Abstract
This literature survey focuses on the pre-investment phase of equity crowdfunding, encompassing three key areas: (i) a comparative analysis of equity crowdfunding (ECF) in relation to traditional sources of entrepreneurial funding, such as venture capital and business angels; (ii) a discussion on why and when entrepreneurs prefer ECF; and (iii) an in-depth examination of the diverse models of ECF platforms. This paper is relevant for both practice and research. It can help entrepreneurs to identify under what circumstances ECF might be preferable to traditional sources of start-up funding and which platform model best suits their needs. It is also relevant for research because, besides providing an organized summary of the literature on this new way of financing start-ups, it also identifies some inconsistencies and gaps in the existing literature, providing some clues for further investigations.
Plain English Summary
This paper provides a literature survey on the pre-investment phase of ECF, exploring the decisions made by entrepreneurs before embarking on the ECF campaign. Specifically, we conduct a comparative analysis of ECF against alternative entrepreneurial funding sources. Additionally, we explore the motivations driving entrepreneurs’ preference for ECF and thoroughly examine various ECF platform models, providing insights into their distinct characteristics. The paper concludes by proposing avenues for further research and acknowledging the limitations of current investigations. Two primary implications emerge from this study. Firstly, it proves invaluable for entrepreneurs aiming to discern the situations where ECF presents advantages over traditional start-up funding sources and to identify the platform model that aligns best with their specific needs. Secondly, it provides a structured, comprehensive, updated summary of the existing literature on this innovative start-up funding source. Furthermore, it identifies inconsistencies and gaps within the current body of research, offering valuable insights and suggesting avenues for further investigation in this field.
Similar content being viewed by others
Avoid common mistakes on your manuscript.
1 Introduction
Many studies highlight the existence of a financial gap for start-ups, which undermines their ability to develop and evolve growth (OECD, 2004). Furthermore, the financial crisis of 2008–2009 exacerbated this issue by worsening the financing conditions. However, the technological, social, and cultural changes and the growing phenomenon of disintermediation contributed to the emergence and expansion of alternative sources of financing outside the traditional financial system (Block et al., 2018). Crowdfunding is one of those alternatives that has begun to assert as a popular method of obtaining funding for start-ups and small and medium-sized enterprises (hereafter SMEs). While crowdfunding encompasses various models, such as donation, reward, lending, and equity, this paper specifically concentrates on equity crowdfunding (hereafter ECF), recognized as the most complex and structured crowdfunding model.
Since its emergence, in the past decade, the crowdfunding industry has experienced remarkable growth worldwide.Footnote 1 At the same time, academic interest in this field also increased significantly. Currently, the literature on crowdfunding spans a broad spectrum of topics and continues to expand. For instance, as for July 2023, a search within Scopus database, limited to the areas of Business, Management and Accounting and Economics, Econometrics and Finance, has yielded over 2300 articles that included the term “Crowdfunding” in their title, abstract, or keywords. Even when focusing specifically on “Equity Crowdfunding” or “Equity-based crowdfunding”, there are 287 articles, with 185 (64%) published in the last three and a half years (since 2020). Indeed, maintaining up to date knowledge in this domain poses a challenge for scholars. Consequently, the assembly of comprehensive research, outlining key findings, assumes paramount importance for the advancement of academic knowledge concerning this innovative start-up funding method. Furthermore, it holds substantial value for entrepreneurs who must decide when ECF might offer advantages over conventional start-up funding sources and which platform model aligns best with their specific needs.
Investing in ECF typically involves three distinct phases. The first phase, known as the pre-investment phase, is where entrepreneurs must make crucial decisions regarding the most suitable source of financing and select the appropriate ECF platform model. Additionally, during this phase, platforms curate and select projects for presentation to potential investors. The second phase centres around the campaign itself. At this stage, entrepreneurs and platforms work together to ensure the success of the campaigns and secure project funding. Meanwhile, investors aim to make informed decisions to maximize their investment returns. The third and final phase pertains to post-campaign performance, which includes metrics such as bankruptcy rates, subsequent financing, and overall company growth.
Given the extensive body of literature on equity crowdfunding, compiling all the information into a single article poses a significant challenge. Therefore, in our opinion, it is advisable to segment the literature review. This approach allows us to focus on each phase individually, as they comprise distinct sets of questions. Specifically, in the first phase, the research questions revolve around comparing ECF with VC/BA, understanding why entrepreneurs choose ECF over other sources of funding, and determining how to select the most suitable platform for ECF campaigns. In the second phase, the primary research question pertains to the determinants of success in ECF campaigns. Finally, in the third phase, the main research questions centre on post-ECF campaign outcomes, including firm failure rates, growth trajectories, and follow-on funding. In our paper, we focus on the first phase because that’s where entrepreneurs make the initial decisions. These decisions shape what happens next with the venture during and after the campaign. As the consequences significantly differ from the usual funding sources like venture capital or business angels, these discrepancies must be recognized when the entrepreneur makes those initial decisions.Footnote 2
We adopt a systematic literature review approach because it is defined as appropriate to “synthesize research findings in a systematic, transparent, and reproducible way” (Snyder, 2019, p. 334). It is also considered the most efficient method to identify and review extensive literature (Tranfield et al., 2003). Following the guidelines for a systematic literature review proposed by Tranfield et al. (2003), the first step was the identification of the keywords and search terms. We use the search terms “Equity crowdfunding”, “Equity-based crowdfunding”, “Crowdinvesting”, and “Crowd Investing” because these terms are used interchangeably in the ECF literature. For selecting the studies for the literature review, we used two relevant bibliographic databases: Web of Science and Scopus.Footnote 3 We limited the search to English documents and published articles (or early access) because we wanted to focus on peer-reviewed contributions. We excluded book chapters, conference papers, and trade journals because of the difficulty in assessing if they were peer-reviewed. As we are only interested in economics and finance topics, we restricted the subject areas to Business, Management, Economics, or Finance. According to these criteria, we found 241 documents from the Web of Science and 287 from the Scopus database. After excluding the duplicates of both reference databases, our preliminary list consists of 269 papers. Then, to ensure that equity crowdfunding is the paper’s main topic, we excluded those that do not have the exact phrase or synonym of search terms within their title, keywords, or abstract. We also excluded editorial and literature review papers to restrict the analysis to theoretical and empirical studies about equity crowdfunding. Finally, as our primary interest is in the ECF pre-campaign, we selected only the papers related to this phase. According to the described research protocol, we selected 65 papers for the literature survey on the pre-campaign choices of entrepreneurs interested in ECF.Footnote 4
The remainder of this paper is organized as follows. In Section 2, we compare the ECF with traditional funding sources for start-ups, highlighting the main differences between venture capital and business angels investors (VC/BA investors) and crowdfunding investors. In Section 3, we address why and when entrepreneurs prefer ECF to traditional funding. In Section 4, we analyse the different models of ECF platforms. Before concluding the paper, in Section 5, we provide insights into potential directions for future research.
2 Comparison of ECF with traditional funding sources for start-ups (VC/BA)
2.1 Asymmetric information, adverse selection, and moral hazard
Equity crowdfunded firms have characteristics of both public and private equity firms (Cummings et al., 2020). As public firms, they have many small investors, and as private firms, the entrepreneurs retain a large share of the equity (Cumming et al., 2021a, b). The high dispersion of capital implies that small shareholders have little incentive to monitor the firms (Hart, 1995), and many agency problems may arise from the inherent separation of ownership and control (Shleifer & Vishny, 1997). Crowd investors do not have the same experience and knowledge to evaluate business plans and select projects/start-ups as venture capitalists and business angels (Ahlers et al., 2015). Furthermore, given the small investment amounts, the resources (time and money) needed to perform complete due diligence and monitor projects are much higher for crowd investors (Agrawal et al., 2014).
Thus, while VC/BA focus on their expertise and due diligence procedures to select the ventures to fund, some argue that crowd investors use a different selection mechanism, namely the “wisdom of the crowd” (Cumming et al., 2021a, b; Surowiecki, 2004; Walthoff-Borm et al., 2018a, b).
The principle of the wisdom of the crowd (Surowiecki, 2004) posits that the crowd possess diverse sources of information and expertise, surpassing that of any individual, including experts. This collective knowledge can be effectively used through group decision-making processes (Schwienbacher & Larralde, 2012), contributing to the mitigation of information asymmetries in equity crowdfunding. As highlighted by Vismara (2018), early bids attract later investors, suggesting that undecided investors observe the behaviour of early investors to make their investment decisions. This phenomenon, known as observational learning, suggests that early investors transmit a relevant and positive signal to late investors, which could be a rational decision in the context of ECF. Since investors often contribute small amounts, the costs of thoroughly evaluating each firm can be disproportionally high. Additionally, many investors lack the qualifications to distinguish between good and weak projects. Therefore, it becomes rational for investors to observe and use the information about the behaviour of previous investors to inform their investment decision.
However, problems related to information manipulation can arise when dealing with information cascades. Like other digital finance markets, ECF investors can retract their bids within a specified time limit. In ECF, given the visibility of bids online, this investor’s right can be exploited to manipulate the information accessible to investors and shape their investment decisions. Meoli and Vismara (2021) found that withdrawals of investments in ECF are frequent before the end of offerings, particularly among members of the crowdfunding platform. This trend is accentuated in low-quality offerings, suggesting that early bids are strategically employed to influence campaign dynamics and boost subsequent bids.
Walthoff-Borm et al. (2018a, b), comparing crowdfunded firms with non-crowdfunded firms, find that both groups show similar post-campaign profitability. However, contrary to their expectations, failure rates are higher for crowdfunded firms, suggesting that the “wisdom of the crowd” does not overcome the adverse selection issues. Thus, given the lack of clear empirical evidence that the “wisdom of the crowd” is an effective way to reduce adverse selection and moral hazard costs, Cumming et al. (2021a, b) highlight the need for the use of other governance mechanisms to deal with such problems. For instance, in addition to the regulatory framework of equity crowdfunding (e.g. investor protection laws), the platform model plays a relevant role in this context. On the one hand, platform due diligence can be an effective governance mechanism to mitigate adverse selection problems. Given the reputational concerns, excluding low-quality projects from the listing is in their interest. On the other hand, the nominee structureFootnote 5 used by some platforms (instead of a direct shareholder model) can be more effective in dealing with moral hazard issues because in this model, the shareholder dispersion and the coordination costs are reduced, and the free rider problems among individual crowd investors are avoided. There are also some hybrid crowdfunding platforms (e.g. SyndicateRoom and AngelList) that combine a lead investor with the crowd. The lead investor (professional investors, such as a business angels or a venture capitalist) must invest a minimum percentage of the round (e.g. 40% in SyndicateRoom), negotiate the terms of the campaign (firm valuation, funding target, etc.), and use their expertise to conduct due diligence and monitoring the investment. The crowd investors receive the same financial terms as the lead investors. These hybrid crowdfunding platforms combine the advantages of professional investors (expertise, ability, and resources to conduct due diligence and monitoring) with the “wisdom of the crowd” and could be an efficient way to reduce the information asymmetries problems, such as adverse selection and moral hazard (Agrawal et al., 2016).
2.2 Geographic and entrepreneur’s diversity
Many studies on VC/BA suggest that entrepreneurs and funders tend to be close geographically, as it facilitates the identification of opportunities, the assessment of entrepreneurs’ reputation, and the conduction of due diligence and monitoring in post-investment (e.g. Lerner (1995) and Van Nieuwerburgh and Veldkamp (2009)). While some suggest that ECF platforms tend to cluster in financial centres within regions (Rossi & Vismara, 2018), crowdfunding platforms possess characteristics that can potentially mitigate market frictions associated with geographical distances (Agrawal et al., 2015; Cumming et al., 2021a, b; Guenther et al., 2018). According to Agrawal et al. (2015), there are three reasons for it. First, as projects are published online, it is easier to find new investment opportunities. Second, given the small contributions, the investment risk and the need for monitoring are reduced. Third, the information problems could be reduced by platforms’ (standardized) information about projects and funders. However, even if crowdfunding reduces the geographical constraints of investments in start-ups, it does not eliminate all of them. According to Bade and Walther (2021), the limited capacity of investors to process information, especially in ventures with more significant information asymmetries (such as young ventures) and the need to allocate their scarce attention resources to selected campaigns increase the likelihood that they will invest in local ventures. Thus, empirical literature continues to identify a local bias in equity crowdfunding investments, noting that the sensitivity to distance depends on investor’s profile. For instance, Guenther et al. (2018) find empirical evidence that while overseas investors are not sensitive to distance, that is not so evident for home-country investors. Hornuf et al. (2022) suggest that crowdfunding investments tend to display a local bias, even when accounting for investors with personal connections to the entrepreneur. However, angel-like investors and individuals with personal connections to the entrepreneur exhibit a more pronounced local bias compared to more experienced investors who maintain a more diversified ECF portfolio. They also demonstrate that investors who predominantly allocate their investments to local companies tend to choose start-ups that face insolvency more frequently, suggesting that certain local ECF investments may represent a behavioural irregularity rather than a rational preference. Moreover, local bias is also detected in the pre-investment phase of ECF investments, as the geographic distance between the firm and the platform’s location affects negatively the likelihood of projects being launched in the ECF platform (Zhang et al., 2019).
