Abstract
This paper makes two contributions to research on the new entrepreneurial finance context of equity crowdfunding. First, we compare its regulation around the world and discuss how this impacts the development of markets. Second, we investigate the signaling role played toward external investors by equity retention and social capital. Using a sample of 271 projects listed on the UK platforms Crowdcube and Seedrs in the period 2011–2014, we find that campaigns launched by entrepreneurs (1) who sold smaller fraction of their companies at listing and (2) had more social capital had higher probabilities of success. Our results combine findings in classical entrepreneurial finance settings, like venture capital and IPOs, with evidence from other, non-equity crowdfunding markets.
Similar content being viewed by others
Notes
See “Seedrs Advances to the US” (www.thefundingcentre.com).
Related to network theory, investigation not only of proponents’ social networks, but also the role of early investors in campaigns would be of interest. Unlike in other public equity markets, such as IPOs, the behavior of individual investors is transparent in crowdfunding platforms. Vismara (2015) found that information cascades play a crucial role in the success of equity crowdfunding campaigns.
Six projects in our sample have two proponents, and two projects have three proponents. For these projects, Social_Capital is measured as the average number of proponents’ LinkedIn connections.
Proponents who list projects on Seedrs are not required to disclose their exit intentions. Exit_IPO and Late_Exit are equal to 0 in these cases.
In the case of multiple proponents, the gender of the CEO determines the Female_Founder variable.
References
Acs, Z., Autio, E., & Szerb, L. (2014). National systems of entrepreneurship: Measurement issues and policy implications. Research Policy, 43(3), 476–494.
Agrawal, A. K., Catalini, C., & Goldfarb, A. (2013). Some simple economics of crowdfunding. In NBER working paper.
Ahlers, G. K., Cumming, D., Günther, C., & Schweizer, D. (2015). Signaling in equity crowdfunding. Entrepreneurship Theory and Practice, 39(4), 955–980.
Akyol, A., Cooper, T., Meoli, M., & Vismara, S. (2014). Do regulatory changes affect the underpricing of European IPOs? Journal of Banking & Finance, 45, 43–58.
Arndt, J. (1967). Role of product-related conversations in the diffusion of a new product. Journal of Marketing Research, 4(3), 291–295.
Audretsch, D. B., & Lehmann, E. E. (2013). Corporate governance in newly listed companies. In M. Levis & S. Vismara (Eds.), Handbook on research on IPO (pp. 268–316). Cheltenham: Edward Elgar.
Audretsch, D. B., Lehmann, E. E., Paleari, S., & Vismara, S. (2015). Entrepreneurial finance and technology transfer. Journal of Technology Transfer,. doi:10.1007/s10961-014-9381-8.
Bertoni, F., Meoli, M., & Vismara, S. (2014). Board independence, ownership structure, and the valuation of IPOs in continental Europe. Corporate Governance: An International Review, 22, 116–131.
Black, B., & Gilson, R. (1998). Venture capital and the structure of capital markets: Banks vs stock markets. Journal of Financial Economics, 47, 243–277.
Bonardo, D., Paleari, S., & Vismara, S. (2010). The M&A dynamics of European science based entrepreneurial firms. Journal of Technology Transfer, 35(1), 141–180.
Bonardo, D., Paleari, S., & Vismara, S. (2011). Valuing university-based firms: The effects of academic affiliation on IPO performance. Entrepreneurship: Theory and Practice, 35, 755–776.
Bruton, G., Khavul, S., Siegel, D., & Wright, M. (2015). New financial alternatives in seeding entrepreneurship: Microfinance, crowdfunding, and peer-to-peer innovations. Entrepreneurship: Theory and Practice, 39, 9–26.
Busenitz, L. W., Fiet, J. O., & Moesel, D. D. (2005). Signaling in venture capitalist—New venture team funding decisions: Does it indicate long-term venture outcomes? Entrepreneurship Theory and Practice, 29(1), 1–12.
Carter, R. B., Dark, F. H., & Singh, A. K. (1998). Underwriter reputation, initial returns and long run performance of IPO stocks. Journal of Finance, 53(1), 285–311.
Carter, R. B., & Manaster, S. (1990). Initial public offerings and underwriter reputation. Journal of Finance, 45, 1045–1067.
Cholakova, M., & Clarysse, B. (2015). Does the possibility to make equity investments in crowdfunding projects crowd out reward-based investments? Entrepreneurship Theory and Practice, 39(1), 145–172.
Colombo, M., Cumming, D. J., & Vismara, S. (2016). Governmental venture capital for innovative young firms. Journal of Technology Transfer, 41(1), 10–24.
Colombo, M. G., Franzoni, C., & Rossi Lamastra, C. (2015). Internal social capital and the attraction of early contributions in crowdfunding. Entrepreneurship Theory and Practice, 39(1), 75–100.
Cumming, D. J., & Johan, S. (2013). Demand driven securities regulation: Evidence from crowdfunding. Venture Capital: An International Journal of Entrepreneurial Finance, 15, 361–379.
