Crowdinvesting in Entrepreneurial Projects: Disentangling Patterns of Investor Behavior
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Small Bus Econ https://doi.org/10.1007/s11187-020-00332-0 Crowdinvesting in entrepreneurial projects: disentangling patterns of investor behavior Maximilian Goethner & Sebastian Luettig & Tobias Regner Accepted: 19 January 2020 # The Author(s) 2020 Abstract Crowdinvesting emerged recently as an alter- JEL classifications G23 . G41 . L26 native way of funding for start-up projects. Our dataset consists of 16,666 investments made at Companisto, one of the largest crowdinvesting platforms in Europe. 1 Introduction Using cluster analysis based on individual investment decisions, we find that crowdinvestors differ in their Early-stage start-ups are confronted with considerable investment strategies and motivations. We can distin- difficulties in attracting external finance. A barrier to the guish three types of crowdinvestors: Casual Investors, acquisition of financial resources arises from imperfec- Crowd Enthusiasts, and Sophisticated Investors. The tions in capital markets, which are conventionally attrib- types also vary in their response to project quality sig- uted to the existence of information asymmetries nals, project-related information reducing the degree of (Carpenter and Petersen 2002;Cassar2004; Colombo uncertainty, and social influence by fellow investors. We and Grilli 2007). Specifically, entrepreneurs possess conclude that crowdinvestors are anything but a homo- more information about their abilities and the prospects geneous group. Instead, they are motivated by different of their new business than outsiders. As start-ups often factors and respond to different signals when making lack assets to provide as collateral, and because they investment decisions. lack the financial history and the track record necessary to establish their reputation, investors cannot readily observe venture quality and may thus be reluctant to Keywords Crowdinvesting . Entrepreneurial finance . provide funding (Shane and Stuart 2002). New ventures . Cluster analysis . Social influence . Recent advancements in information and communi- Signaling cation technologies (ICTs) have led to financial innova- tions that ease the way in which capital demand meets M. Goethner (*) : S. Luettig : T. Regner supply and thus improve the efficiency of capital mar- School of Economics and Business Administration, Friedrich kets (Agrawal et al. 2014). Among these innovations, Schiller University Jena, Carl-Zeiss-Str. 3, 07743 Jena, Germany crowdfunding (CF) is emerging as one prominent fi- e-mail: [email protected] nancing alternative for early-stage entrepreneurial pro- jects (Block et al. 2018a;Brutonetal.2015). S. Luettig The recent phenomenon of CF promises to be a new e-mail: [email protected] way to match entrepreneurs looking for funds and po- T. Regner tential financiers. In contrast to traditional financiers, CF e-mail: [email protected] allows funds to be raised by rather small amounts from a large group of individuals, the “crowd.” CF grew M. Goethner et al. exponentially in the last years (Massolution 2016)giv- The remainder of this paper is structured as follows. ing reason to believe that it will develop into an impor- Section 2 discusses the related literature, and Sect. 3 tant funding channel in the future. describes our data source, the crowdinvesting platform The success of CF stimulated an increasing body of Companisto. We derive our typology of crowdinvestors research devoted to determinants of the individual decision in Sect. 4. In Sect. 5, we explore differences in invest- to fund a specific project. This research highlights the ment behavior among these investor types. Section 6 significance of quality signals (Ahlers et al. 2015;Li concludes. et al. 2016; Ralcheva and Roosenboom 2016;Nitaniand Riding 2017; Piva and Rossi-Lamastra 2018; Bapna 2019), social influence (Herzenstein et al. 2011; Zhang 2 Background literature and Liu 2012; Lee and Lee 2012;HekmanandBrussee 2013;Vulkanetal.2016;CrosettoandRegner2018; To address the problems of information asymmetry Hornuf and Schwienbacher 2018;Vismara2018), and involved in the financing of entrepreneurial projects, social capital (Mollick 2014; Colombo et al. 2015; professional investors individually design their financ- Giudici et al. 2018;Vismara2016). Using data from ing contracts (Gompers and Lerner 2001;Wongetal. Kickstarter, a pre-ordering based CF platform, Lin et al. 2009). This allows them to separate the allocation of (2014) demonstrate that different types of crowdfunders cash flow rights, voting rights, board rights, liquidation can have different motives of backing a project leading to rights, and other control rights such as staged capital different funding strategies. Also, the