Norwegian School of Economics Bergen, Spring 2017 Mind the Gap Is there an equity gap in Norway, and can equity crowdfunding close it? Haakon Møyner Lund Supervisor: Bram Timmermans Master Thesis in Strategy NORWEGIAN SCHOOL OF ECONOMICS This thesis was written as a part of the Master of Science in Economics and Business Administration at NHH. Please note that neither the institution nor the examiners are responsible − through the approval of this thesis − for the theories and methods used, or results and conclusions drawn in this work. 2 Abstract When an entrepreneur starts a new company, accessing funding is essential. However, funding is not always easily accessible due to the lack of internally generated profits, operating history and collateral that could have been used to lower the risk for potential lenders or investors. Companies that introduce new technologies or business models with a large potential for growth will in many cases have larger problems accessing financial capital due to both a larger need for capital, but also a higher risk of failure. These companies are also especially important to for the society because they represent a small minority of fast-growth companies that generates a significant proportion of new jobs and economic growth in the economy. International researchers have identified so-called equity gaps in the financing of this category of fast-growing ventures. This paper explores the phenomenon of equity gaps in existing academic literature and examines whether such gaps exists in the Norwegian market for risk capital. The thesis also evaluates equity crowdfunding’s ability to close such gaps. A qualitative design using semi-structured interviews with leading risk capital investors as well as secondary sources were used to answer the research questions set forward. This approach was chosen due to the explorative nature of the paper and the lack of quantitative data. Overall, the interviews seem to point to the existence of an equity gap in Norway, but not investors all did not agree. The investors did also not agree on the size of the gap measured in the size of the investment. In addition, there were disagreements among the investors on equity crowdfunding’s ability to close the equity gap. The data collected from equity crowdfunding platforms did as well show that equity crowdfunding currently does not serve the investment sizes that the majority of investors identified as the equity gap. This paper concluded that there is an equity gap in Norway, but at the current stage equity crowdfunding is not a suitable solution to close or reduce the gap. This thesis contributes to the limited research on equity gap in Norway, as well as use a novel approach to evaluate equity crowdfunding’s ability to close the gap. The research in this thesis can be of interest to market participants, including entrepreneurs, investors and the government, to better understand why young companies fail to attract funding. 3 Preface This study has been conducted as a concluding part of an M.Sc. in Economics and Business Administration at Norwegian School of Economics in Bergen. The thesis consists of 30 credits and is written within the master profile of Strategy and Management. The process of trying to answer whether there is an equity gap in Norway, and if equity crowdfunding can close it has been a six-month long roller-coaster ride with ups and downs, causing both excitement and frustration. In other words, I could not have asked for a better way to end my time here at NHH. I would like to thank my supervisor Bram Timmermans who contributed with very useful input and feedback along the way. In addition, I want to thank the investors that contributed with their time and knowledge in this study. Not one single investor declined to be interviewed, leaving me with the impression that this is an industry with people that sincerely want to share their knowledge to help create tomorrow’s great companies. A big thank you also goes to family and friends who have contributed constructive discussions, feedback and proofreading of the assignment. Bergen, June 16th, 2017 Haakon Møyner Lund 4 Table of contents ABSTRACT........................................................................................................................................... 2 PREFACE ............................................................................................................................................. 3 TABLE OF CONTENTS ..................................................................................................................... 4 1. INTRODUCTION ...................................................................................................................... 6 2. RESEARCH QUESTIONS ...................................................................................................... 10 3. METHODOLOGY ................................................................................................................... 12 3.1 RESEARCH DESIGN ................................................................................................................. 12 3.2 CONDUCTING THE INTERVIEWS .............................................................................................. 16 3.3 THEMATIC ANALYSIS ............................................................................................................. 17 3.4 SECONDARY DATA ................................................................................................................. 18 3.5 LITERATURE REVIEW ............................................................................................................. 18 3.6 RELIABILITY AND VALIDITY ................................................................................................... 20 3.7 ETHICAL CHALLENGES ........................................................................................................... 22 3.8 STRUCTURE OF THE THESIS .................................................................................................... 23 4. WHAT IS AN EQUITY GAP? ................................................................................................ 24 4.1 INTRODUCTION ...................................................................................................................... 24 4.2 LITERATURE REVIEW ............................................................................................................. 25 4.3 ANALYSIS .............................................................................................................................. 28 4.4 CONCLUSION .......................................................................................................................... 30 5. IS THERE AN EQUITY GAP IN NORWAY AND WHAT IS ITS SIZE AND LOCATION? 33 5.1 INTRODUCTION ...................................................................................................................... 33 5.2 LITERATURE REVIEW ............................................................................................................. 33 5.3 PHASES OF DEVELOPMENT: .................................................................................................... 39 5.4 ANALYSIS .............................................................................................................................. 41 5 5.5 CONCLUSION .......................................................................................................................... 44 6. WHY COULD THERE BE AN EQUITY GAP IN NORWAY? .......................................... 46 6.1 INTRODUCTION ...................................................................................................................... 46 6.2 LITERATURE REVIEW AND THEORETICAL BACKGROUND ........................................................ 46 6.3 ANALYSIS .............................................................................................................................. 52 6.4 CONCLUSION .......................................................................................................................... 56 7. HOW CAN EQUITY CROWDFUNDING AFFECT THE EQUITY GAP? ...................... 59 7.1 INTRODUCTION ...................................................................................................................... 59 7.2 THE CROWDFUNDING CONCEPT .............................................................................................. 60 7.3 CROWDFUNDING IN NORWAY ................................................................................................ 61 7.4 LITERATURE REVIEW ............................................................................................................. 62 7.5 ANALYSIS .............................................................................................................................. 67 7.6 CONCLUSION .......................................................................................................................... 71 8. CONCLUSION ......................................................................................................................... 73 9. BIBLIOGRAPHY .................................................................................................................... 75 9.1 LIST OF FIGURES ..................................................................................................................... 80 10. APPENDIXES .........................................................................................................................