Cumming, D., Pandes, A., & Robinson, M. (2015a). The role of agents in private entrepreneurial finance. Entrepreneurship Theory and Practice, 39(2), 345–374.
Cumming, D., Meoli. M., Signori, A., & Vismara, S. (2015b). Corporate governance in equity crowdfunding. In University of Bergamo working paper.
Enterprise Research Centre. (2014). Survey of business angels: Interim report. London: ERC/UKBAA.
Gao, X., Ritter, J. R., & Zhu, Z. (2013). Where have all the IPOs gone? Journal of Financial and Quantitative Analysis, 48(6), 1663–1692.
Groh, A., Liechtenstein H., & Lieser, K. (2012). The global venture capital and private equity country attractiveness index 2012 annual report.
Judge, W. Q., Witt, M., Zattoni, A., Talaulicar, T., Chen, J., Lewellyn, K., et al. (2014). Corporate governance and IPO underpricing in a cross-national sample: A multi-level knowledge-based view. Strategic Management Journal, 36(8), 1174–1185.
Leland, H. E., & Pyle, D. (1977). Informational asymmetries, financial structure and financial intermediation. Journal of Finance, 32, 371–387.
Leyden, D. P., Link, A. N., & Siegel, D. S. (2014). A theoretical analysis of the role of social networks in entrepreneurship. Research Policy, 43, 1157–1163.
Megginson, W. L. (2005). The financial economics of privatization. Oxford: Oxford University Press.
Megginson, W. L., & Weiss, K. (1991). Venture capitalist certification in initial public offerings. Journal of Finance, 46, 879–903.
Meoli, M., Paleari, S., & Vismara, S. (2013). Completing the technology transfer process: M&As of science-based IPOs. Small Business Economics, 40, 227–248.
Migliorati, K., & Vismara, S. (2014). Ranking underwriters of European IPOs. European Financial Management, 20(5), 891–925.
Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of Business Venturing, 29(1), 1–16.
Moritz, A., & Block, J. H. (2015). Crowdfunding: A literature review and research directions. In J. H. Block, A. Kuckertz (Series Eds.), D. Brüntje, O. Gajda (Vol. Eds.), FGF studies in small business and entrepreneurship: Vol. 1. Crowdfunding in Europe—State of the art in theory and practice. Cham: Springer.
Nahata, R. (2008). Venture capital reputation and investment performance. Journal of Financial Economics, 90, 127–151.
Nesta (2014). Understanding alternative finance: The UK alternative finance industry report 2014.
Ordanini, A., Miceli, L., Pizzetti, M., & Parasuraman, A. (2011). Crowd-funding: Transforming customers into investors through innovative service platforms. Journal of Service Management, 22(4), 443–470.
Paleari, S., Pellizzoni, E., & Vismara, S. (2008). The going public decision: Evidence from the IPOs in Italy and in the UK. International Journal of Applied Decision Sciences, 1(2), 131–152.
Paleari, S., Signori, A., & Vismara, S. (2014). How do underwriters select peers when valuing IPOs? Financial Management, 43(4), 731–755.
Ritter, J. R. (2013). Re-energizing the IPO market. In M. N. Bailey, R. J. Herring, & Y. Seki (Eds.), Restructuring to speed economic recovery. Washington: Brookings Press.
Ritter, J. R., Signori, A., & Vismara, S. (2013). Economies of scope and IPO activity in Europe. In M. Levis & S. Vismara (Eds.), Handbook on research on IPO (pp. 11–34). Cheltenham: Edward Elgar.
Shane, S., & Cable, D. (2002). Network ties, reputation, and the financing of new ventures. Management Science, 48(3), 364–381.
Vismara, S. (2015). Information cascades among investors in equity crowdfunding. SSRN working paper.
Vismara, S., Paleari, S., & Ritter, J. R. (2012). Europe’s second markets for small companies. European Financial Management, 18, 352–388.
Vismara, S., Signori, A., & Paleari, S. (2015). Changes in underwriters’ selection of comparable firms pre- and post-IPO: Same bank, same company, different peers. Journal of Corporate Finance, 34, 235–250.
World Bank (2013). Crowdfunding’s potential for the developing world. http://www.infodev.org/infodev-files/wb_crowdfundingreport-v12.pdf.
Zattoni, A., & Judge, W. (2012). Corporate Governance and Initial Public Offerings: An International Perspective. Cambridge: Cambridge University Press.
Acknowledgments
This paper was presented at the 2014 Conference on National Systems of Entrepreneurship in Mannheim (Germany), co-organized by the Zentrum für Europäische Wirtschaftsforschung (ZEW) and Small Business Economics: An Entrepreneurship Journal. I thank Zoltan J. Acs, David B. Audretsch, Erik E. Lehmann, and Georg Licht for the invitation, as well as Sandra Gottschalk, Gordon Murray, Sandra Schillo, Andrea Signori, Scott Stern, two anonymous reviewers, and conference participants for helpful comments. Nicola Berera provided superb research assistance.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Vismara, S. Equity retention and social network theory in equity crowdfunding. Small Bus Econ 46, 579–590 (2016). https://doi.org/10.1007/s11187-016-9710-4
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11187-016-9710-4