdfunding, a new form of entrepreneurial finance, to fund projects. Whilst research has shown that signals originating from the entrepreneur and project can affect the outcome of crowdfunding, how different signals work together under different signalling environments remains underexplored. Drawing on signalling theory, we examine how signals of entrepreneurs’ credibility (success, failure, backer and industry experience) and project quality (preparedness and third-party endorsements) produce crowdfunding success in different signalling environments. We collected a unique dataset with matched projects listed on both Kickstarter and Indiegogo, but with different funding models, to represent two distinct signalling environments. Results based on qualitative comparative analysis (QCA) identify two distinct signalling patterns that show entrepreneur’s credibility and project quality signals can complement each other to produce crowdfunding success. In an environment with less uncertainty, entrepreneur’s credibility in terms of crowdfunding experience can also compensate absent project quality to produce crowdfunding success. In an environment with higher uncertainty, entrepreneur’s credibility and project quality need to be both present to establish the necessary legitimacy for crowdfunding to be successful. Furthermore, by integrating positive (i.e. success) and negative (i.e. failure) signals, we demonstrate how signal incongruence can enhance crowdfunding success.Plain English Summary Failure experience is an important signal in achieving crowdfunding success, but its effectiveness depends on other signals as well as the signalling environment. Our study shows how crowdfunding success can be achieved in multiple ways and that the path to success depends on the funding model of the platform used. For entrepreneurs to demonstrate credibility, backer experience and project preparedness are important. Both are under the control of the entrepreneur and well worth considering investing effort into. Importantly, the study also shows that demonstrating failure experience is important in achieving crowdfunding success. Failure experience can either replace the lack of prior success experience by demonstrating a track record of learning or it can enhance prior success experience by producing a more realistic picture of the entrepreneurs. Thus, the study offers practical implications for entrepreneurs on how to use different signals to increase the likelihood of success in reward-based crowdfunding.

New directions in entrepreneurial finance

Abstract Entrepreneurial finance is a distinctive aspect of corporate finance, notably with respect to informational asymmetries and investor involvement in portfolio companies. Entrepreneurial finance research has explored four levels of analysis: the entrepreneur or entrepreneurial firm, the organization providing finance to the entrepreneurs, the organizations providing funds to these organizations, and the region or country in which the entrepreneurial firms or investors are established. We discuss recent developments in forms of entrepreneurial finance. We summarize the contributions of the papers published in this issue on entrepreneurial finance at different points in the life cycle, including work on trade credit, debt finance, micro-cap IPOs, venture capital, and angel finance. Also, we highlight avenues for future research focusing on funding gaps, accelerators, crowdfunding, secondary buyouts, boards, and exits.

Determinants of individual investment decisions in investment‐based crowdfunding

AbstractWe investigate determinants of investment decisions in investment‐based (equity and bond) crowdfunding campaigns, using a novel investment‐, investor‐ and campaign‐level database, where equity refers to investments in entrepreneurial start‐ups and bonds to large real estate projects. We find that investors who have higher social interactions invest more. Social interactions are important in an equity crowdfunding context but do not affect participation in bond investments. This is consistent with the view that investors' social networks help reduce information asymmetry. Women invest less in the riskiest (equity) investments but more in safer ones (bonds). These findings are better explained by differences in risk aversion than differences in overconfidence between men and women. Overall, the findings contribute to the understanding of how investment‐based crowdfunding can be a viable source of entrepreneurial finance and how entrepreneurs' campaign decisions affect investor participation in this new form of entrepreneurial finance.

Investor Motivations and Decision Criteria in Equity Crowdfunding

Online equity crowdfunding is a novel form of entrepreneurial finance, through which ventures can sell shares to large numbers of small investors. We analyze the motivations and decision criteria of equity crowdfunding investors using responses to a large-scale survey. We find, first, that investors form three distinct motivation-based clusters: donation-oriented supporters, return-oriented supporters, and pure investors. Second, investors use five main investment decision criterion factors: campaign specifications, target attractiveness, familiarity, campaign scale, and personal acquaintances. Third, investors’ decision criteria are related to their motivations. The results contribute to literature on entrepreneurship and new venture financing.

