Essays on Investors' Decision-Making in Equity-Based Crowdfunding

Abstract

Equity crowdfunding (ECF) is a fast-growing source of equity financing for entrepreneurial ventures, complementary to existing actors within the entrepreneurial finance domain, such as business angels and venture capital funds (Hornuf & Schwienbacher, 2018; Tuomi & Harrison, 2017; Vismara, 2022). For example, in 2021, 573 (23%) of all investment rounds in the UK utilized ECF, making it the third most active actor, after business angels (BA), accounting for 602 deals (24%), and private equity and venture capital firms (VC) facilitating 1,359 deals (54%) (Beauhurst, 2022). ECF can also be a disruptive form of bypassing traditional sources of equity financing, such as BA and VC, by raising capital from a large group of people (Drover et al., 2017; Lehner et al., 2015; Lukkarinen et al., 2016). As such, it aims to at least partially fill the gap of a chronic shortage of access to early-stage finance for SMEs often underserved by traditional financial institutions and channels across the world (Bruhn et al., 2017), with 26% of European SMEs indicating this as a major concern in 2023 (European Central Bank, 2023). Furthermore, the high-risk profile of early-stage entrepreneurial ventures, their sometimes-modest expected returns, and high transaction costs associated with due diligence and emissions made these highly innovative firms less attractive for BA and VC. At the same time, the needed capital is too large for friends and family to cover, as well as for VCs to cover alone. Therefore, ECF might have the potential to fill the equity gap for these early-stage entrepreneurial ventures (Hornuf & Schmitt, 2016; Mason et al., 2016). Indeed, between 2011 and 2021, the majority of companies (53%) utilizing ECF were at the seed stage compared to only 33% backed by VC firms (Beauhurst, 2022). The 2012 Jumpstart Our Business Startup Act (JOBS Act), signed by the President of the United States, dramatically affected the entrepreneurial finance landscape by legalizing ECF, opening new opportunities to both entrepreneurs and investors. Entrepreneurs were allowed to sell limited amounts of equity in their companies, and investors were provided with new opportunities to diversify their investment portfolios (Stemler, 2013). Since the 2012 JOBS Act and the legalization of ECF, the field of research for entrepreneurial financing has seen a growing interest among…