Competition between Equitycrowdfunding Platforms: Network Effects Vs. Matching Efficiency

Nabita Penmetsa David Eccles School of Business University of Utah Agenda

» Introduction » Research Statement » Literature Review » Model » Findings » Conclusion

July 14, 2016 Platform Strategy Research Symposium, Boston University 2 Industry

July 14, 2016 Platform Strategy Research Symposium, Boston University 3 Multiple Platforms and Presence of Asymmetries

US Crowdfunding Platforms Platform Raised to Date Investments UK Crowdfunding Industry P5 P4 Angellist $248,219,051 275 P3 Equitynet $137,273,855 579 Crowdfunder $107,886,625 134 Fundable $80,615,590 42 Seedinvest $49,475,025 36 $38,793,650 23 $22,955,248 21 $19,852,292 26 Source: Crowcube blogs Source: Fundwisdom.com

July 14, 2016 Platform Strategy Research Symposium, Boston University 4 Research Questions

How do we characterize the nature of competition between equity crowd funding platforms?

Is there place for multiple platforms?

How does the choice of pricing structures influence competition

July 14, 2016 Platform Strategy Research Symposium, Boston University 5 Literature Review Crowdfunding

Rewards –based Debt-based crowdfunding crowdfunding Funder, Lender, Investor Burtch et al. (2015) Zhang and Liu (2012) Kim and Viswanathan Behavior Chen et al. (2015) Burtch et al. (2014) (2016) Hsu et al. (2015) Lin and Wei ( 2015) Project or Funding Success Mollick (2014) Burtch et al. (2016) Ahlers et al. (2015)

Strategic Issues Agrawal et al. (2015) Wei and Lin (2016) Competition: Pricing and Lin and Viswanathan quality differentiation (2015)

July 14, 2016 Platform Strategy Research Symposium, Boston University 6 Literature Review Two-sided Markets

Two-sided Markets (Pricing Structures and Externalities) Market Places Caillaud and Jullien (Network Effects) Pricing and Matching Markets (2003) Quality (Compatibility) Rochet and Tirole Ambrus and Differentiat (2003) Argenziano (2009) ion Damiano and Li Parker and Van Hagiu (2009) (2008) Alystyne (2005) Gabszewicz and Armstrong (2006) Wauthy (2014) Rochet and Tirole (2006)

July 14, 2016 Platform Strategy Research Symposium, Boston University 7 Platform – Matching Startups and Investors

Startups (Growth Factor) Investors (Risk Appetite)

Platform (Price, Quality) s1 r1

s2 r2 Compatibility Compatibility

s Network Size 3 r3

s4 r4

s5 r5

July 14, 2016 Platform Strategy Research Symposium, Boston University 8 Pricing Strategies

Charging Startups Charging Startups Charging Investors and Investors

July 14, 2016 Platform Strategy Research Symposium, Boston University 9 Model

July 14, 2016 Platform Strategy Research Symposium, Boston University 10 Segmenting Equilibrium

P1 > P2 Platform 1 q1> q2 Platform 2

High Growth Startups Low growth Startups

Low risk averse Investors High risk averse Investors

Segmenting Equilibrium exists only when there is significant quality differentiation between the platforms and both startups and investors place a higher value on compatibility.

July 14, 2016 Platform Strategy Research Symposium, Boston University 11 Findings

Segmenting Asymmetry Profits Equilibrium

Charging both Weak Network High Higher profits sides Externalities when network externalities are

Charging Charging Startups weak Charging Charging Investors Charging Charging sides both

Compatibility Charging Weak Network Low Higher profits Investors Externalities when network No Segmenting externalities are Equilibrium strong

Network Charging Strong Network Size Startups Externalities

July 14, 2016 Platform Strategy Research Symposium, Boston University 12 Conclusions

» Segmentation can improve the value of intermediation service offered by platforms and increase platform profits.

» Platforms can achieve segmentation and strengthen their competitive position by offering differentiated services. Example: CircleUp focusses exclusively on consumer product companies.

» Choice of pricing strategy can enhance the efficiency of matching by supporting segmentation. Example: Charging only startups may align well with EquityNet’s focus on scale.

July 14, 2016 Platform Strategy Research Symposium, Boston University 13 Thank You Feedback and Suggestions are welcome

July 14, 2016 Platform Strategy Research Symposium, Boston University 14