Prior literature also suggests the existence of gender and race gaps in entrepreneurial finance, showing evidence of higher constraints on access to capital for businesses owned by a woman (Coleman & Robb, 2009; Greene et al., 2001) and by black person (Fairlie & Robb, 2007). However, some argue that ECF can help the democratisation of entrepreneurial finance. For instance, Cumming et al., (2021a, 2021b) compare two samples of equity offerings, one sample of ECF campaigns from Crowdcube and another of IPOs from London’s Alternative Investment Market (AIM) and provide some evidence that underrepresented groups of potential entrepreneurs on traditional stock markets (e.g. IPO) use ECF. They find evidence that companies with younger team members are more likely to launch ECF offerings than IPOs and that ECF alleviates some distance-related economic friction between entrepreneurs and investors. However, while they do not find evidence that female entrepreneurs have higher chances of successfully raising capital in ECF than in an IPO, the research shows a higher sensitivity to ethnicity from small investors relative to professional investors, as minority entrepreneurs are associated with a higher number of investors. Nevertheless, empirical research about the relevance of gender on ECF is not consensual. While some suggest a limited impact of women-owned start-ups in the democratising access to capital access in the ECF (Andrieu et al., 2021; Geiger & Oranburg, 2018; Malaga et al., 2018), others suggest that gender gap may be reversed in the context of crowdfunding, even if women’s advantage could be weaker in later development stages of ventures (Zhao et al., 2021). However, given the relatively recent emergence of research on gender in the context of ECF, some argue that certain factors may not have been considered yet. For instance, Kleinert and Mochkabadi (2022) find evidence that the increased challenges female entrepreneurs encounter in obtaining funding are not solely determined by gender. These challenges also depend on how quality signals related to entrepreneurs are perceived. They observed that established quality signals, such as managerial experience, predominantly benefit male entrepreneurs, whereas media coverage serves as a more influential signal for female entrepreneurs. In a different perspective, Prokop and Wang (2022) examined whether the gender impact remains consistent in both early and later campaigns. He found that the gender of the firm’s managing director does not influence significantly funding outcomes in initial ECF campaigns. However, a gender gap is observed in seasoned ECF offerings, with female manging directors tending to raise less capital from crowdfunding investors compared to their male counterparts (Prokop & Wang, 2022).
2.3 Type of investors and its contributions for start-up growth
Some argue that small investors may benefit from the presence of large institutional investors who can contribute to the selection, monitoring, and management support of investment opportunities (Hornuf & Schwienbacher, 2018b). Although one of the disadvantages highlighted in ECF is the opportunity costs associated to the advantages of professional investors (Agrawal et al., 2014), there is evidence that crowd equity investors can also enhance the performance of start-up firms, providing insights related to product development, defining business growth strategies, assisting with market expansion, sharing market knowledge, and facilitating access to networks and industry players (F. Di Pietro et al., 2018). However, it is important to note that the extent of these benefits may vary among start-ups and it is contingent upon the characteristics of the start-ups and their founders. While most crowdfunding investors demonstrate some level of involvement with the start-ups they invest in, the extent of their involvement varies. Garaus et al. (2020) found evidence that the majority of crowdfunding investors participate in low-involvement activities, such as word of mouth to promote the product or the company, buy the product or service, and provide feedback. However, there are also some investors who take part in high-involvement activities, such as providing strategic advice or feedback concerning the development of the new product. The authors noted that the level of involvement is positively related with the size of the investment. Additionally, high-involvement activities tend to be associated with personal proximity and intrinsic motivation. Nevertheless, geographic proximity and age are only associated with low-involvement activities.
2.4 Exit options
VC/BA also diverge from crowdfunding investors in terms of exit options. VC often opt for IPO for their disinvestments,Footnote 6 but this exit option might not be feasible for crowdfunding-backed firms due to their small size (Hornuf & Schwienbacher, 2016). Further, there is empirical evidence suggesting that post-offering deals, such as M&A or IPO, are rare for crowdfunded firms. For instance, Signori and Vismara (2018), who analysed a sample of firms successfully funded on the Crowdcube platform between 2011 and 2015, found evidence that by the end of April 2017, only 1.4% of these firms were involved in M&A (and any of them had undertaken an IPO). Even so, there is some evidence that firms that explicitly communicate their intention to list on a secondary market after the ECF campaign are more likely to raise more money and get larger individual investments (Lukkarinen & Schwienbacher, 2023). An alternative exit option for ECF investors could involve the implementation of an early exit mechanism, which would enable investors to withdraw their investment and their shares will be repurchased. However, there is evidence in the Chinese market that introducing an early exit mechanism substantially reduces the total funds raised, the number of investors, and the overall funding percentage of a crowdfunding campaign (Bi & Lv, 2023). This evidence could be explained by the fact that although early exit options offer investors the ability to exit projects prematurely and increase the flexibility of their investments, it is important to note that investors might incur higher costs in exchange for this exit privilege.
2.5 Investment process
Finally, another distinction between VC/BA and ECF lies in the investment process. Salomon (2016) identifies that crowdfunding portals and VC investment processes share similarities but differ in two key aspects: the timing of fundraising and the selection/evaluation phase. In VC, where investments are made on behalf of institutional investors, the first step in the investment process involves fundraising for the VC fund, and only then the selection of projects begin. In equity crowdfunding, this sequence is reversed. Projects are selected by the crowdfunding platform before fundraising takes place. Regarding the selection/evaluation phase, VCs typically assume full responsibility for their investment decisions. In ECF, this phase is divided into two stages: first, there’s pre-selection, conducted by the platform team, and second, crowd evaluation and selection come into play. Crowdfunding platforms also tend to conduct lighter and less exhaustive due diligence compared to VC firms. Salomon (2016) also suggests that a combined model, as observed in a case study of an ECF platform in Switzerland, which integrates VC practices with ECF, can be mutually beneficial. In such a model, VC benefit from the “social proof”, which helps to reduce uncertainty associated with start-ups. Simultaneously, ECF gains from the VC’s expertise in conducting deep due diligence, providing monitoring, and participating on the start-ups’ boards.
While distinct differences have traditionally observed between traditional funding sources for start-ups and ECF, a recent study on the evolution of ECF in Finland suggests a progressive maturation of the ECF industry, aligning it with certain practices common in VC and BA funding (Lukkarinen et al., 2022). The study reveals that critical factors contributing to fundraising success in initial ECF campaigns, such as early support from private networks, minimum investment thresholds, and specific business models, have diminished in significance during later campaigns. These factors have been replaced by considerations more typical of experienced investors. This maturation trend is evident in campaigns, investment targets, and investor behaviours. Nevertheless, ECF still retains its unique digital, platform-related, and diversity-focused characteristics, setting it apart from traditional entrepreneurial finance methods.
Appendix 3 summarizes the main findings of ECF literature that compares ECF with traditional entrepreneurial funding sources.
3 Why and when do entrepreneurs prefer ECF?
In this section, we will cover why and when entrepreneurs should opt for ECF over traditional funding.
ECF offers significant advantages over traditional funding sources. Firstly, being listed on an ECF platform can be part of a start-up’s marketing strategy (Estrin et al., 2018), boosting both the project and the firm’s media exposure (Brown et al., 2018). Secondly, the interaction with new shareholders and engagement with end-users provide valuable market insights about product demand and inputs for product development (Agrawal et al., 2014; Blaseg et al., 2021; Francesca Di Pietro, 2021; F. Di Pietro et al., 2018; Estrin et al., 2018; Garaus et al., 2020), and it offers access to network connections within industry players (Brown et al., 2018; F. Di Pietro et al., 2018). Thirdly, ECF allows start-ups to retain strategic control, minimize equity dilution, and maintain a high degree of autonomy (Brown et al., 2018; Francesca Di Pietro, 2021). It also offers the advantage of securing funding at a lower cost (Agrawal et al., 2014) and in a shorter timeframe (Brown et al., 2018; Francesca Di Pietro, 2021). Moreover, a successful ECF campaign can enhance firms’ credibility, reduce information asymmetries, and facilitate future funding rounds with professional investors (Brown et al., 2018; Wald et al., 2019). Notwithstanding, it is worth noting that these benefits may not be uniform across all start-ups and can depend on characteristics of the star-ups and its founders (F. Di Pietro et al., 2018; Troise & Tani, 2021). Empirical evidence suggests that innovative, consumer-focused, early-stage firms tend to exhibit a stronger demand for ECF (Brown et al., 2018).
Indeed, there are also drawbacks associated with ECF that may dissuade entrepreneurs from choosing it as a method to fund their projects. ECF firms can incur potential costs linked to the early disclosure of entrepreneurial activities (Agrawal et al., 2014; Blaseg et al., 2021), opportunity costs arising from professional investors’ advantages (Agrawal et al., 2014), costs related to maintaining communication with a large investor community, and the equity dilution that can dissuade future professional investors (Agrawal et al., 2014; Blaseg et al., 2021). Each of these drawbacks will be detailed below.
Indeed, highly innovative projects often attract a larger number of investors and raise more capital in ECF campaigns (Le Pendeven & Schwienbacher, 2023). However, Hornuf and Schwienbacher (2016) highlight the existence of a double trust dilemma faced by entrepreneurs in relation to innovation. They must disclose their innovations through the crowd to signal the quality of their projects, but this exposes them to the risk of losing market value if the innovation is replicable.
As mentioned earlier, VC/BA investors offer valuable mentoring and strategic guidance (Denis, 2004; Lerner, 1995), facilitate networking with potential clients and suppliers, as well as other specialized services (Hsu, 2006), assist in the recruitment of professional managers (Hellmann & Puri, 2002), and play a crucial role in certifying the quality of start-ups (Hsu, 2004). Therefore, entrepreneurs may not reap the same benefits by choosing ECF over VC/BA. Nonetheless, some argue that crowd investors complement professional investors, rather than replace them, as they often co-invest or bridge funding gaps (Hornuf & Schwienbacher, 2016; Wang et al., 2019). Empirical evidence supports the complement perspective, indicating that angel and crowd investors interact on ECF platforms, and angel investors help reduce information asymmetries by providing valuable information to the crowd. Indeed, high-contribution pledges of VC and angles pledges that are costly and difficult to imitate serve as effective signal of venture quality. While VC/BA investors play a critical role in financing larger ventures, crowd investors complement them in larger campaigns and are particularly relevant in funding smaller ventures that may be less attractive to VC/BA investors. This evidence suggests that ECF facilitates access to capital for both small and large ventures, filling a gap that traditional sources of funding may not cover (Wang et al., 2019).
Thus, considering the advantages and disadvantages associated with ECF, why and when do entrepreneurs prefer to get funding through ECF campaigns rather than VC/BA investors?
Some studies propose that ECF campaigns are part of the company’s funding strategy, arguing that entrepreneurs prefer ECF over other forms of entrepreneurial funding to minimise equity dilution and retain the maximum level of autonomy (Brown et al., 2018). Nevertheless, Troise and Tani (2021) point out that both entrepreneurial characteristics, alertness, and self-efficacy influence the motivations of entrepreneurs to adopt ECF (e.g. acquiring new market/strategy knowledge, co-creating products, promoting their products, or exploiting the crowd network), which in turn have an impact on their behaviour in terms of campaign characteristics (campaign communication strategy and offerings characteristics) that can influence ECF campaign performance. Entrepreneurial alertness allows entrepreneurs to identify new opportunities, leverage the crowd to access more networks, and engage the crowd in promoting their business. However, entrepreneurial self-efficacy reduces the perceived need for external inputs for their products (or markets) and networking capabilities.
However, ECF could be inappropriate to fund start-ups with complex due diligence requirements high information sensitivity (information that cannot be disclosed to the crowd) or long economic life, requiring follow-on funding (Ley & Weaven, 2011).
Stevenson et al. (2021) identify two types of entrepreneurs in ECF: necessity fund-seekers and strategic fund-seekers. Through case studies of 14 firms that completed funding rounds in the USA and interviews with entrepreneurs and funders, they found that strategic fund-seekers opt for ECF over other funding source for various reasons. These include retaining power and strategic control in the company (transactional value), greater efficiency (less time-consuming), capturing value from funders (demand-side complementary value, e.g. mass referrals, prospective customer lists), creating value from the fundraising process (market validation information), and addressing external stakeholder concerns.
Others argue that the decision to opt for ECF may be linked to firm’s capital structure choices, drawing connections to Pecking Order Theory and Market Timing.
On one hand, Walthoff-Borm et al., (2018a, b) propose that firms turn to ECF as a last resort. Consistent with Pecking Order Theory (Myers & Majluf, 1984), they provide empirical evidence indicating that firms with lower internal funds (often unprofitable) and limited debt capacity (due to excessive debt levels and high intangible assets values) are more likely to seek ECF. They also observe a relatively higher failure rate among crowdfunded firms compared to matched samples of non-ECF firms (13% and 6% in each group, respectively). Furthermore, they find that firms with unsuccessful ECF campaigns have significantly higher failure rates (43%) than those with successful campaigns (15%), which reinforce the idea that firms use ECF as a last resort.
On the other hand, Cerpentier et al. (2022) investigate the influence of market timing on the capital structure of ECF firms (Baker & Wurgler, 2002), finding empirical evidence that ECF firms in hot markets set notably higher funding goals, accumulate more overfunding, and consequently secure more equity capital compared to those in cold markets. Despite these trends, ECF firms in hot markets do not consistently exhibit lower leverage ratios than their counterparts in cold markets. In contrast, ECF firms in hot markets simultaneously attract more debt financing, primarily in the form of financial debt.
The hypothesis that riskiest firms, with fewer financing alternatives, are more inclined to seek ECF was also examined by Blaseg et al. (2021). They use a sample of 163 crowdfunded firms from Germany’s largest ECF platforms and compared them with 163 firms that did not use ECF but had the option to do so. Their findings provide evidence that start-ups are indeed more inclined to pursue ECF when they have connections to troubled banks and lack access to other sources of equity financing. In their sample, start-ups that opted for ECF had a higher likelihood of encountering financial difficulties and potential failure.
