Access Denied: How Equity Crowdfunding Platforms Use Quality Signals to Select New Ventures

Abstract

Among the new ventures actively seeking funds through equity crowdfunding, only a lucky few seemingly survive the rigorous selection process imposed by equity crowdfunding platforms (ECFPs). With a conjoint experiment involving decision-makers from 50 platforms in 22 countries, this study provides first quantitative evidence regarding how ECFPs actually use quality signals to select new ventures to start fundraising campaigns. The ECFPs interpret signals differently, depending on whether they impose a co-investment requirement or generate revenues from new ventures’ long-term performance. The effectiveness of the signals also is contingent on the applicant’s industry background and the signals’ accessibility in the country where the ECFP operates.

Signals for Entrepreneurial Family Lending: Psychological Capital as an Intent Signal

“…Specifically, the quality signals include corporate competitive advantage and firm performance. Prior founding experience supports that these signals influence obtaining investment in the context of venture capital or crowdfunding due to improved information asymmetry (Gerrit et al, 2015;Ko and McKelvie, 2018;Kleinert et al, 2021). In this regard, we argue that these signals still are valuable predictors of entrepreneurial potential in entrepreneurial family financing.…”

How to capitalize on investors by using information presentation and feedback on crowdfunding projects

“…Fundraisers with crowdfunding experience often perform better than novices in crowdfunding activities and can better ensure the success of entrepreneurial activities (Colombo et al, 2015;Lafontaine and Shaw, 2016). The reason is that fundraisers have been access to different sectors of knowledge and make relations with different supporters through multiple crowdfunding activities to accumulate rich human capital and crowdfunding experience (Ko and McKelvie, 2018;Kleinert et al, 2021). Human capital includes rich industry experience and keen observation of entrepreneurial opportunities (Martin et al, 2013), and crowdfunding experience includes goodwill value earned from individual or collective social relations (Gedajlovic et al, 2013).…”

“…With the uncertainty of crowdfunding investments, investors normally judge projects on the basis of the project information. High-quality signal information certainly boosts their investment confidence (Bapna, 2019;Kleinert et al, 2021). These high-quality signals include quality characteristics, including the financial and social status of the crowdfunding project (Allison et al, 2017); a description of the founder experience, the management system, and the equity allocation scheme of the startup; among others (Robb and Robinson, 2014).…”

The role of equity crowdfunding campaigns in shaping firm innovativeness: evidence from Italy

“…Several crowdfunding models have emerged, and among them, equity crowdfunding is one of the fastest-growing (Walthoff-Borm et al, 2018). It allows entrepreneurs to make open campaigns for selling equity shares of their start-ups to the crowd (Ahlers et al, 2015) through specific platforms that connect them with investors (Kleinert et al, 2021). This often attracts a large audience of small amateur investors (Polzin et al, 2017;Vismara, 2018).…”