The entrepreneurial finance markets of the future: a comparison of crowdfunding and initial coin offerings

Abstract

Entrepreneurial finance markets are in a dynamic state. New market niches and players have developed and continue to emerge. The rules of the game and the methods for receiving financial backing have changed in many ways. This editorial and the special issue of Small Business Economics focus on crowdfunding (CF) and initial coin offerings (ICOs), which are two distinct but important entrepreneurial finance market segments of the future. Although the two market segments initially appear to be similar, we identify differences between them. Our comparison focuses on the stakeholders, micros t r u c t u r e s , r e g u l a t o r y e n v i r o n m e n t s , a n d development of the markets. We conclude with suggestions for future ICO and CF research.

Talking about a revolution? Costly and costless signals and the role of innovativeness in equity crowdfunding

“…It accounted for nearly 40 percent of global equity crowdfunding market in 2016 (Walthoff-Borm, Schwienbacher, and Vanacker 2018) and represented 73 percent of the European market in 2017 (Ziegler et al 2018). Unlike the more traditional entrepreneurial finance segments such as the venture capital (VC) or initial public offering (IPO) market, the United States (US) does not dominate (Block et al 2020). Some of the equity crowdfunding platforms with the largest transaction volumes, which includes Crowdcube and Seedrs, are based in Europe (Ziegler et al 2018).…”

“…To investigate this topic, we use a sample of companies that have raised funding via equity crowdfunding. In the last ten years, equity crowdfunding has become an established source of financing for entrepreneurial firms (Hornuf, and Schwienbacher 2018;, and has been shown to have the potential to shape future entrepreneurial finance markets (Block et al 2020). Equity crowdfunding involves the crowd injecting money via the issue of equity by unlisted companies (Ahlers et al 2015).…”

Initial coin offerings, information disclosure, and fraud

“…However, new technologies have brought the digitalization a step further, including the invention of the blockchain, which enables new forms of contracting and issuance of tokens and securities. Recently, startups have started using the blockchain to raise money in the form of an ICO (Block et al 2020).…”

“…24 These platforms may even be existing equity crowdfunding platforms integrating ICOs, as they have done similar expansions for other asset classes such as real estate crowdfunding, fixed income products, and secondary markets. In fact, combining crowdfunding and ICOs may be optimal to overcome the current inefficiencies of crowdfunding or the shortcomings of ICOs respectively (Ackermann et al 2020;Block et al 2020). Moreover, these platforms could use small business credit scoring, a technology that has been used by financial institutions to evaluate applicants for small loans that involves analyzing data about the owner of the firm and the limited data about the firm 24 Crowdfunding campaigns in the early days of the market were also run on individual websites set up by the issuer; for example, Trampoline Systems in the UK.…”

Signals in equity-based crowdfunding and risk of failure

“…In particular, the brokerage for equity-like forms of financing to startups via Internet-based crowdfunding platforms has showed strong growth (Pichler and Tezza 2016). Consequently, the interest in the research on this topic has grown (Block et al 2018b(Block et al , 2020. Extensive research has thus been conducted on the signals provided during crowdfunding campaigns that influence investors' investment behavior (Vismara 2018b).However, since Internet-based crowdfunding is a relatively new phenomenon, only a few studies have been conducted on venture performance after the completion of the crowdfunding campaign (…”