Other authors have devoted their research to the development of models that address the choice between reward and equity crowdfunding. Within the context of asymmetric information, these models predict that entrepreneurs prefer the reward model when the initial capital requirements are low (Belleflamme et al., 2014) and when the projects demonstrate high-quality (Miglo & Miglo, 2019). However, if entrepreneurs exhibit overconfidence, ECF becomes the preferred option because entrepreneurs can acquire valuable information through the sale of shares before making critical production decisions (Miglo, 2021).
From a different perspective, Van Tassel (2023) has also constructed a theoretical model to investigate the optimal investment decisions of individual investors when operating under imperfect information. These investors are faced with a pivotal choice: whether to entrust their funds to intermediaries or engage in direct investment. This decision is shaped by the trade-offs entailing cost and risks associated with each alternative. When the level of risk is low, investors across all age groups tend to favour crowdfunding. Conversely, as the degree of risk rises, intermediation emerges as the more preferred choice. Interestingly, at moderate risk levels, both crowdfunding and intermediation coexist in equilibrium.
It is important to note, though, that the predictions of these models have not yet been empirically validated.
Appendix 4 summarizes the key findings of ECF literature about why and when entrepreneurs prefer ECF over traditional sources of entrepreneurship funding.
4 ECF platforms models
Platforms play a pivotal role in ECF, acting as intermediaries connecting between projects or firms with potential investors. Typically, their operations are subject to regulation under specific laws in each country.Footnote 7 The literature on the role of platforms in ECF can be categorized into two groups. The first group primarily offers descriptive insight and focuses on the differences among platforms models in terms of business models (fee structures, due diligence procedures, industry focus) (Cumming et al., 2019), mechanism of shares allocation (first come, first serve or auction mechanism) (Hornuf & Schwienbacher, 2018b), funding process itself (Löher, 2017; Salomon, 2016), and crowd designs (Aggarwal et al., 2021; Chen et al., 2016). The second group investigate how these differences across equity crowdfunding platforms influence the success of equity crowdfunding campaigns and the subsequent outcomes of firms in post-campaign (Cumming et al., 2019; Rossi & Vismara, 2018; Rossi et al., 2019).
Platforms are profit-making entities whose revenues come from the fees charged to firms and, in some cases, investors. In many cases, the fees are only charged if the crowdfunding campaign is successful, i.e. if the target amount is reached (Cumming et al., 2019). As their performance and survival depend on the growth of the crowdfunding industry and their ability to attract high-quality projects, platforms benefit from applying due diligence procedures to reduce the likelihood of promoting in their websites fraudulent or lower-quality projects (Cumming et al., 2021a, b). Thus, before launching the campaigns online on their websites, the platforms’ teams pre-select investment proposals (Cumming et al., 2019; Salomon, 2016, 2018).
Beyond the crowdfunding model (donation, reward, equity, and lending), as highlighted by Cumming et al. (2019), the ECF platforms make three critical strategic choices: (i) fee structures (fixed or variable—frequently, the platform only receives a fee from successfully funded projects), (ii) due diligence procedures (even considering that almost all crowdfunding regulations require that platform do due diligence, they can decide to do a more or less extensive one), and (iii) industry focus (while some platforms are generalists, others focus on a specific industry).
4.1 Governance issues
Cumming et al., (2021a, b) suggest that the distinct characteristics of ECF imply that many governance mechanisms traditionally employed in public and private firms may not be as effective in this context. In contrast to public firms, crowdfunded firms are neither actively monitored nor assessed by stock analysts, nor are they subject to the disciple of the capital market (due to the absence of a liquid secondary market, which limits exit options for investors (Signori & Vismara, 2018). Contrary to private firms, crowd investors lack abilities and resources of professional investors (VC/BA) to conduct in-depth due diligence, negotiate and establish comprehensive contracts, or effectively monitor the firms after investment. This way, Cumming et al. (2021a, b) propose a set of specific governance mechanisms tailored for ECF. These mechanisms offer a potentially effective means of mitigating the costs associated with informational asymmetry problems, including adverse selection and moral hazard. These mechanisms apply to all participants in the ECF market, including investors (leveraging the “wisdom of the crowd”), entrepreneurs (signalling the unobservable quality of the firmFootnote 8), platforms (enhancing due diligenceFootnote 9 and managing shareholder structures and secondary markets), and country institutions (encompassing both formal institutions—e.g. investor protection laws—and informal institutions—e.g. higher country-level trust (La Porta et al., 1997)).
Platforms also use different mechanisms of share allocation to investors in ECF, such as (i) the first-come, first-served mechanism (the most usual) or (ii) the auction mechanism. Empirical evidence suggests that the market mechanism choice affects investor behaviour dynamics during the campaign. While an auction mechanism induces late investments (as in this mechanism, prices change during the campaign, and the investors have an incentive to postpone their investment decisions to the last days of the campaign, avoiding a price increase due to higher demand), the first-come, first-served mechanism induces quick investments during the first days (on this mechanism, the prices remain constant during the campaign and investors prefer to bid in early days to guarantee the investments) (Hornuf & Schwienbacher, 2018b).
The ECF platform models can also be classified according to the crowd design: pure crowds or hybrid crowds (Chen et al., 2016). While in pure crowds, the crowd members participate as equal investors; in hybrid models, the crowd members are led by an expert investor. Based on the observation of industry practices, Chen et al. (2016) argue that pure crowds have several shortcomings in terms of providing due diligence, social influence, home bias, and high management costs associated with a lack of a single voice, suggesting that hybrid crowds can overcome those inefficiencies, particularly, in the presence of high-risk projects, with high information asymmetry and a high cost of crowd management. However, within the category of pure crow designs, it is essential to differentiate two shareholder models: the direct shareholder model and the nominee structure, as they exhibit varying abilities to attract investors. For instance, as found by Butticè et al. (2022), firms that choose the direct shareholder model, which can result in increased coordination and agency costs, tend to draw less reputable VCs compared to firms that select the nominee shareholder structure.
Agrawal et al. (2016) argue that the syndicate structure of ECF, which involves a lead investor responsible for conducting due diligence and monitoring progress on behalf of other crowd investors, helps to reduce market failures caused by information asymmetries and allows for a more efficient allocation of capital. However, some agency conflicts can arise between lead and crowd investors. While there is empirical evidence suggesting that corporate anchor investors significantly influence crowd investor’s herd behaviour (Sendra-Pons et al., 2023), it is worth noting that a high capital contribution by the lead investor reduces subsequent crowd investment. This observation, as highlighted by Chen and Ma (2023), implies that concentrated insider ownership by a lead investor, acting as an agent to lead fundraising and manage the syndicate on behalf of principal—crowd investors, weakens the bargaining power of the crowd investors, potentially increasing agency concerns. To mitigate potential agency problems between lead investors and the crowd, some authors propose implementing compensation and reputation mechanisms for lead investors (Agrawal et al., 2016). Additionally, factors such as the trustworthiness of lead investors (Zhang et al., 2023a, b), their specialized human capital (Zhang et al., 2023a, b), are significant considerations for crowd investors and can positively contribute to the fundraising performance of syndicates.
Given the greater efficiency of the hybrid model over the pure crowd, Aggarwal et al. (2021) developed a measure of the quality of lead investors that can be useful for platforms to identify investors who are good candidates to lead financing rounds.
Another topic explored in the literature within this context is related to the allocation of voting rights to crowd investors. Rossi et al. (2023), using a sample of 1769 start-ups that had unsuccessful initial ECF campaigns, found evidence that family-owned business exhibits a higher level in their pursuit of equity capital. Specifically, there are 1.95 times more likely to seek equity funding following an unsuccessful ECF campaign compared to nonfamily-owned start-ups. Furthermore, family business initially tends to be reluctant to offer voting rights in offerings, but they become more willing to provide it when seeking follow-on equity after an unsuccessful campaign. In this context, there is an 18.1% increase in the likelihood of offering voting rights during subsequent equity raising.
Lastly, the characteristics of the founder team also play a role in platform selection, as highlighted by Coakley et al. (2022). Larger, more diverse teams (in terms of tenure, nationality, and age), experienced teams, and highly educated teams tend to favour the co-investment shareholder model, which involves professional investors. In contrast, solo founders and small teams are inclined towards the nominee model.
4.2 Funding process and success rates
Another line of research in the context of platforms is related to the funding process, particularly on the relevance of the pre-selection process of the platforms (Kleinert et al., 2021; Löher, 2017). There is evidence that this pre-selection phase can be even more critical to the campaign’s success than the online campaign phase. For instance, Kleinert et al. (2021) find that 90% of start-ups are rejected in the pre-campaign phase.
Löher (2017) investigated the pre-selection process of German equity crowdfunding platforms, using interviews with platform operators, managers of crowdfunded start-ups, and external experts. The author finds that the pre-selection process in German ECF platforms is similar to the practices of VC/BA. It includes four steps: sourcing deals, assessment of investment deals, deal structuring, and campaign preparation. During the first step, the platforms receive proposals for investment deals. While there is some direct contact from entrepreneurs, they rely mainly on platforms’ networks and their active search. The second step is the assessment of investment deals, including pitch screening and evaluation. The authors state that more than half of the deals are rejected in the screening phase, during which the platforms’ assessment is focused on the business model, product characteristics, and financial considerations. The deals that pass the first screening go to a deeper evaluation phase, including a due diligence/plausibility check, where the characteristics of the entrepreneurs and teams are more relevant. Then, the selected deals go to deal structuring (definition of investment conditions, such as firm valuation, funding amount, and platforms’ commission) and contracting. The last step includes campaign preparation activities, helping entrepreneurs communicate campaigns to reduce the information asymmetries between the venture and potential investors.
However, what signals are used by platforms to assess the proposal quality and select the projects that go to the online platform? This question was investigated by Kleinert et al. (2021) and Zhang et al. (2019).
Kleinert et al. (2021), using a conjoint experiment involving 78 decision-makers from 50 platforms in 22 countries, suggest that the most important signal of start-up quality for ECF platforms is the team experience, followed by sales agreements and, with greater distance, patents, and venture capital backing. However, the relevance of venture quality signals varies according to the business characteristics of ECF platforms (in terms of long-term, performance-oriented fee structures and co-investment requirements), the firm’s industry (research-oriented or retail-oriented industries), and across countries (due to regulatory or cultural differences). On the one hand, in platforms that use the co-investment model, the acceptance rate of the venture is more positively influenced by the existence of patents and sales agreements. On the other hand, when the ECF platform prioritizes long-term performance (based on its platform’s fee structure), the influence of both team experience and venture capital backing is more substantial. Moreover, sales agreements are more relevant to retail-oriented industries, and in countries where human capital and venture capital are more easily accessible, the related signals become less influential.
Zhang et al. (2019) examined 473 investment proposals from the Chinese platform Dahuotou. Out of these, 72 (15%) were launched online by the platforms and the remaining 401 projects were rejected. They find that local bias still exists in the pre-investment stage platforms since the geographic distance between the locations of projects and a platform negatively affects the possibility of being launched. Moreover, engaging in strategic emerging industries, signals of media usage (e.g. videos) and start-ups’ quality (credit) are also positively correlated with launching projects on the platform.
Despite the relevance of platforms for the crowdfunding industry, empirical evidence on how the differences across equity crowdfunding platforms influence the success of equity crowdfunding campaigns and post-campaign firm outcomes is still scarce (Cumming et al., 2019). There are, however, some exceptions, which we discuss below.
Belleflamme et al. (2013) argue that non-profit organisations attract more money for initiatives that interest the general community due to their reduced focus on profits. The authors develop a theoretical model and find empirical evidence that in the context of individual crowdfunding practices (in which entrepreneurs do not make use of a “structured” crowdfunding platform), non-profit organisations raise larger amounts and thereby are more successful in obtaining their targeted funds than other forms of for-profit entrepreneurs.
Cumming et al. (2019), using a sample of Canadian crowdfunding portals (of all crowdfunding models), investigate the relevance of due diligence (which includes background checks, site visits, credit checks, cross-checks, monitoring accounts, and third-party proof) for the success of crowdfunding campaigns. They find a significant positive effect of due diligence on the total amount of capital raised and the percentage of fully funded projects on the platform. They also argue that due diligence helps identify lower quality or fraudulent projects and reduces information asymmetries between entrepreneurs and investors, suggesting that due diligence is relevant for a platform’s reputation and to increase its performance.
Rossi and Vismara (2018) focus their research on services provided by the platform (pre-launch, ongoing campaign, and post-campaign). Using a sample of 127 investment-based crowdfunding portals in four European countries (France, Germany, Italy, and the UK), they suggest that a higher number of post-campaign services offered by the platforms increase the annual number of successful campaigns, even though pre-launch and ongoing campaign services do not have a significant impact.
Hornuf and Schwienbacher (2018a), using hand-collected data on the complete set of 181 successful and unsuccessful crowd-investing campaigns run in Germany between 2011 and 2014, find that platform design and the structure of contracts affect crowd participation. The chances of achieving successful campaigns (raising a larger amount and higher crowd participation) increase when the minimum ticket is small, the crowd is pooled in a financial vehicle, and the investments are offered in the form of profit-participating loans (instead of silent partnership agreements, common equity, and other financial contracts).
