Title: 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 causal evidence that start-ups with a prior crowdinvesting (securities-based crowdfunding) tend to be not selected by venture capitalists, while high sums of (reward-based) crowdfunding, collected fast by start-ups with a B2C business model, can have a positive effect on VC managers’ funding decisions. Our results also suggest that traditional forms of prefunding, i.e., prior business angel investments, by contrast significantly increase the likelihood of subsequent financing rounds. Theoretical and managerial implications are discussed.
Publication Year: 2018
Publication Date: 2018-08-01
Language: en
Type: article
Indexed In: ['crossref']
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