Signals in equity-based crowdfunding and risk of failure

Abstract

This study investigates signal validity in equity-based crowdfunding by examining whether signals that increase crowd participation are associated with higher post-offering success. Post-offering success is measured as the probability of survival. We use a hand-collected data set of 88 campaigns with over 64,000 investments and 742 updates from a well-established and leading German equity-based crowdfunding platform, Companisto. We find that indicating that the chief executive officer holds a university degree and a higher number of business-related updates are associated with a lower risk of failure, which is in line with recent research on offering success. The number of updates on external certification, promotions, and the team is associated with a higher risk of failure. In contrast to recent findings on offering success, we find that the equity share offered is positively related to post-offering success, whereas a high number of large investments or updates on campaign development are accompanied by a higher probability of failure. Our results provide guidance for entrepreneurs and investors regarding which signals are worth sending or using. Furthermore, these results suggest that investors are partly using wrong signals and challenge the rationality and wisdom of the crowd.

How do the network structures of lead investors affect the following of distant strangers? Evidence from Chinese equity crowdfunding

“…Future studies should explore the evolution direction of syndication networks with the participation of distant strangers. Third, crowd investors have an effect on new ventures' subsequent success (Reichenbach & Walther, 2021;Signori & Vismara, 2018). Future studies should explore how the participation of distant strangers affects the follow-on financing.…”

Crowdfunding small businesses and startups: a systematic review, an appraisal of theoretical insights and future research directions

“…The diffusion of innovations theory suggests that there are five key elements that could influence the diffusion of a new idea (through crowdfunding platforms), including the innovation itself, adopters/users, communication/media channels, time, as well as social systems (Kleinert, Volkmann and Grünhagen, 2020;Lim and Busenitz, 2020;Reichenbach and Walther, 2021;Rogers, 2003). Crowdfunding platforms allow creators to promote their projects to generate interest and to ultimately lure investors (Yang and Lee, 2019;Yang et al, 2016).…”

“…Project initiators of commercial entities may be wary of providing details of their intellectual properties (particularly during the early stages of their crowdfunding campaigns), as they may be concerned that someone could steal their ideas, innovations and projects (Kim and Hall, 2020). They could (willingly or unwillingly) decide not to disclose material information like historic defaults or hidden costs, even after the investor becomes a member of the crowdfunding platform (Carvajal et al, 2018;Kleinert et al, 2020;Lim and Busenitz, 2020;Reichenbach and Walther, 2021) As a result, investors of crowdfunded projects may not always have adequate and sufficient information on the borrowers of finance, as crowdfunding platforms may not exercise thorough due diligence on their users (Paschen, 2017). This argument is related to the reasoning behind the signaling theory.…”

“…This argument is related to the reasoning behind the signaling theory. In fact, many researchers relied on this theory to explore the signals that are communicated by project creators to lure investments from crowd funders (Kleinert et al, 2020;Lim and Busenitz, 2020;Reichenbach and Walther, 2021).…”

Monopolistic Dynamics with Endogenous Product Differentiation

“…In addition, since [13], the literature has extensively focused on the study of the emergence of complex dynamics even in the absence of interactions (nonlinear monopoly) due to the existence of bounded rationality [14][15][16][17][18][19][20]. In this regard, there is also growing attention given in the theoretical and empirical branches of the literature to defining possible heuristics for dealing with decision-making problems under uncertainty ( [21][22][23] and references therein).…”