information on infusion. As crowdinvesting (CI) caters to a large num- which crowdfunders base their individual decision, rang- ber of investors, tailor-made contracts can hardly be ing from quality signals to information about the activity of implemented resulting in the use of highly standardized other crowdfunders, are not alike across the different types. contracts. Thus, CI contracts provide only little ex-ante Our paper builds on the approach of Lin et al. (2014) protection against problems of asymmetric information but focuses on equity-based CF or crowdinvesting (CI). (Kortleben and Vollmar 2012; Hornuf and In the USA, specific rules of the Jumpstart Our Business Schwienbacher 2016). Since most crowdinvestors are Start-ups (JOBS) Act were implemented only in less experienced in evaluating the actual value of a May 2016. Thus, only limited US data on CI exists so business idea compared to professional investors, the far. By analyzing data from Companisto, one of the problem of information asymmetry is especially pro- largest CI platforms in Europe, our study is the first, to nounced in the setting of CI. Even if some securities the best of our knowledge, to provide valuable insights regulators took initial steps towards the alleviation of about crowdinvestor heterogeneity. Our dataset consists these issues (Hornuf and Schwienbacher 2017), there is of 16,666 investments into 28 projects made by 7474 still a great concern about the possible exploitation of funders at Companisto. less sophisticated investors (Hildebrand et al. 2017). Our analysis shows that investors differ in their mo- In particular, the identification of valuable investment tivations and investment strategies. We identify the fol- opportunities and the monitoring of the investee remain lowing three types: a relatively small group is very a key challenge in CI (Agrawal et al. 2014). Against this active and experienced (“Sophisticated Investors”), a backdrop, recent research on CF and CI has been sizable group of funders is motivated by pro-social/ devoted to understanding the identification of community factors (“Crowd Enthusiasts”), and the ma- worthwhile investments under asymmetric information jority of funders seem mostly concerned about monetary between investor and campaign initiator. One part of this returns (“Casual Investors”). Furthermore, these identi- literature addresses the entrepreneurial perspective. For fied crowdinvestor types react in distinct ways to project example, Mollick (2014) conducted a study on the quality signals sent by the creators of start-up projects determinants of success and failure of CF projects listed and information observed from the investment decisions on Kickstarter. He found that project quality signals of fellow crowdinvestors, when selecting among invest- such as a video description of the project are correlated ment opportunities. These insights about investor het- to fundraising success. Moreover, the size of an entre- erogeneity contribute to a better understanding of preneur’ social network is found to be a determinant of crowdinvesting with practical implications for platforms successful fundraising. Similarly emphasizing the ben- and entrepreneurs. eficial role of social capital, Hekman and Brussee Crowdinvesting in entrepreneurial projects: disentangling patterns of investor behavior (2013) and Giudici et al. (2018) stress the importance of Vismara (2018) demonstrates how information cascades social networks for signaling project quality to potential among investors can form. He finds that a higher num- investors. ber of investors within the first 5 days of a campaign to The first study trying to assess the crowd’sresponse increase the number of subsequent investors, the total to quality signals within CI has been conducted by funding amount, and hence the probability of a Ahlers et al. (2015) using data from ASSOB, an Aus- successful funding campaign. The number of early tralian CI platform on which entrepreneurs sell equity investors turned out to be significantly higher when shares to their investors. Their findings support the public profile investors have been present within the importance of human capital (proxied by the number first 5 days of a campaign. Relatedly, Kim and of board members in the management team and the Viswanathan (2018) identify investors on Appbackr, a share of board members holding an MBA degree) as CF platform for mobile applications, as experts if they an effective quality signal that increases the number of have already developed an app or if they have prior investors. Likewise, providing financial forecasts in investment experience. They show that investors with- their offering documents (e.g., a financial disclaimer out specialized expertise emulate the investment deci- stating forecasts of future earnings)