In the Italian context, two recent papers investigate the relevance of platforms’ networks to the success of ECF campaigns. Vrontis et al. (2021), using a sample of 315 campaigns (funded or not) launched on 21 ECF platforms, find that the presence of platforms on social networks (number of ECF platforms’ connections, particularly on Twitter) and their intellectual capital (quality of a platform’s employees and other people involved) influence positively the success rate of ECF campaigns. They find that the presence of EC platforms on social media and the quality of the platform’s teams increase their capability to attract investors’ attention and stimulate their investments in the campaigns launched on the platform, enhancing the probability of EC campaign success. Cosma et al. (2021) examine ten Italian ECF platforms to assess the role of (size and diversity) partner networks in a platform ecosystem in the success of the ECF campaign. They found that the choice of platform can be critical for the performance of the crowdfunding campaign in terms of capital raised, relative success, and probability of success. A network of partners (including banks, investment funds, associations, agencies, syndicates, universities, advisors, incubators, firms, and others) offer unique and strategic value propositions and define the competitive positioning of platforms. However, they find no evidence supporting the importance of the platform’s partner network size. Instead, they observe that the campaign success is influenced by the diversity of these networks.
Others investigate the impact of voting rights on the success of crowdfunding platforms. Using a sample of 185 investment-based crowdfunding portals based in Australia, Austria, Canada, France, Germany, Italy, New Zealand, the UK, and the USA, Rossi et al. (2019) identify three types of platforms in terms of voting rights: (i) platforms delivering individual voting rights to single investors, (ii) platforms delivering pooled voting rights to the community of crowdfunding investors (nominee structure), and (iii) platforms with the involvement of a lead accredited investors (syndicate-like platforms). They find evidence that platforms with individual voting rights are associated with less successful crowdfunding campaigns than platforms delivering pooled voting and that syndicate-like platforms register fewer offerings.
A recent strand of research in ECF explores the impact of environmental, social, and governance (ESG) goals on crowdfunding platforms performance. Cumming et al. (2024) find that the adoption of ESG criteria in the selection of businesses positively influences the survival of crowdfunding platforms by attracting a higher number of investors. Furthermore, in countries characterized by lower power distance, this impact is more evident, as the democratisation of access to capital is viewed more favourably. Among the three individual components of ESG, governance emerges as the predominant factor and the relevance of environmental goals has grown over time.
While the empirical studies about the role of platforms in the ECF market are dominant, according to our systematic literature review, only two papers develop a theoretical model on this issue. Gal-Or et al. (2019) analyse the ECF platform competition, and Aggarwal et al. (2021) develop a measure of the quality of lead investors.
The competition model developed by Gal-Or et al. (2019) assumes the heterogeneity of both investors (in terms of experience and risk aversion) and start-ups (in terms of expected return and risk) and find that a segmenting equilibrium with two competing platforms can arise only when compatibility is very relevant for both investors and start-ups and such compatibility is more important than the size of the network externality considered by start-ups. In the segmenting equilibrium, each platform attracts segments of the two user groups that are more compatible with each other in terms of the risk profile, i.e. one platform matches more risky start-ups and experienced investors (usually more risk-tolerant), and the second platform matches the less risky start-ups with more highly risk‐averse investors. However, if such a preference for compatibility is not sufficiently high, the equilibrium occurs when one platform dominates the entire market.
Arguing that hybrid crowds have some advantages over pure crowd models, Aggarwal et al. (2021) develop a Bayesian model to measure the quality of lead investors, which can be useful for platforms to identify investors who are good candidates to lead financing rounds and, this way, to improve the funding operations of ECF platforms.
In sum, these studies identify a set of characteristics of platforms that increase the success of equity crowdfunding campaigns and post-campaign firm outcomes, including the due diligence procedures (Cumming et al., 2019), the number of post-campaign services offered by the platforms (Rossi & Vismara, 2018), and the platform model in terms of voting rights of investors (Rossi et al., 2019).
Appendix 5 presents a summary of the literature on ECF platform models.
5 Avenues for future research
In this section, we outline several avenues for future research. We start by emphasising general considerations concerning the limitations of current investigations. Subsequently, we offer specific recommendations for further research on the topics explored in this paper.
In many cases, research related to ECF lacks consensus and needs additional investigation to reconcile seemingly contradictory empirical finding on various topics. For instance, it is still unclear if ECF contributes to democratising entrepreneurial finance, alleviating some distance-related economic friction between entrepreneurs and investors, and enhancing the presence of underrepresented groups in entrepreneurship, including woman and individuals from Black communities. As proposed by Kleinert (2023), certain factors may have been overlooked in previous research, specifically the nature of signals provided by entrepreneur. Notably, address signals, which can be inconsequential in equity crowdfunding, could potentially carry significant costs in venture capital.
The presence of contradictory empirical results is some cases can be attributed to the use of limited sample sizes and inadequate proxy variables. On one hand, the absence of comprehensive databases for start-ups seeking ECF, encompassing both successful and unsuccessful campaigns, often necessitates hand-collected data. As a result, many studies rely on relatively small samples, often concentrated on just one or two platforms. On the other hand, the challenge of accessing complete information about campaigns and entrepreneurs can introduce bias when inappropriate variables are employed. Consequently, future research may benefit from the inclusion of larger, more diverse samples and the incorporation of more pertinent variables to enhance the robustness of its findings. Furthermore, the use of diverse measures for the same variable complicates cross-study comparisons, as highlighted by Le Pendeven and Schwienbacher (2023) in the context of assessing innovativeness of crowdfunding projects.
While the majority of papers in this field tend to be descriptive or empirical, there are a limited number of theoretical models. These models encompass various dimensions, including the choice between reward and equity crowdfunding (Belleflamme et al., 2014; Miglo & Miglo, 2019), the impact of entrepreneurial bias on crowdfunding campaign outcomes (Miglo, 2021), the influence of platform competition on market segmentation (Gal-Or et al., 2019), and the investment decisions of individual investors who must decide whether to allocate their wealth through an intermediary or invest directly with an entrepreneur (Van Tassel, 2023). However, empirical evidence is imperative to validate these models and their predictions.
Finally, as the ECF industry continues to mature (Lukkarinen et al., 2022), it is necessary to corroborate some of the earlier findings. This maturation may bring about changes and developments in the ECF landscape that warrant a revaluation of previous research findings to ensure their relevance and accuracy.
Now, we propose some specific research directions for some of the topics explored within this paper.
5.1 Geographic and entrepreneur’s diversity
According to the literature review, while ECF possesses characteristics that can mitigate geographical constraints in start-up investments (Agrawal et al., 2015), it does not entirely eliminate them Bade and Walther (2021). This raises a pertinent question: do these geographical constraints affect all types of investors and firms/projects equally? Existing evidence already suggests differences in sensitivity to distance between overseas investors and domestic investors in ECF (Guenther et al., 2018), However, it remains crucial to investigate how other investor characteristics, such as age and qualifications, may influence their sensitivity to distance. Similarly, exploring how the characteristics of firms/projects interact with geographical factors is also a valuable avenue for research. Is the sensitivity to investor proximity different among firms or projects in specific sectors, such as technology, environmental sustainability, or innovative ventures?
The empirical evidence regarding the democratisation of entrepreneurial finance and its potential to reduce the gender and race gaps is inconclusive, with mixed results. While recent investigations have attempted to reconcile these mixed results concerning the gender gap, suggesting that it depends on other factors such as campaign signals (Kleinert & Mochkabadi, 2022) and the funding round (Prokop & Wang, 2022), further research is needed. For instance, exploring these factors for other underrepresented groups could shed more light on this issue.
5.2 Exit options
ECF offers investors a more limited set of exit options compared to other investment alternatives. Therefore, numerous ECF platforms have initiated discussions regarding the creation of secondary markets for buying and selling shares. However, to our knowledge, empirical research on secondary markets for ECF remains limited to one paper (Lukkarinen & Schwienbacher, 2023). This study focuses on whether plans to list on the secondary market increase investor participation and explores the factors that ultimately drive start-ups to list on such markets following their campaigns. Yet, several critical questions remain unanswered. What are the cost and benefits associated with secondary markets in ECF? How do they compare to traditional financial markets in terms of costs and liquidity? Can secondary markets serve as an exclusive exit channel for specific investor types, or do they possess the potential to become a universal mechanism enabling all crowd investors to sell their shares? Additionally, it remains to be explored whether the investors participating in secondary markets are the same as those in the initial campaigns? Other avenue for research on this topic is to explore the implications of other early exit options on funding performance, particularly in the context of different countries with varying degrees of ECF industry maturity. For instance, examine whether the effect of early exit options on funding performance, such as those observed in Bi and Lv (2023) research for the Chinese market, can be adapted and expanded to other countries with distinct ECF industry development stages.
5.3 Platform models and governance issues
In addition to the research conducted by Butticè et al. (2022), future research should investigate how entrepreneurs’ human capital, the innovative nature of business ideas, or other unexplored variables can potentially moderate the negative association between ECF and VC reputation in comparison to BA investments.
Furthermore, as suggested by Rossi et al. (2023), upcoming research could examine the extent to which entrepreneurs learn from their crowdfunding experiences and how this learning influences their subsequent interactions with external investors. Are differences in campaign characteristics between initial and subsequent campaigns reveal distinct learning paths and strategies employed by entrepreneurs?
Regarding the lead-investment shareholder model, there are unexplored questions to consider. For example, how are syndicates formed and influenced at the group level? This involves not only the pairings of individual investors but also the impact of existing syndicate members and the collective fundraising objectives of the syndicate. What group-level factors drive the formation and dynamics of investment syndicates in equity crowdfunding? Additionally, how do hidden psychological factors, such as investor ideology and identity, affect syndicate formation and investment decisions in equity crowdfunding? What methods and data sources can be utilized to gain insights into these concealed psychological drivers?
The nominee structure has been recognized as a shareholder model offering several advantages. It has shown promise in addressing moral hazard issues (Cumming et al., 2021a, b) and has the potential to reduce coordination and agency costs and attract more reputable VC (Butticè et al., 2022). However, similarly to the co-investment shareholder model, which reveals agency conflicts between lead and crowd investors (Chen & Ma, 2023), the nominee shareholder structure may also give rise to agency conflicts between the nominee entity (acting as the agent) and the small investors (the principals, who have no voting rights). Consequently, future research should delve into these agency problems within nominee shareholders structures and explore potential mechanism for their mitigation.
6 Conclusion
This study conducts a systematic literature review encompassing 65 research papers focusing on the pre-campaign phase of equity crowdfunding. Over the past decade, the volume of publications related to ECF has exhibited exponential growth, with 70 papers dedicated to this subject in just the year 2022 alone. This blooming interest has resulted in a substantial body of literature covering diverse aspects of crowdfunding, underscoring the need to construct a comprehensive and up-to-date framework for ECF research. We opted for a systematic approach in our literature review, widely regarded as the most effective methodology for identifying and reviewing an extensive body of literature (Tranfield et al., 2003).
While the body of literature on ECF remains somewhat limited, the existing papers in this domain predominantly focus on exploring the determinants of campaign success. Our comprehensive survey of the literature, on the other hand, explores the decisions made by entrepreneurs prior to embarking on ECF campaign. Specifically, in this paper we provide (i) a comparative analysis of ECF in relation to traditional sources of entrepreneurial funding, such as venture capital and business angels; (ii) a discussion on the motivations behind entrepreneurs’ preference for ECF; and (iii) an in-depth examination of the various models of ECF platforms, providing insights into their distinct characteristics.
This paper makes relevant contributions both in practical applications and academic research. In practical terms, it holds considerable value for entrepreneurs who seek to identify the circumstances in which ECF might offer advantages over traditional start-up funding sources and to determine which platform model aligns best with their specific needs. On the academic research front, this document offers a structured, comprehensive, and update summary of the existing literature regarding this innovative source of funding for start-ups. Additionally, it identifies some inconsistencies and gaps within the current body of research, offering valuable insights and avenues for further investigation in this field.
Investing in ECF typically involves three distinct phases. The first one is the pre-investment phase, where entrepreneurs must decide about the most suitable source of financing and select the appropriate ECF platform model. The second phase centres around the campaign itself. At this stage, entrepreneurs and platforms work together to ensure the success of the campaigns and secure project funding. The third and final phase pertains to post-campaign performance, which includes metrics such as bankruptcy rates, subsequent financing, and overall company growth.
One of the primary limitations of our paper is its exclusive focus on the first phase, despite its critical importance, as it significantly impacts the subsequent investment and post-investment phases. Additionally, the rapidly evolving nature of research in this field means that our literature review may become outdated relatively quickly. Future extensions of the paper endeavours should consider conducting literature reviews for the other two phases. While there are some existing literature reviews on the investment phase, they are often outdated. Moreover, literature reviews on the post-investment phase appear to be scarce or non-existent.
Notes
For in-depth insights into the growth of alternative, for instance, “The 2nd Global Alternative Finance Market Benchmarking Report” provided by the Cambridge Centre for Alternative Finance. This report can be found at https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/the-2nd-global-alternative-finance-market-benchmarking-report/.
We acknowledge this may lead to considering some topics other than strictly the first stage of ECF, which may be perceived as inconsistent with the literature survey’s declared focus. Still, we think it is essential to maintain an integrated perspective on entrepreneurs’ choices in the pre-launch phase of campaigns.
Despite these being two of most comprehensive and multidisciplinary repositories, we recognize that by limiting our search to the documents indexed therein, we may occasionally exclude some relevant papers (e.g. (Rossi et al., 2021). Nevertheless, we believe that the articles included in our literature review are representative of the body of literature on entrepreneurs’ choices prior to equity crowdfunding campaigns.
A shareholder structure whereby the nominee holds legal title to the shares on behalf of crowd investors. In this arrangement, the nominee acts as the registered owner of the shares but holds them in trust for the ultimate benefit and control of the crowd investors.
For instance, according to the report “Investing in Europe: Private Equity Activity 2020” by Invest Europe, the association that represents Europe’s private equity and venture capital industry, the exit routes more often (in % of total amount) used by Venture Capital in divestments are trade sale, write-off, and public offering (IPO). Report available at https://www.investeurope.eu/research/activity-data/.