Public policy towards entrepreneurial finance: spillovers and the scale-up gap

Research in the area of public policy towards entrepreneurial finance has traditionally been focused on financing gaps, and whether or not government programs successfully address market failures for those financing gaps. More recently, a growing literature has identified externalities across different forms of entrepreneurial finance. These externalities include but are not limited to spillovers from one form of finance to another (such as from crowdfunding to venture capital, etc.), spillovers from domestic to international investment, and spillovers from early stage to late stage investment. Sometimes these externalities are positive and other times they are negative. In this paper, we review what is known about these spillovers and highlight a need to better understand these spillovers for the optimal design of a government’s portfolio of policy towards entrepreneurial finance.

Start-ups, entrepreneurial networks and equity crowdfunding: A processual perspective

This paper outlines findings from a large-scale interview based study of start-ups who obtained equity crowdfunding in the UK. It takes a novel integrative approach towards the analysis of entrepreneurial networks by examining both personal and business networks involved in the equity crowdfunding process. Adopting a processual perspective, the empirical findings show that networks and social capital play a critical role in the crowdfunding process. Start-ups leverage, build and draw upon a complex array of network actors and “ties” as they move through the different stages of their crowdfunding journey. The paper shows that this form of funding confers important relational benefits to recipients which amount to “more than money”. It concludes that equity crowdfunding is a highly “relational” form of entrepreneurial finance, requiring holistic forms of empirical investigation. Implications for theoretical development, managerial practice and further research are outlined.

Public Policy Towards Entrepreneurial Finance: Spillovers and the Scale-Up Gap

Research in the area of public policy towards entrepreneurial finance has traditionally been focused on financing gaps, and whether or not government programs successfully address market failures for those financing gaps. More recently, a growing literature has identified externalities across different forms of entrepreneurial finance. These externalities include but are not limited to spillovers from one form of finance to another (such as from crowdfunding to venture capital, etc.), spillovers from domestic to international investment, and spillovers from early stage to late stage investment. Sometimes these externalities are positive and other times they are negative. In this paper, we review what is known about these spillovers and highlight a need to better understand these spillovers for the optimal design of a government’s portfolio of policy towards entrepreneurial finance.

Market mechanisms and funding dynamics in equity crowdfunding

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.

The Problems with and Promise of Entrepreneurial Finance

Research summary This article provides a review of the entrepreneurial finance literature in the surprisingly not very well integrated entrepreneurship and finance journals. Entrepreneurial finance encompasses venture capital, private equity, private debt, trade credit, IPOs, angel finance, and crowdfunding, among other forms of finance. We analyze trends in citation activity to these topic areas across 16 journals that publish at least somewhat regularly on these topics, and we show there has been a rise in citations on venture capital, private equity, and IPOs post-2006. We highlight an unfortunate degree of segmentation in the literature, as well as topics that have been the subject of scholarly focus, and identify promising topics for future research. Managerial summary Who does research in entrepreneurial finance—entrepreneurship or finance scholars? And which types of journals are more likely to publish research in entrepreneurial finance? In this article, we provide an overview of the literature on topics that include venture capital, private equity, private debt, trade credit, IPOs, angel finance, and crowdfunding. Our review of the literature shows some elements of segmentation by the specific topic, which we explain is partly due to the fact that datasets on entrepreneurial finance themselves are often segmented and do not include information on more than one form of entrepreneurial finance at a time. Further, we show citation patterns are segmented by the type of journal, with finance journals being much less likely to refer to entrepreneurship journals. Copyright © 2017 Strategic Management Society

ENTREPRENEURSHIP. Cash from the crowd.

