Journal Article

Third-party signals in equity crowdfunding

Grünhagen, Marc, Kleinert, Simon, Volkmann, Christine

2020

Overview

Drawing on signaling theory, this study provides preliminary evidence that prior financing certifies firm quality to investors and reduces information asymmetries in equity crowdfunding. We examine 221 business plans and project descriptions of start-ups that ran equity crowdfunding campaigns on Crowdcube in 2017 and 2018. Almost half of the start-ups had previously raised funds through business angels, venture capitalists, crowdfunding, or grants. Prior financing positively affects campaign success. Overall, the effect is larger for firms backed by multiple investor types and for firms that have run successful crowdfunding before. To isolate the quality signal from the additional benefits related to an affiliation with other investors, we analyze whether the effect of prior financing is moderated by the uncertainty around a project. In support of a signaling effect, preliminary evidence suggests that prior financing is most relevant for firms in the uncertain seed stage. Among the different investor types, we find that, in particular, an affiliation with venture capitalists signals quality. Such an affiliation is more important for firms with low levels of human and social capital. Our study adds to the understanding of how equity crowdfunding interacts with traditional forms of entrepreneurial finance.

• Publisher: Springer Science + Business Media,Springer US,Springer Nature B.V
• Subject: Business and Management / Business planning / Campaigns / Companies / Crowdfunding / Entrepreneurs / Entrepreneurship / Equity / Finance / Financing / Grants / Industrial Organization / Investors / Management / Membership / Microeconomics / Signaling / Social capital / Startups / Third party / Uncertainty / Venture capital