For instance, some credible signals that entrepreneurs may send to investors about the firm quality are equity retention (empirically confirmed, for instance, by Vismara (2016) or setting a formal board of directors. However, other signals sent by entrepreneurs are not verifiable, the called “cheap talk” (e.g. intention to conduct an IPO in future), may exacerbate the adverse selection problems.
Given the reputational concerns of platforms that can determine their future survival and performance, they are interested in performing due diligence (even if they were not required by law) to identify and exclude from their websites, potential fraud projects or firms without a minimum level of quality.
References
Aggarwal, R., Lee, M. J., Osting, B., & Singh, H. (2021). Improving funding operations of equity-based crowdfunding platforms. Production and Operations Management, 30(11), 4121–4139. https://doi.org/10.1111/poms.13505
Agrawal, A., Catalini, C., & Goldfarb, A. (2014). Some simple economics of crowdfunding. Innovation Policy and the Economy, 14(1), 63–97. https://doi.org/10.1086/674021
Agrawal, A., Catalini, C., & Goldfarb, A. (2015). Crowdfunding: Geography, social networks, and the timing of investment decisions. Journal of Economics & Management Strategy, 24(2), 253–274. https://doi.org/10.1111/jems.12093
Agrawal, A., Catalini, C., & Goldfarb, A. (2016). Are syndicates the killer app of equity crowdfunding? California Management Review, 58(2), 111–124. https://doi.org/10.1525/cmr.2016.58.2.111
Ahlers, G. K. C., Cumming, D., Günther, C., & Schweizer, D. (2015). Signaling in equity crowdfunding. Entrepreneurship Theory and Practice, 39(4), 955–980. https://doi.org/10.1111/etap.12157
Andrieu, G., Le Pendeven, B., & Leboeuf, G. (2021). Equity crowdfunding success for female entrepreneurs: French evidence. Economics Bulletin, 41(2).
Bade, M., & Walther, M. (2021). Local preferences and the allocation of attention in equity-based crowdfunding. Review of Managerial Science, 15(8), 2501–2533. https://doi.org/10.1007/s11846-020-00429-6
Baker, M., & Wurgler, J. (2002). Market timing and capital structure. Journal of Finance, 57(1), 1–32. https://doi.org/10.1111/1540-6261.00414
Belleflamme, P., Lambert, T., & Schwienbacher, A. (2013). Individual crowdfunding practices. Venture Capital, 15(4), 313–333. https://doi.org/10.1080/13691066.2013.785151
Belleflamme, P., Lambert, T., & Schwienbacher, A. (2014). Crowdfunding: Tapping the right crowd. Journal of Business Venturing, 29(5), 585–609. https://doi.org/10.1016/j.jbusvent.2013.07.003
Bi, G., & Lv, J. (2023). Can an early exit mechanism attract more pledges in equity-based crowdfunding? Evidence from China. Finance Research Letters, 56, 104166. https://doi.org/10.1016/j.frl.2023.104166
Blaseg, D., Cumming, D., & Koetter, M. (2021). Equity crowdfunding: High-quality or low-quality entrepreneurs? Entrepreneurship Theory and Practice, 45(3), 505–530. https://doi.org/10.1177/1042258719899427
Block, J. H., Colombo, M. G., Cumming, D. J., & Vismara, S. (2018). New players in entrepreneurial finance and why they are there. Small Business Economics, 50(2), 239–250. https://doi.org/10.1007/s11187-016-9826-6
Brown, R., Mawson, S., Rowe, A., & Mason, C. (2018). Working the crowd: Improvisational entrepreneurship and equity crowdfunding in nascent entrepreneurial ventures. International Small Business Journal, 36(2), 169–193. https://doi.org/10.1177/0266242617729743
Butticè, V., Di Pietro, F., & Tenca, F. (2022). They do not look alike: What kind of private investors do equity crowdfunded firms attract? The Journal of Technology Transfer, 47(6), 1707–1736. https://doi.org/10.1007/s10961-021-09895-w
Cerpentier, M., Vanacker, T., Paeleman, I., & Bringmann, K. (2022). Equity crowdfunding, market timing, and firm capital structure. The Journal of Technology Transfer, 47(6), 1766–1793. https://doi.org/10.1007/s10961-021-09893-y
Chen, X., & Ma, L. (2023). Lead investors’ insider ownership and crowd investors’ agency concerns in investor-led equity crowdfunding. Pacific-Basin Finance Journal, 78, 101978. https://doi.org/10.1016/j.pacfin.2023.101978
Chen, L., Huang, Z., & Liu, D. (2016). Pure and hybrid crowds in crowdfunding markets. Financial Innovation, 2(1), 19. https://doi.org/10.1186/s40854-016-0038-5
Coakley, J., Lazos, A., & Liñares-Zegarra, J. (2022). Strategic entrepreneurial choice between competing crowdfunding platforms. The Journal of Technology Transfer, 47(6), 1794–1824. https://doi.org/10.1007/s10961-021-09891-0
Coleman, S., & Robb, A. (2009). A comparison of new firm financing by gender: Evidence from the Kauffman Firm Survey data. Small Business Economics, 33(4), 397. https://doi.org/10.1007/s11187-009-9205-7
Cosma, S., Grasso, A. G., Pattarin, F., & Pedrazzoli, A. (2021). Platforms’ partner networks: The missing link in crowdfunding performance. European Journal of Innovation Management. https://doi.org/10.1108/EJIM-06-2020-0230
Cumming, D., Johan, S., & Zhang, Y. (2019). The role of due diligence in crowdfunding platforms. Journal of Banking and Finance, 108, 105661. https://doi.org/10.1016/j.jbankfin.2019.105661
Cumming, D., Meoli, M., & Vismara, S. (2021a). Does equity crowdfunding democratize entrepreneurial finance? Small Business Economics, 56(2), 533–552. https://doi.org/10.1007/s11187-019-00188-z
Cumming, D., Vanacker, T., & Zahra, S. (2021b). Equity crowdfunding and governance: Toward an integrative model and research agenda. Academy of Management Perspectives, 35(1), 69–95. https://doi.org/10.5465/amp.2017.0208
Cumming, D., Meoli, M., Rossi, A., & Vismara, S. (2024). ESG and crowdfunding platforms. Journal of Business Venturing, 39(1), 106362. https://doi.org/10.1016/j.jbusvent.2023.106362
Cummings, M. E., Rawhouser, H., Vismara, S., & Hamilton, E. L. (2020). An equity crowdfunding research agenda: Evidence from stakeholder participation in the rulemaking process. Small Business Economics, 54(4), 907–932. https://doi.org/10.1007/s11187-018-00134-5
Daskalakis, N., & Karpouzis, E. (2021). Exploring determinants in cross-border activity in equity crowdfunding and peer-to-peer lending, from a user’s perspective. Small Enterprise Research, 28(3), 293–313. https://doi.org/10.1080/13215906.2021.1989624
Denis, D. J. (2004). Entrepreneurial finance: An overview of the issues and evidence. Journal of Corporate Finance, 10(2), 301–326. https://doi.org/10.1016/S0929-1199(03)00059-2
Di Pietro, F. (2021). The rationale for listing on equity crowdfunding: Actual and expected benefits for companies. Journal of Industrial and Business Economics, 48(4), 527–549. https://doi.org/10.1007/s40812-021-00188-9
Di Pietro, F., Prencipe, A., & Majchrzak, A. (2018). Crowd equity investors: An underutilized asset for open innovation in startups. California Management Review, 60(2), 43–70. https://doi.org/10.1177/0008125617738260
Estrin, S., Gozman, D., & Khavul, S. (2018). The evolution and adoption of equity crowdfunding: Entrepreneur and investor entry into a new market. Small Business Economics, 51(2), 425–439. https://doi.org/10.1007/s11187-018-0009-5
Fairlie, R. W., & Robb, A. M. (2007). Why are black-owned businesses less successful than white-owned businesses? The Role of Families, Inheritances, and Business Human Capital., 25(2), 289–323. https://doi.org/10.1086/510763
Fatehi, S., & Wagner, M. R. (2019). Crowdfunding via revenue-sharing contracts. Manufacturing & Service Operations Management, 21(4), 875–893. https://doi.org/10.1287/msom.2018.0729
Gal-Or, E., Gal-Or, R., & Penmetsa, N. (2019). Can platform competition support market segmentation? Network externalities versus matching efficiency in equity crowdfunding markets. Journal of Economics and Management Strategy, 28(3), 420–435. https://doi.org/10.1111/jems.12286
Garaus, C., Izdebski, N., & Lettl, C. (2020). What do crowd equity investors do? Exploring post-investment activities in equity crowdfunding. IEEE Transactions on Engineering Management. https://doi.org/10.1109/TEM.2020.3041073
Geiger, M., & Oranburg, S. C. (2018). Female entrepreneurs and equity crowdfunding in the US: Receiving less when asking for more. Journal of Business Venturing Insights, 10, e00099. https://doi.org/10.1016/j.jbvi.2018.e00099
Greene, P. G., Brush, C. G., Hart, M. M., & Saparito, P. (2001). Patterns of venture capital funding: Is gender a factor? Venture Capital, 3(1), 63–83. https://doi.org/10.1080/13691060118175
Guenther, C., Johan, S., & Schweizer, D. (2018). Is the crowd sensitive to distance?—how investment decisions differ by investor type. Small Business Economics, 50(2), 289–305. https://doi.org/10.1007/s11187-016-9834-6
Hart, O. (1995). Corporate governance: Some theory and implications. The Economic Journal, 105(430), 678–689. https://doi.org/10.2307/2235027
Hellmann, T., & Puri, M. (2002). Venture capital and the professionalization of start-up firms: Empirical evidence. The Journal of Finance, 57(1), 169–197. https://doi.org/10.1111/1540-6261.00419
Hornuf, L., & Neuenkirch, M. (2017). Pricing shares in equity crowdfunding. Small Business Economics, 48(4), 795–811. https://doi.org/10.1007/s11187-016-9807-9
Hornuf, L., & Schwienbacher, A. (2017). Should securities regulation promote equity crowdfunding? Small Business Economics, 49(3), 579–593. https://doi.org/10.1007/s11187-017-9839-9
Hornuf, L., & Schwienbacher, A. (2018a). Internet-based entrepreneurial finance: Lessons from Germany. California Management Review, 60(2), 150–175. https://doi.org/10.1177/0008125617741126
Hornuf, L., & Schwienbacher, A. (2018b). Market mechanisms and funding dynamics in equity crowdfunding. Journal of Corporate Finance, 50, 556–574. https://doi.org/10.1016/j.jcorpfin.2017.08.009
Hornuf, L., Schmitt, M., & Stenzhorn, E. (2022). The local bias in equity crowdfunding: Behavioral anomaly or rational preference? Journal of Economics & Management Strategy, 31(3), 693–733. https://doi.org/10.1111/jems.12475
Hornuf, L., & Schwienbacher, A. (2016). Crowdinvesting – angel investing for the masses? In Handbook of Research on Business Angels (pp. 381–398). Edward Elgar Publishing. https://doi.org/10.4337/9781783471720.00024
Hsu, D. H. (2004). What do entrepreneurs pay for venture capital affiliation? Journal of Finance, 59(4), 1805–1844. https://doi.org/10.1111/j.1540-6261.2004.00680.x
Hsu, D. H. (2006). Venture capitalists and cooperative start-up commercialization strategy. Management Science, 52(2), 204–219. https://doi.org/10.1287/mnsc.1050.0480
Kleinert, S., Bafera, J., Urbig, D., & Volkmann, C. K. (2021). Access denied: How equity crowdfunding platforms use quality signals to select new ventures. Entrepreneurship Theory and Practice, 10422587211011945. https://doi.org/10.1177/10422587211011945
Kleinert, S., & Mochkabadi, K. (2022). Gender stereotypes in equity crowdfunding: The effect of gender bias on the interpretation of quality signals. The Journal of Technology Transfer, 47(6), 1640–1661. https://doi.org/10.1007/s10961-021-09892-z
Kleinert, S. (2023). The promise of new ventures’ growth ambitions in early-stage funding: On the crossroads between cheap talk and credible signals. Entrepreneurship Theory and Practice, 10422587231164750. https://doi.org/10.1177/10422587231164750
La Porta, R., Lopez-De-Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. Journal of Finance (Wiley-Blackwell), 52(3), 1131–1150. https://doi.org/10.1111/j.1540-6261.1997.tb02727.x
Le Pendeven, B., & Schwienbacher, A. (2023). Equity crowdfunding: The influence of perceived innovativeness on campaign success. British Journal of Management, 34(1), 280–298. https://doi.org/10.1111/1467-8551.12585
Lerner, J. (1995). Venture capitalists and the oversight of private firms. The Journal of Finance, 50(1), 301–318. https://doi.org/10.1111/j.1540-6261.1995.tb05175.x
Ley, A., & Weaven, S. (2011). Exploring agency dynamics of crowdfunding in start-up capital financing. Academy of Entrepreneurship Journal, 17(1), 85–110.
