Third-party signals in equity crowdfunding: the role of prior financing

Simon Kleinert*, Christine Volkmann, Marc Grünhagen

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Drawing on signaling theory, this study provides preliminary evidence that prior financing certifies firm quality to investors and reduces information asymmetries in equity crowdfunding. We examine 221 business plans and project descriptions of start-ups that ran equity crowdfunding campaigns on Crowdcube in 2017 and 2018. Almost half of the start-ups had previously raised funds through business angels, venture capitalists, crowdfunding, or grants. Prior financing positively affects campaign success. Overall, the effect is larger for firms backed by multiple investor types and for firms that have run successful crowdfunding before. To isolate the quality signal from the additional benefits related to an affiliation with other investors, we analyze whether the effect of prior financing is moderated by the uncertainty around a project. In support of a signaling effect, preliminary evidence suggests that prior financing is most relevant for firms in the uncertain seed stage. Among the different investor types, we find that, in particular, an affiliation with venture capitalists signals quality. Such an affiliation is more important for firms with low levels of human and social capital. Our study adds to the understanding of how equity crowdfunding interacts with traditional forms of entrepreneurial finance.
Original languageEnglish
Pages (from-to)341-365
Number of pages25
JournalSmall Business Economics
Volume54
Issue number1
DOIs
Publication statusPublished - Jan 2020

JEL classifications

  • l26 - Entrepreneurship
  • g23 - "Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors"
  • g24 - "Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies"

Keywords

  • certification
  • entrepreneurial finance
  • equity crowdfunding
  • securities issuance
  • signaling theory
  • INITIAL PUBLIC OFFERINGS
  • ENTREPRENEURS
  • INVESTMENT DECISIONS
  • SUCCESS
  • MARKET
  • Securities issuance
  • PERFORMANCE
  • INFORMATION
  • CERTIFICATION
  • Signaling theory
  • Certification
  • Entrepreneurial finance
  • Equity crowdfunding
  • CROWD
  • VENTURE CAPITALISTS

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