Be Careful What You Ask For: Fundraising Strategies in Equity Crowdfunding

Hellmann, Thomas; Mostipan, Ilona; Vulkan, Nir

doi:10.2139/ssrn.3448596

Cited by 4 publications

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“…Several ECF campaigns allow investors to benefit from tax incentives. Several prior studies have indicated that this tax incentive positively affects the success of ECF (Hellmann et al, 2019;Mochkabadi & Volkmann, 2018;Vulkan, Åstebro & Sierra, 2016), that the tax benefit has no effect (Vismara, 2016(Vismara, , 2018, and that tax incentive evaluations are inconsistent. Therefore, we set Hypothesis 1-9.…”

Section: Signals About Tax Incentivesmentioning

confidence: 99%

What makes equity crowdfunding successful in Japan? Testing the signaling and lack of financial literacy hypotheses

Nose,

Hosomi

2023

JEMI

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PURPOSE: The first objective of this study is to identify the factors that contribute to the success of equity crowdfunding (ECF) campaigns in Japan. We examined what makes a campaign successful using data from 217 campaigns conducted on FUNDINNO, Japan’s largest ECF platform, between February 2017 and May 2021. The second objective is to assess individual investors’ financial literacy based on the ECF campaign’s success or failure. This study is unique in that it focuses on funding method differences as well as the contents of the business plans disclosed in the ECF campaigns. In Japan, a common equity campaign and stock acquisition rights campaign are run on the same ECF platform, as if they were the same type of funding. Common stock and stock acquisition rights are treated differently by venture capitalists and other professional investors. By comparing the success or failure of the two Japanese projects, we can assess individual investors’ financial literacy after taking into account the project signals. METHODOLOGY: The “Signaling Hypothesis” and the “Lack of Financial Literacy Hypothesis” were tested. Nine and four variables were set as proxy variables for the Signaling Hypothesis and the Lack of Financial Literacy Hypothesis, respectively. This study first divides the qualitative data into success/failure dichotomies for the proxy variables that comprise the hypotheses and then uses a chi-square test to examine the composition ratio of each. The quantitative data among the hypotheses’ proxy variables are then tested for differences in means (t-test) and medians (Wilcoxon signed-rank test). Subsequently, we perform a probit analysis with the explained variable being “success (1)/failure (0)” and the explanatory variable being a proxy variable for the hypothesis. We begin with a probit analysis, and the Logit model is then introduced. Finally, a multiple regression analysis is run with the explained variables “fundraising rate” and “number of investors” and the hypothesized proxy variables as explanatory variables. FINDINGS: We found that the “number of directors” is an effective management ability indicator of ECF success. In terms of start-up fundamentals, investors appear to accept the signals “intellectual property”, “product releases” and “tax incentives.” Awards affected the size of the final funding round. In contrast, B2C companies negatively signaled to private investors. The proxy variable “in final year sales” was supported concerning the lack of a financial literacy hypothesis. Individual investors can be assumed to be financially literate if they perform due diligence. However, since “expected rate of return (Internal Rate of Return, hereafter abbreviated as IRR)” and “common stock dummy” are uncorrelated, we can conclude that they do not demonstrate financial literacy in “valuation,” nor whether or not the investment is profitable. Thus, individual investors’ financial literacy in the Japanese ECF can be considered to be limited. IMPLICATIONS: We have demonstrated which signals investors in Japan’s ECF campaigns respond to. These guidelines will be useful for future start-ups planning ECF campaigns. We were able to identify the lack of financial literacy among ECF individual investors. Therefore, for Japan’s equity capital market to grow in the future, individual investors’ financial literacy must be improved. ORIGINALITY AND VALUE: With very limited analysis in Asia, home to the world’s second- and third-largest stock markets, we have identified the factors behind the success of Japan’s ECF. Identifying success factors in a country like Japan, where many individual investors are extremely risk averse, will provide new insights. By comparing the success or failure of the two types of Japanese ECF projects (common equity projects and stock acquisition rights), we could test the financial literacy of individual investors, taking into account the project signals.