Löher, J. (2017). The interaction of equity crowdfunding platforms and ventures: An analysis of the preselection process. Venture Capital, 19(1/2), 51–74. https://doi.org/10.1080/13691066.2016.1252510
Lukkarinen, A., & Schwienbacher, A. (2023). Secondary market listings in equity crowdfunding: The missing link? Research Policy, 52(1), 104648. https://doi.org/10.1016/j.respol.2022.104648
Lukkarinen, A., Shneor, R., & Wallenius, J. (2022). Growing pains and blessings: Manifestations and implications of equity crowdfunding industry maturation. Decision Support Systems, 157, 113768. https://doi.org/10.1016/j.dss.2022.113768
Malaga, R., Mamonov, S., & Rosenblum, J. (2018). Gender difference in equity crowdfunding: An exploratory analysis. International Journal of Gender and Entrepreneurship, 10(4), 332–343. https://doi.org/10.1108/IJGE-03-2018-0020
Meoli, M., & Vismara, S. (2021). Information manipulation in equity crowdfunding markets. Journal of Corporate Finance, 67, 101866. https://doi.org/10.1016/j.jcorpfin.2020.101866
Miglo, A. (2021). Crowdfunding under market feedback, asymmetric information and overconfident entrepreneur. Entrepreneurship Research Journal, 11(4), 19. https://doi.org/10.1515/erj-2019-0018
Miglo, A., & Miglo, V. (2019). Market imperfections and crowdfunding. Small Business Economics, 53(1), 51–79. https://doi.org/10.1007/s11187-018-0037-1
Miller, A., Scahill, S., & Warren, L. (2019). Investor motivations of a New Zealand biopharma start-up: Angels and crowdfunders. The International Journal of Entrepreneurship and Innovation, 20(4), 252–262. https://doi.org/10.1177/1465750319877391
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
OECD. (2004). Financing SMEs and entrepreneurs - an OECD scoreboard. In: OECD Publishing. https://www.oecd.org/cfe/smes/financing-smes-and-entrepreneurs-23065265.htm
Prokop, J., & Wang, D. (2022). Is there a gender gap in equity-based crowdfunding? Small Business Economics, 59(3), 1219–1244. https://doi.org/10.1007/s11187-021-00574-6
Rossi, A., & Vismara, S. (2018). What do crowdfunding platforms do? A comparison between investment-based platforms in Europe. Eurasian Business Review, 8(1), 93–118. https://doi.org/10.1007/s40821-017-0092-6
Rossi, A., Vismara, S., & Meoli, M. (2019). Voting rights delivery in investment-based crowdfunding: A cross-platform analysis. Journal of Industrial and Business Economics, 46(2), 251–281. https://doi.org/10.1007/s40812-018-0109-x
Rossi, A., Vanacker, T., & Vismara, S. (2021). Equity crowdfunding: New evidence from US and UK markets. Review of Corporate Finance, 1(3–4), 407–453. https://doi.org/10.1561/114.00000009
Rossi, A., Vanacker, T., & Vismara, S. (2023). Unsuccessful equity crowdfunding offerings and the persistence in equity fundraising of family business start-ups. Entrepreneurship Theory and Practice, 47(4), 1327–1355. https://doi.org/10.1177/10422587221121290
Rostamkalaei, A., & Freel, M. (2023). Some initial observations on the geography of the supply of equity crowdfunding. Venture Capital, 25(1), 65–90. https://doi.org/10.1080/13691066.2022.2132891
Salomon, V. (2016). Emergent models of financial intermediation for innovative companies: From venture capital to crowdinvesting platforms in Switzerland. Venture Capital, 18(1), 21–41. https://doi.org/10.1080/13691066.2015.1079953
Salomon, V. (2018). Strategies of startup evaluation on crowdinvesting platforms: The case of Switzerland. [Strategies of startup evaluation on crowdinvesting platforms: The case of Switzerland]. Journal of Innovation Economics & Management, 26(2), 63–88. https://doi.org/10.3917/jie.pr1.0029
Schwienbacher, A., & Larralde, B. (2012). Crowdfunding of small entrepreneurial ventures. In O. H. D. Cumming (Ed.), The Oxford handbook of entrepreneurial finance (pp. 369–391). Oxford University Press. https://doi.org/10.2139/ssrn.1699183
Sendra-Pons, P., Mas-Tur, A., & Garzon, D. (2023). Anchor investors and equity crowdfunding for entrepreneurs. European Journal of Management and Business Economics, ahead-of-print(ahead-of-print). https://doi.org/10.1108/EJMBE-06-2022-0167
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. Journal of Finance (Wiley-Blackwell), 52(2), 737–783. https://doi.org/10.1111/j.1540-6261.1997.tb04820.x
Signori, A., & Vismara, S. (2018). Does success bring success? The post-offering lives of equity-crowdfunded firms. Journal of Corporate Finance, 50, 575–591. https://doi.org/10.1016/j.jcorpfin.2017.10.018
Snyder, H. (2019). Literature review as a research methodology: An overview and guidelines. Journal of Business Research, 104, 333–339. https://doi.org/10.1016/j.jbusres.2019.07.039
Stevenson, R., McMahon, S. R., Letwin, C., & Ciuchta, M. P. (2021). Entrepreneur fund-seeking: Toward a theory of funding fit in the era of equity crowdfunding. Small Business Economics, 58(4), 2061–2086. https://doi.org/10.1007/s11187-021-00499-0
Surowiecki, J. (2004). The wisdom of crowds: Why the many are smarter than the few and how collective wisdom shapes business. Economies, Societies and Nations, 296.
Tranfield, D., Denyer, D., & Smart, P. (2003). Towards a methodology for developing evidence-informed management knowledge by means of systematic review. British Journal of Management, 14(3), 207–222. https://doi.org/10.1111/1467-8551.00375
Troise, C., & Tani, M. (2021). Exploring entrepreneurial characteristics, motivations and behaviours in equity crowdfunding: Some evidence from Italy. Management Decision, 59(5), 995–1024. https://doi.org/10.1108/MD-10-2019-1431
Van Tassel, E. (2023). Crowdfunding investors, intermediaries and risky entrepreneurs. Small Business Economics, 60(3), 1033–1050. https://doi.org/10.1007/s11187-022-00622-9
Van Nieuwerburgh, S., & Veldkamp, L. (2009). Information immobility and the home bias puzzle. The Journal of Finance, 64(3), 1187–1215. https://doi.org/10.1111/j.1540-6261.2009.01462.x
Vismara, S. (2016). Equity retention and social network theory in equity crowdfunding. Small Business Economics, 46(4), 579–590. https://doi.org/10.1007/s11187-016-9710-4
Vismara, S. (2018). Information cascades among investors in equity crowdfunding. Entrepreneurship: Theory and Practice, 42(3), 467–497. https://doi.org/10.1111/etap.12261
Vrontis, D., Christofi, M., Battisti, E., & Graziano, E. A. (2021). Intellectual capital, knowledge sharing and equity crowdfunding. Journal of Intellectual Capital, 22(1), 95–121. https://doi.org/10.1108/JIC-11-2019-0258
Wald, A., Holmesland, M., & Efrat, K. (2019). It is not all about money: Obtaining additional benefits through equity crowdfunding. The Journal of Entrepreneurship, 28(2), 270–294. https://doi.org/10.1177/0971355719851899
Walthoff-Borm, X., Schwienbacher, A., & Vanacker, T. (2018a). Equity crowdfunding: First resort or last resort? Journal of Business Venturing, 33(4), 513–533. https://doi.org/10.1016/j.jbusvent.2018.04.001
Walthoff-Borm, X., Vanacker, T., & Collewaert, V. (2018b). Equity crowdfunding, shareholder structures, and firm performance. Corporate Governance: An International Review, 26(5), 314–330. https://doi.org/10.1111/corg.12259
Wang, W. X., Mahmood, A., Sismeiro, C., & Vulkan, N. (2019). The evolution of equity crowdfunding: Insights from co-investments of angels and the crowd. Research Policy, 48(8). https://doi.org/10.1016/j.respol.2019.01.003
Wu, J., Liu, L., & Cao, Y. (2023). Understanding investor co-investment in a syndicate on equity crowdfunding platforms. Industrial Management & Data Systems, 123(5), 1599–1623. https://doi.org/10.1108/IMDS-09-2022-0538
Zhang, Y., Hughes, M., Fu, K., Scholes, L., & Tang, F. (2023a). The effect of lead investors’ trustworthiness on funding performance: The moderating effect of investment-specific human capital. Technology in Society, 73, 102222. https://doi.org/10.1016/j.techsoc.2023.102222
Zhang, Y., Scholes, L., Fu, K., Hughes, M., & Tang, F. (2023b). Equity crowdfunding syndicates and fundraising performance: The effect of human capital and lead investor reputation. Journal of Small Business and Enterprise Development, 30(4), 645–666. https://doi.org/10.1108/JSBED-06-2022-0282
Zhang, D. R., Li, Y. K., Wu, J., & Long, D. (2019). Online or not? What factors affect equity crowdfunding platforms to launch projects online in the pre-investment stage? Entrepreneurship Research Journal, 9(2). https://doi.org/10.1515/erj-2017-0176
Zhao, Y., Xie, X., & Yang, L. (2021). Female entrepreneurs and equity crowdfunding: The consequential roles of lead investors and venture stages. International Entrepreneurship and Management Journal, 17(3), 1183–1211. https://doi.org/10.1007/s11365-020-00659-w
Funding
Open access funding provided by FCT|FCCN (b-on).
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Appendices
Appendix 1. Number of papers published by year
No. of papers published by year | Number |
---|---|
2011 | 1 |
2013 | 1 |
2014 | 3 |
2015 | 1 |
2016 | 4 |
2017 | 2 |
2018 | 10 |
2019 | 9 |
2020 | 2 |
2021 | 14 |
2022 | 7 |
2023 | 11 |
Total | 65 |
Appendix 2. Number of papers published by journal
Journal | Number |
---|---|
Academy of Entrepreneurship Journal | 1 |
Academy of Management Perspectives | 1 |
British Journal of Management | 1 |
California Management Review | 3 |
Decision Support Systems | 1 |
Economics Bulletin | 1 |
Entrepreneurship Research Journal | 2 |
Entrepreneurship: Theory and Practice | 3 |
Eurasian Business Review | 1 |
European Journal of Innovation Management | 1 |
European Journal of Management and Business Economics | 1 |
Finance Research Letters | 1 |
Financial Innovation | 1 |
Handbook of Research on Business Angels | 1 |
IEEE Transactions on Engineering Management | 1 |
Industrial Management and Data Systems | 1 |
Innovation Policy and the Economy | 1 |
International Entrepreneurship and Management Journal | 1 |
International Journal of Entrepreneurship and Innovation | 1 |
International Journal of Gender and Entrepreneurship | 1 |
International Small Business Journal: Researching Entrepreneurship | 1 |
Journal of Banking and Finance | 1 |
Journal of Business Venturing | 2 |
Journal of Business Venturing Insights | 1 |
Journal of Corporate Finance | 1 |
Journal of Economics and Management Strategy | 3 |
Journal of Entrepreneurship | 1 |
Journal of Industrial and Business Economics | 2 |
Journal of Innovation Economics & Management | 1 |
Journal of Intellectual Capital | 1 |
Journal of Small Business and Enterprise Development | 1 |
Journal of Technology Transfer | 4 |
Management Decision | 1 |
Manufacturing and Service Operations Management | 1 |
Pacific Basin Finance Journal | 1 |
Production and Operations Management | 1 |
Research Policy | 2 |
Small Business Economics | 9 |
Small Enterprise Research | 1 |
Technology in Society | 1 |
Venture Capital | 4 |
Total | 65 |
Appendix 3. Summary of main findings of literature about the comparison of ECF with other sources of start-up financing
Paper | Research design | Data (sample) | Main results/conclusions |
---|---|---|---|
Agrawal et al. (2014) | Conceptual | - | Incentives and disincentives for entrepreneurs, platforms, and investors that participate in ECF. Potential sources of market failure in ECF (adverse selection, moral hazard, collective action) and market design features that may reduce it (reputation signalling, platform rules, and industry regulation, crowd due diligence and provision point mechanism) |
Hornuf and Schwienbacher (2016) | Conceptual | - | Differences and similarities between ECF and BA. Like BA, crowdfunders buy shares of a company, but they differ in terms of financial contracting, securities regulations, degree of involvement in firm management, degree of financial asymmetries, and potential exit strategies. More than BA/VC substitutes, crowdinvestors complement professional investors because they fill the gap or co-invest with them |
Agrawal et al. (2015) | Empirical (quantitative) | 34 projects (artists) funded in Sellaband (Netherlands) | Crowdfunding reduces but does not eliminate the geographical constraints of investments in start-ups. It maintains social frictions as information continues to be held more likely by individuals socially connected |
Salomon (2016) | Empirical (qualitative) | 11 interviews with market participants and 1 case study (Investee—Swiss platform) | The investment process of crowdfunding portals and VC is similar, but they differ in the timing of fundraising and in the selection/evaluation phase. In ECF, fundraising occurs only after the crowd evaluation of the project, and the selection/evaluation phase is divided into two stages: (i) the pre-selection carried out by the platform team and (ii) the crowd evaluation and selection |
Geiger and Oranburg (2018) | Empirical (qualitative) | 243 ECF campaigns (USA) | ECF does not democratize access to capital concerning gender. Provide empirical evidence that campaigns with a female primary signatory receive significantly less funding, and this effect is amplified for larger campaigns |
Guenther et al. (2018) | Empirical (quantitative) | 104 crowdfunding projects from ASSOB (Australia) | While ECF does not eliminate distance-related economic frictions within the home country investors (for both retail and accredited investors), overseas investors are not sensitive to distance |
Malaga et al. (2018) | Empirical (quantitative) | 6234 Title II ECF offerings from 17 platforms (USA) | ECF has limited impact on democratising access to capital for women-owned firms, which continue to be under-represented in Title II ECF platforms in the USA. The target of the campaigns launched by women-owned firms is also lower than that of male-led companies. However, in many industries, companies led by women have the same success rates, if not higher, than those led by men. Thus, the evidence of the underrepresentation of firms led by women can be explained by self-selection rather than the existence of a bias against women in the US Title II ECF platforms |
Miller et al. (2019) | Empirical (quantitative) | 74 (of 171) noncorporate shareholders of a firm (New Zealand) | For both crowdfunders and BA, philanthropy is the main investment motivation, even though this is more pronounced in the crowdfunders group. BAs have a higher proportion of rationally based compared to emotionally based investment decisions, for crowdfunders emotionally based investment decisions are more frequent. In any case, crowdfunders put fewer funds at risk, as the average sum invested is substantially lower than for BA investors |
Cummings et al. (2020) | Empirical (qualitative) | 540 comments submitted as part of a public consultation on the US ECF regulations (the USA, 2013–2015) | Explores how the spread of ECF (that combines characteristics of both public and private equity financing) may affect entrepreneurial finance research and practice. From a framework of two primary dimensions (“Actors” involved in equity crowdfunding: issuers, investors, and intermediaries and “Perspective” with which the actor was considered—expectations, interests, and concerns related to equity crowdfunding from the perspective relational, behavioural, or technical), the authors derive and present a set of unanswered questions and research directions about ECF |
Garaus et al. (2020) | Empirical (quantitative) | 151 investors from Seedmatch (Germany), 254 investors from Conda (a German-speaking country) | Most crowdfunders get involved with the start-ups they invest in. Although most are low-involvement activities (word of mouth to promote the product or the company, using the product or service, and providing feedback), some of the investors also engage in high-involvement activities (strategic advice). The degree of involvement is positively related to the size of the investment. High-involvement activities are linked to personal proximity and intrinsic motivation, while geographic proximity and age are only associated with low-involvement activities |
