Equity retention and social network theory in equity crowdfunding

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.

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Fig. 1

Notes

  1. 1.

    See “Seedrs Advances to the US” (www.thefundingcentre.com).

  2. 2.

    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.

  3. 3.

    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.

  4. 4.

    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.

  5. 5.

    In the case of multiple proponents, the gender of the CEO determines the Female_Founder variable.

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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.

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Correspondence to Silvio Vismara.

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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

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Keywords

  • Crowdfunding
  • Signaling
  • Network theory
  • National Systems of Entrepreneurship
  • Entrepreneurial finance

JEL Classifications

  • G18
  • G38
  • L26