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Section: Signals About Tax Incentivesmentioning

confidence: 99%

What makes equity crowdfunding successful in Japan? Testing the signaling and lack of financial literacy hypotheses

Nose,

Hosomi

2023

JEMI

View full text Add to dashboard Cite

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Section: Signals About Tax Incentivesmentioning

confidence: 99%

Untitled

2023

JEMI

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The JOURNAL OF ENTREPRENEURSHIP, MANAGEMENT AND INNOVATION is an interdisciplinary, double blind-reviewed journal, emphasizing theoretical and empirical articles in entrepreneurship, management, innovation and related fields. The journal is published both in printed form and on-line at www.jemi.edu.pl. THE ENTREPRENEURSHIP AREA OF THE JOURNALThe entrepreneurship area of the journal covers the three major topics: 1) venture creation and small business, 2) the impact of entrepreneurship on economic growth including local and regional development, and 3) entrepreneurial attitudes and motives. We invite original papers of theoretical and empirical nature, rooted in the disciplines of economics, management, sociology, political science, and psychology. The interdisciplinary research is encouraged to assure a comprehensive approach to the topics discussed and to advance both theory and practice. THE MANAGEMENT AREA OF THE JOURNALManagement, as a thematic scope of the journal, focuses on theoretical and empirical considerations of various areas, such as: strategic management, operation or production management, human resource management, information and management, contemporary management problems, new methods and management tools, new forms of organization and management, new threats in management, or new challenges in the organization's environment. THE INNOVATION AREA OF THE JOURNALThe innovation area of the Journal's focus will emphasize a broad range of topics and approaches, including (but not limited to): 1) role of private and public sector in development and diffusion of innovations, 2) product, process and business model innovations, 3) profiles of innovative products, structures and processes, aimed at improving management practice and providing inspiration for entrepreneurs, 4) comparative analyses of national, regional policy or sector issues, such as R&D trends, patents, citations etc., 5) theoretical work on economic, organizational and scientific aspects of innovation, encouraging the search for inspirations from various disciplines, including natural sciences, arts and humanities. THE ENTREPRENEURIAL FINANCE AREA OF THE JOURNALThe entrepreneur or entrepreneurial firm, the institutions providing finance to the entrepreneurs, and the different types of financial sources used by the entrepreneurial firms or investors. Among the areas of our special interests might be enumerated: accounting and corporate finance, financial market as a background for SME development, entrepreneurial finance, regulatory and supervisory aspects related to corporate finance.

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“…Campaign studies previously described focused on the issuer's external characteristics, such as entrepreneurial qualities, patents, website attractiveness and the presence of angel investors, but not on the issuer's business plan or the share price of the issued stock. Hellmann et al (2019) used the pre-money-market capitalization as an explanatory variable for the success or failure of a campaign but did not examine returns on the investment. Uchida and Hayashi (2018) published a crowdfunding campaign study in Japan, although not related to ECF.…”

Section: Campaign Studymentioning

confidence: 99%

Equity crowdfunding and financial literacy of individual investors in Japan

Fujii

Hosomi

Nose

2021

JCMS

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PurposeThis study aims to fill the gap in previous research that focuses on the superficial aspects of equity crowdfunding (ECF) campaigns and financial practices by examining financial literacy aspects, such as due diligence and valuation, in terms of factors that influence Japanese individual investors' investments in ECF.Design/methodology/approachThe status of information disclosure in ECF campaigns is checked. In addition, the feasibility of the initial due diligence and valuation using this information is verified. Specifically, the lack of financial literacy hypothesis is developed and (1) expected market capitalization in the final fiscal year of the business plan and (2) expected returns on investment (IRR: internal rate of return) are estimated.FindingsECF campaigns in Japan disclose information equivalent to that obtained by professional venture capitalists. Analysis of the disclosed business plan allows for initial due diligence and valuation. By contrast, due diligence reveals that some projects are unlikely to be listed even if their business plans are met, and others have low IRRs. In addition, a stock acquisition rights project, in which even professional investors are unable to calculate IRRs, is completed at the same rate as a common stock project; this suggests that individual investors lack financial literacy.Originality/valueAnalyzing ECF from financial literacy aspects, such as due diligence and valuation, is unique. Such aspects are essential for private equity investments but have not been addressed in previous studies.

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Be Careful What You Ask For: Fundraising Strategies in Equity Crowdfunding

Cited by 4 publications

References 0 publications

What makes equity crowdfunding successful in Japan? Testing the signaling and lack of financial literacy hypotheses

What makes equity crowdfunding successful in Japan? Testing the signaling and lack of financial literacy hypotheses

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Equity crowdfunding and financial literacy of individual investors in Japan

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