Andrieu et al. (2021) | Empirical (quantitative) | 151 ECF firms from Wiseed, Smart Angels, Sowefund, and Anaxago platforms (France) | Crowd propensity to finance start-ups is significantly lower when the firm is led by women |
Empirical (quantitative) | 167 crowdfunded firms from Crowdcube (UK) and 99 offerings from London’s AIM | ECF democratises entrepreneurial finance by providing access to funding to underrepresented groups of potential entrepreneurs on traditional stock markets (IPO). Companies with younger team members are more likely to launch equity crowdfunding offerings than IPO and ECF alleviate some of the distance-related economic frictions between entrepreneurs and investors. However, they do not find evidence that female entrepreneurs have higher chances of successfully raising capital in ECF than in an IPO | |
(Daskalakis & Karpouzis, 2021) | Empirical (quantitative) | Survey of 663 persons that have already used crowdfunding with financial returns (ECF and P2P lending) | The study reveals distinct characteristics between equity crowdfunding and P2P lending in term of cross-border activity. Equity crowdfunders are motivated by “Interest / Excitement” and are worried about “Fraudulent fundraisers”. P2P lenders seek “Higher return” and are concerned about “Poor returns”. Equity crowdfunders display a stronger inclination towards cross-border investments through familiar platforms compared to P2P lenders. Demographics, risk perceptions, and motivations contribute to cross-border differences. P2P lenders invest abroad if the project is appealing, while equity crowdfunders prefer foreign platforms for diversification. Younger respondents in both categories show greater openness to foreign investments |
Zhao et al. (2021) | Empirical (quantitative) | 259 campaigns from Dreammove, Ifwolf and Gdrrc platforms (China) | Find evidence suggesting that women entrepreneurs are more likely to secure funding through ECF than their male counterparts. This outcome could be attributed to the fact that ECF is characterized by high information asymmetry and uncertainty, where trustworthiness likely holds more weight than the perceived competence of entrepreneurs. However, the presence of lead investors and the stage of the firm’s development play a moderating role in this context. When a lead investor is involved and as the firm progresses into later stages of development, the advantage experienced by female entrepreneurs becomes less pronounced |
Hornuf et al. (2022) | Empirical (quantitative) | 68 start‐ups/74 campaigns from Companisto and Innovestment platforms (Germany) | They find evidence supporting the existence of a local bias, both at the level of individual investments and investment portfolios. When considering different types of investors, including angel-like investors, those with personal ties to the entrepreneur, more experienced investors, and regular crowd investors, they observe that both angel-like investors and individuals with personal connections to the entrepreneur exhibit a more pronounced local bias compared to more experienced investors who maintain a better-diversified equity crowdfunding portfolio |
Kleinert and Mochkabadi (2022) | Empirical (quantitative) | 263 campaigns from Crowdcube (UK) | The evidence suggesting that female entrepreneurs frequently face greater challenges in obtaining funding compared to males is not solely determined by gender but also depends on how quality signals about entrepreneurs are perceived, particularly whether they are sent by male or female entrepreneurs. The interpretation of quality signals in equity crowdfunding (ECF) is not always rational and can be influenced by gender bias. It is observed that established quality signals, such as managerial experience, primarily benefit male entrepreneurs, while media coverage serves as a more potent signal for female entrepreneurs compared to their male counterparts |
Lukkarinen et al. (2022) | Empirical (quantitative) | 145 campaigns from Invesdor (Finland) | ECF industry is converging towards traditional venture capital and angel investment practices, while still maintaining distinct characteristics. The study demonstrates that as the ECF industry matures, investment object quality, provided information, investor sophistication, and reliance on traditional investment criteria have all increased. Initially significant factors in fundraising success (e.g. early funding from private networks, minimum investment thresholds, and business models) have become less influential in later campaigns, replaced by considerations typical of experienced investors. This maturation is evident in campaigns, investment objects, and investor behaviours. ECF retains unique digital, platform-related, and diversity aspects compared to traditional entrepreneurial finance |
Prokop and Wang (2022) | Empirical (quantitative) | 213 campaigns from 15 German crowdfunding platforms | Find that the gender of a firm’s managing director does not impact the funding outcomes in initial ECF campaigns. However, in the case of seasoned ECF offerings, it is observed a gender gap: ventures led by female managing directors tend to be less successful in raising capital from crowdfunding investors compared to those led by men. Nonetheless, this gender gap in seasoned offerings becomes less pronounced when ventures present more audacious campaign pitches. Consequently, it appears that setting a higher funding threshold could serve as a straightforward strategy for female entrepreneurs to enhance their chances of achieving their funding objectives |
Bi and Lv (2023) | Empirical (quantitative) | 372 campaigns from Kaishiba platform (China) | In the Chinese market, there is evidence that the introduction of an early exit mechanism (allowing investors to opt out before the contractual horizon matures) substantially reduces the total funds raised, the number of investors, and the overall funding percentage of a crowdfunding campaign. This effect can be attributed to the reluctance of value-added investors to embrace such exit options. Conversely, smaller investors do not show a clear preference for projects with or without early exit options |
Lukkarinen and Schwienbacher (2023) | Empirical (quantitative) | 287 campaigns from Invesdor and Privanet platforms (Finland) | Firms that explicitly communicate their intention to list on a secondary market after the ECF campaign are more likely to raise more money and get larger individual investments. This effect is more pronounced among regular crowd investors, as opposed to larger or more experienced investors, who tend to be more susceptible to liquidity shocks. But most crowdfunded firms opt against listing even when there are no associated fees or formal prerequisites, suggesting that secondary markets can be beneficial for ECF, but only if investors have confidence in the efficiency and liquidity of these markets. Additionally, start-ups that have conducted a more successful ECF campaign exhibit a higher likelihood of listing on the secondary market |
Rostamkalaei and Freel (2023) | Empirical (quantitative) | 98 campaigns from Companisco (Germany) | Despite revealing a negative relationship between investor distance to campaign offices and investment levels, distance lacks significance as predictor for low investment levels. Beyond distance, specific spatial attributes enhance investments, with densely populated and affluent regions emerging as prominent fund sources. Moreover, regions with higher connectivity and science/technology engagement show positive correlations with crowdfunding investments. The complexity of these factors challenges the notion that online crowdfunding will completely democratize entrepreneurial finance |
Appendix 4. Summary of main findings of why and when entrepreneurs seek funding on ECF platforms
Paper | Research design | Data (sample) | Main results/conclusions |
---|---|---|---|
Ley and Weaven (2011) | Conceptual | 11 interviews with venture capitalists | Equity crowdfunding is not appropriate to fund start-ups that have complex due diligence requirements, high information sensitivity (information that cannot be disclosed to the crowd) or long economic life and require follow-on funding |
Belleflamme et al. (2014) | Theoretical model | - | Theoretical model about the entrepreneur’s choice between reward and equity crowdfunding models. Assuming that “community benefits” increase the utility of investors, the model shows that entrepreneurs prefer the reward model when the initial capital requirements are small compared to the market size and ECF otherwise |
Brown et al. (2018) | Empirical (qualitative) | Entrepreneurs of 42 ECF start-ups from Crowdcube, Seedrs, and SyndicateRoom (UK) | Find evidence that innovative, consumer-focused, early-stage firms reveal a strong demand for ECF. However, the perceived lack of financial alternatives and the ability to get finance quickly are crucial factors for entrepreneurs seeking ECF. Consistent with the pecking order theory, entrepreneurs also prefer equity crowdfunding to minimise equity dilution and retain maximum levels of autonomy. More than money, the ECF delivers important intangible benefits to entrepreneurs, such as media exposure, interaction with new shareholders, and end-user engagement and feedback. It can also facilitate future rounds of funding |
Estrin et al. (2018) | Empirical (qualitative) | 64 structured interviews with entrepreneurs and experienced investors in the UK | The ECF market has grown significantly in recent years and qualitative data suggests that this new form of entrepreneurial finance is incremental to the traditional ones (VC/BA), attracting many new investors. In addition to raising funds, ECF is part of the marketing strategy for entrepreneurs. While some investors are somewhat optimistic about ECF returns, most of them clearly understand and properly assess the risk that they are bearing |
Empirical (quantitative) | 277 crowdfunded firms on Crowdcube (UK) and 2 matched samples | Consistent with the pecking order theory, firms search for equity crowdfunding platforms as a “last resort”: when they do not have internal funds and have limited debt capacity | |
Miglo and Miglo (2019) | Theoretical model | - | Theoretical model on the entrepreneur’s choice between different types of crowdfunding. The model predicts that when asymmetric information is important, high-quality projects prefer reward-based crowdfunding |
Wald et al. (2019) | Empirical (qualitative) | 26 interviews with market participants in ECF (Israel and Norway) | In addition to financing, ECF investors provide two categories of benefits: inward benefits and outward benefits. Inward benefits include investors’ contributions of personal experience and expertise (support for firm management, practical knowledge and expertise, future finance, and strategic functions). The outward benefits are related to public exposure and the recruitment of additional investors (including public relations, media exposure and social connections) |
Wang et al. (2019) | Empirical (quantitative) | 50,999 investors and 1151 campaigns from one of the UK’s leading ECF platforms | Angels and crowd are complementary investors, which has a positive effect on the overall efficiency of the ECF market. There is evidence that angel and crowd investors interact on ECF platforms, and angel investors help to reduce information asymmetries by providing valuable information to the crowd. While angels are important for financing large ventures, the crowd investors not only complement angels in large campaigns, but also play a key role in the funding of small ventures (less interesting to angels) |
Blaseg et al. (2021) | Empirical (quantitative) | 163 ECF firms from Companisto, Fundsters, Innovestment, Seedmatch (Germany), and 163 non-ECF firms | ECF offers entrepreneurs a way to access many investors and get market feedback. However, potential costs also arise from early disclosure of entrepreneurial activities, costs of communication with a large investor community, and capital dilution that can discourage future equity investors. Finds evidence that start-ups are more likely to seek ECF when they relate to troubled banks and less likely when they have access to other sources of equity funding and are associated with less risky banks (well capitalized and liquid). According to Pecking Order Theory, lower-quality start-ups are more likely to seek ECF |
Di Pietro (2021) | Empirical (qualitative) | 38 interviews with entrepreneurs who successfully fundraised on Crowdcube and Seedrs (UK) | In addition to raising finance in a short time, entrepreneurs benefit from the validation of market potential, create a large customer community before commercialization, and increase professional investment readiness (gain credibility and reduce information asymmetries) and maintenance of strategic control (minimize dilution of their equity stake and retain the maximum level of autonomy) |
Miglo (2021) | Theoretical model | - | Theoretical model on the entrepreneur’s choice about crowdfunding model using a behavioural finance approach. In the presence of asymmetric information and overconfident entrepreneurs, the model predicts that ECF is preferable to reward-based crowdfunding because entrepreneurs may obtain relevant information from the sale of shares before making production decisions. In contrast to Pecking Order Theory, the model predicts an equilibrium where some firms use ECF |
Troise and Tani (2021) | Empirical (quantitative) | Survey of 97 firms with ECF campaigns from 12 platforms (Italy) | Both entrepreneurial characteristics, alertness, and self-efficacy influence the motivations of entrepreneurs to adopt ECF, which in turn have an impact on their behaviour in terms of campaign communication and offerings characteristics, which can influence ECF campaign performance |
Stevenson et al. (2021) | Empirical (qualitative) | Case studies of 14 ECF firms from the leading portal in the USA and 16 interviews with entrepreneurs and funders (USA) | There are two types of entrepreneurs in ECF: necessity fund-seekers and strategic fund-seekers. There are several factors why strategic fund-seekers prefer ECF, such as transactional value (avoid losing power and strategic control in the company), efficiency (not overly time-consuming), value capture from funders (demand-side complementary value, e.g. mass referrals, prospective customer lists), value creation from the fundraising process itself (market validation information), and external stakeholder values |
Cerpentier et al. (2022) | Empirical (quantitative) | 591 firms that raised initial ECF from Crowdcube and Seedrs | Investigating the impact of market timing on the capital structure of ECF firms, they find evidence that ECF firms in hot markets set significantly higher funding goals, accumulate more overfunding, and consequently secure more equity capital compared to those in cold markets. Despite these trends, ECF firms in hot markets do not consistently exhibit lower leverage ratios than their counterparts in cold markets. In contrast, ECF firms in hot markets simultaneously attract more debt financing than their counterparts in cold markets |
Le Pendeven and Schwienbacher (2023) | Empirical (quantitative) | 191 campaigns from Anaxago, Smart Angels, Sowefund, and WiSEED platforms (France) | Using an investor’s perspective, the authors find that highly innovative projects tend to attract a larger number of crowdfunding investors and consequently raise more capital. These results hold true for both measures of perceived innovativeness (Diamond Framework and Early Metrics), validating the hypothesis that crowdfunding investors evaluate innovativeness in a manner consistent with professional and qualified investors (BA and VC) |