Crowdfunding (CF), in which financing for projects is sought via the Internet from large groups of individuals, is a $3.3 billion per year phenomenon. But it's not clear how well CF, typically used for creative arts projects, can be used to finance science and technology (“tech”) projects. We analyzed nearly 112 thousand CF campaigns launched on [Kickstarter.com][1] through late 2014 (see supplementary materials). The share of tech projects is increasing, from 4% of total projects in 2009 to 8% in 2014. Tech projects have the largest average target budgets ($86,529; nontech average, $18,003). The rate of tech projects that reached their target budget and were funded, 38%, is lower than the overall 58% success rate. Tech projects received 14% of the capital raised through Kickstarter, totaling $139.8 million. Although this is a substantial amount, it is only 3% of the $4.7 billion invested by venture capitalists in high-tech ventures in the United States in 2013. CF also differs qualitatively from other forms of entrepreneurial finance. CF money is not invested in exchange for a financial return but is pledged in the form of product prepurchasing from end users as consumers. This has three important implications. First, CF invites gathering feedback from users during project development, a practice shown to be effective in problem-solving and product-testing in open-source and open-innovation platforms. By cutting development time and failure rates, this feature offers new means for tech transfer. Second, crowdfunders are highly responsive to social exchanges that the entrepreneur uses inside the CF community and beyond ([ 1 ][2]). Third, CF is more suitable when the project outcome is a ready-to-use product that can be offered in exchange for the pledge. This makes CF more suitable for applied projects, which are close to market delivery, but calls into doubt the suitability of CF as a means for funding basic research. [www.sciencemag.org/content/348/6240/1201/suppl/DC1][3] 1. [↵][4]1. M. G. Colombo, 2. C. Franzoni, 3. C. Rossi-Lamastra , Entrep. Theory Pract. 39, 75 (2015). [OpenUrl][5][CrossRef][6] [1]: http://Kickstarter.com [2]: #ref-1 [3]: http://www.sciencemag.org/content/348/6240/1201/suppl/DC1 [4]: #xref-ref-1-1 View reference 1 in text [5]: {openurl}?query=rft.jtitle%253DEntrep.%2BTheory%2BPract.%26rft.volume%253D39%26rft.spage%253D75%26rft_id%253Dinfo%253Adoi%252F10.1111%252Fetap.12118%26rft.genre%253Darticle%26rft_val_fmt%253Dinfo%253Aofi%252Ffmt%253Akev%253Amtx%253Ajournal%26ctx_ver%253DZ39.88-2004%26url_ver%253DZ39.88-2004%26url_ctx_fmt%253Dinfo%253Aofi%252Ffmt%253Akev%253Amtx%253Actx [6]: /lookup/external-ref?access_num=10.1111/etap.12118&link_type=DOI

Internet-Based Entrepreneurial Finance: Lessons from Germany

This paper presents the development of the Internet-based crowdinvesting market in Europe since its start in 2007. It evidences a great variety in portal design and contract forms used by crowdinvesting portals. By analyzing more detailed, hand-collected data on the complete set of successful and unsuccessful crowdinvesting campaigns run in Germany, the paper further tests whether different portal and contractual mechanisms affect crowd participation. The latter is a necessary, though not sufficient, precondition for achieving “wisdom of the crowd”. Consistent with predictions on the different mechanisms used, the results show that crowd participation is largest when the minimum ticket size is small, the crowd is pooled in a financial vehicle, and the crowd is offered investments in the form of profit-particiapting loans (so-called partiarische Darlehen). Moreover, the very same mechanisms increase the chance of achieving successful campaigns and of raising larger amounts. These findings are useful for entrepreneurs who need to choose among a large range of crowdinvesting portals and other forms of entrepreneurial finance.

Crowdfunding: The New Frontier for Financing Entrepreneurship?

This paper aims to take stock of the extant knowledge on an emerging practice in the entrepreneurial finance landscape: crowdfunding, which seems to play an increasing important role for the seed financing of entrepreneurial projects. We provide a systematization of what it is known on this theme, which can be useful to scholars, practitioners, and policymakers interested in the phenomenon from different angles. Adopting a phenomenon-based approach, which is deemed to be appropriate when investigating new and rather unexplored phenomena, we first review the emergent literature on the theme to single out the aspects that so far have attracted the bulk of scholarly interest. Then, we compare the crowdfunding with other forms of entrepreneurial finance. Finally, we offer a first survey on Italian crowdfunding platforms.