Van Tassel (2023) | Theoretical model | - | Under imperfect information, investors face a choice between entrusting their funds to intermediaries or making a direct investment themselves. This decision hinges on the trade-offs involving cost and risk for each option. At low risk levels, all investors, regardless of age, opt for crowdfunding. Conversely, when risk levels are high, intermediation becomes the preferred choice. Intriguingly, at moderate risk levels, both crowdfunding and intermediation coexist in equilibrium |
Appendix 5. Summary of main findings of literature about ECF platforms
Paper | Research design | Data (sample) | Main results/conclusions |
---|---|---|---|
Belleflamme et al. (2013) | Theoretical model & Empirical (quantitative) | 44 cases of individually crowdfunded ventures | Develops a theoretical model and finds empirical evidence that non-profit organisations attract larger amounts of money and are more successful in ECF campaigns than profit entrepreneurs, due to the stronger focus on social outcomes than on monetary gains. Additionally, entrepreneurial initiatives with higher community benefits and that offer a product (rather a service) tend to attract larger amounts of funds. However, social networks and firm age do not seem to enhance the amounts of funds raised, and the relevance of the crowdfunding model is unclear |
Agrawal et al. (2016) | Conceptual | - | Syndicates reduce market failures (related to information asymmetry) and allocate capital more efficiently, boosting economic growth. By amplifying the impact of high-performing BA investors (who attract capital from global investors, rather than becoming dependent on a local investor community), the syndicate model increases the volume and pattern of capital flows in ECF |
Chen et al. (2016) | Conceptual | - | Compares two crowd designs in ECF: pure crowds and hybrid crowds. Identify several shortcomings of pure crowds, arguing that hybrid crowds can overcome those inefficiencies. Propose the use of compensation and reputation mechanisms to surplus the potential agency problems between lead investors and the crowd |
Löher (2017) | Empirical (qualitative) | 21 interviews with platform operators, managers of crowdfunded start-ups, and external experts in Germany | The pre-selection process in ECF is similar to usual practices in VC/BA, and it is structured in four steps: sourcing deals; assessment of investment deals; deal structuring, and campaign preparation |
Hornuf and Neuenkirch (2017) | Empirical (qualitative) | 1450 bids made by 499 backers in 44 ECF campaigns in Innovestment (Germany, 2011–2014) | In an ECF platform with an auction mechanism, where the funders can specify the price of the investment ticket, the willingness of backers to pay for cash flow rights is significantly influenced by campaign characteristics, sophistication of the investors, funding progress, herding, and stock market volatility. However, geographic distance, learning effects, and sniping at the end of the auction do not affect the backers’ willingness to pay for cash flow rights. The results suggest that portal designs and the organisation of ECF campaigns can have a relevant impact on the willingness of funders to pay for cash flow rights and company shares more broadly |
Hornuf and Schwienbacher (2018a) | Empirical (quantitative) | 181 successful and unsuccessful campaigns from all ECF platforms in Germany | Platforms differentiate themselves along several dimensions, including the type of contracts offered to the crowd. Smaller investment tickets, pooled investments in a financial vehicle, and the use of profit-participating loans (as opposed to silent partnership agreements, common equity, and other financial contracts) help to attract a larger crowd and raise more money on ECF platforms |
Hornuf and Schwienbacher (2018b) | Empirical (quantitative) | 89 campaigns (of 81 start-ups) from 4 German ECF portals (Companisto, United Equity, Seedmatch, and Innovestment) | ECF platforms use mainly two mechanisms of share allocation to investors: (i) the first-come, first-served mechanism and (ii) the auction mechanism. Empirical evidence suggests that the choice of the market mechanism affects the dynamics of investor behaviour during the campaign. While an auction mechanism induces late investments, the first-come, first-served mechanism induces quick investments during the first days |
Rossi and Vismara (2018) | Empirical (quantitative) | 127 investment-based crowdfunding portals based in France, Germany, Italy, and the UK | ECF platforms are concentrated in the same regions as traditional financial centres. Older platforms with less competition in the same region and that offer a higher number of post-campaign services have a greater number of successful campaigns |
Salomon (2018) | Empirical (qualitative) | 2 case studies of ECF platforms in Switzerland (c-crowd and Investiere) | Case study of two ECF platforms in Switzerland, with significantly different ways of functioning, it is found that the process of evaluating the investment proposals depends on the sociotechnical devices implemented by the platforms and it depends on “social proof” dynamics that operate within the community of platform’s investors and at the start-up ecosystem |
Cumming et al. (2019) | Empirical (quantitative) | 93 Canadian crowdfunding platforms | Due diligence procedures are more likely for larger crowdfunding platforms, in equity and lending crowdfunding models, and after legislation updates. Due diligence facilitates fundraising campaign success and helps to increase the number of investors and the total amount of capital raised on a platform |
Fatehi and Wagner (2019) | Theoretical model & Empirical (quantitative) | 56 campaigns from Bolstr (USA) | Proposes a revenue-sharing contract approach to crowdfunding that maximize net present value under investor participation constraints and platform charges. The proposed revenue-sharing contract outperforms equity crowdfunding, as it has higher NPV and identical bankruptcy probabilities |
Gal-Or et al. (2019) | Theoretical model | - | Competition model for platforms in a two-sided ECF market, where investors and start-ups are heterogeneous in terms of risk preferences. Under certain conditions, the model predicts a segmenting equilibrium, where each platform attracts segments of the two user groups that are more compatible with each other (the riskiness of the start-up and the risk profile of the investor). However, if the preference for compatibility is not sufficiently high, the equilibrium occurs when one platform dominates the entire market |
Rossi et al. (2019) | Empirical (quantitative) | 185 ECF platforms based in Australia, Austria, Canada, France, Germany, Italy, New Zealand, the UK, and the USA | Identify three types of platforms in terms of voting rights delivered to investors: individual voting rights, pooled voting rights (nominee structure), and involvement of lead accredited investors (syndicate-like platforms). Platforms with individual voting rights are associated with less successful ECF campaigns compared to other platforms while delivering pooled voting does not influence the success of the platforms. Syndicate-like platforms register fewer successful offerings |
Zhang et al. (2019) | Empirical (quantitative) | 473 investment proposal campaigns from Dahuotou (China) | Platforms are more likely to list projects from local start-ups (suggesting that local bias still exists in the pre-investment stage) engaging in strategic emerging industries. Signals of media usage (e.g. videos) and start-ups’ quality (credit) are also positively correlated with the launching of projects on platforms |
Aggarwal et al. (2021) | Theoretical model & Empirical (quantitative) | Survey of 319 investors from one of the largest crowdfunding platforms in the US | Arguing that hybrid crowds have some advantages over pure crowd models, the authors develop a measure of the quality of lead investors that can be useful for platforms to identify investors who are good candidates to lead financing rounds |
Cosma et al. (2021) | Empirical (quantitative) | 233 projects (funded or not) in 10 Italian ECF platforms | The choice of platform can be critical for the performance of the ECF campaign. The diversity (not the size) of the platform’s network influences positively the probability of campaign success and how much capital it raises. Partner networks (including banks, investment funds, associations, agencies, syndicates universities, advisors, incubators, firms, and others) offer unique and strategic value propositions and define the competitive positioning of the platforms |
Conceptual | - | Propose a conceptual model of combined governance mechanisms that can be used in equity crowdfunding markets to reduce adverse selection and moral hazard problems. These mechanisms encompass crowd investors (wisdom of the crowd), entrepreneurs (signalling and related substantive action), platforms (due diligence, shareholder structures, secondary markets), and country institutions (formal and informal institutions) | |
Kleinert et al. (2021) | Empirical (quantitative) | Conjoint experiment with 624 venture evaluations by 78 decision-makers from 50 ECF platforms in 22 countries | The rejection rate of the pre-campaign phase is around 90%. The most important signal of venture quality to ECF platforms is the team experience, followed by sales agreements and, at a greater distance, patents, and venture capital backing. However, the valuation of venture quality signals varies across countries, with the business characteristics of ECF platforms and with the industry orientation of the new venture |
Vrontis et al. (2021) | Empirical (quantitative) | 315 projects (funded or not) in 21 Italian ECF platforms | The presence of platforms on social networks (number of EC platforms’ connections, particularly on Twitter) and their intellectual capital (quality of a platform’s employees and other people involved) influence positively the success rate of EC campaigns |
Butticè et al. (2022) | Empirical (quantitative) | 170 crowdfunded firms in Crowdcube and Seedrs (UK) and control group of 2074 firms financed by BA investors | Equity crowdfunded firms tend to attract VCs with lower reputable reputation compared to angel-backed firms. Furthermore, the ownership structure of crowdfunded firms has a significant impact on the quality of VC they can attract for subsequent funding rounds. Firms that opt for a direct shareholder model (leading to increased coordination and agency costs) tend to attract less reputable VCs compared to firms that opt for the nominee shareholder structure |
Coakley et al. (2022) | Empirical (quantitative) | 1291 initial campaigns from Crowdcube, Seedrs, and SyndicateRoom | Founder team attributes significantly influence platform selection. Larger, heterogeneous (in terms of tenure, nationality, and age), experienced, and highly educated teams tend to favour the co-investment shareholder model, involving professional investors. Conversely, solo founders and small teams lean towards the Seedrs nominee model |
Chen and Ma (2023) | Empirical (quantitative) | 92 campaigns from JD.com (Chinese platform) | Examine agency conflicts in equity crowdfunding (between lead and crowd investors) within the co-investment shareholder model. High capital contribution by the lead investor reduces subsequent crowd investment, suggesting that concentrated insider ownership by a lead investor (who act as an agent to lead the fundraising and manage the syndicate on behalf of the principal—crowd investors) weakens crowd investors’ bargaining power, increasing agency concerns. However, trust mitigates insider ownership worries, easing fundraising impact. Unlike lead investors, early peer’s capital foster follow-on crowd investment. This suggests that the wisdom of the crowd may be more appreciated than professional lead investors’ opinion in equity crowdfunding |
Rossi et al. (2023) | Empirical (quantitative) | 1769 start-ups that had unsuccessful initial ECF campaigns from Crowdcube, Seedrs, and SyndicateRoom | In comparison to nonfamily business start-ups, family business start-ups demonstrate a higher degree of persistence in acquiring equity capital. Additionally, family business start-ups initially hesitate to offer voting rights, but they become more willing to do so when seeking follow-on equity after an unsuccessful campaign. These findings can be understood by interpreting family business start-ups' financial behaviour post an unsuccessful ECF campaign through the lens of preservation of socioemotional wealth |
Sendra-Pons et al. (2023) | Empirical (quantitative) | 24 syndicated ECF campaigns from Startupxplore (Spain) | Considering the herd behaviour model, this paper explores the influence of anchor investors (corporate and individuals) in facilitating fundraising success and found that revealing financial and reputational commitments of anchor investors is valuable for reducing information asymmetries in ECF. Find evidence that (i) corporate anchor investors exert significant influence in driving herd behaviour, even when the investor’s resume is not detailed or has little experience in entrepreneurial investment but (ii) for individual anchor investors is essential a detailed resume, including the track record of past investments, (iii) when the identity of the anchor investor remains undisclosed, the absolute investment becomes significant when the experience in entrepreneurial investment is low |
Empirical (quantitative) | 179 lead investors from AngelList (USA) | This study examines lead investors’ trustworthiness—integrity, ability, and benevolence—and their effects on ECF syndicate funding performance. The fundings suggest that integrity and ability contribute positively to performance outcomes, while benevolence might hold lesser influence | |
Empirical (quantitative) | 178 lead investors from AngelList (USA) | By distinguishing between general human capital (education and general work experience) and specialized human capital (investment, entrepreneurial, and advisory experience) of lead investors, this study discerns that general human capital lacks impact. In contrast, the specialized human capital of a lead investor is positively linked to syndicate fundraising performance. Additionally, the study reveals that the connection between lead investor specialized human capital and fundraising performance is mediated by their reputation | |
Wu et al. (2023) | Empirical (quantitative) | 139 syndicate leaders and 249 backers for 461 start-ups from AngelList (USA) | Explores the factors influencing co-investment between leaders and backers within ECF syndicates, namely two primary mechanisms, homophily (similarity) and repeated ties. Find evidence that the similarity among investors had an inverted U-shaped relationship with their likelihood of co-investing in an equity crowdfunding syndicate. This means that as similarity increases, co-investment becomes more likely up to a certain critical threshold, after which it starts to decrease. Additionally, it was found that leader-backer pairs were more inclined to create new syndicates if they had a history of prior co-investment ties, supporting the idea of repeated ties as a mechanism in syndicate formation |
Rights and permissions
Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.
About this article
Cite this article
Correia, S., Sousa, M. & Brandão, E. What do we know about the choices of entrepreneurs before the equity crowdfunding campaign?. Small Bus Econ (2024). https://doi.org/10.1007/s11187-023-00868-x
Accepted:
Published:
DOI: https://doi.org/10.1007/s11187-023-00868-x