With these two empirical contribution, this dissertation focuses on the question whether successful crowdfunding campaigns are more likely to receive VC than unsuccessful campaigns, and if the existence of a crowdfunding campaign influences the syndication behavior of venture capitalists. Based on the research question two and three derived in the literature review, this dissertation firstly directs the focus to reward-based crowd- funding campaigns and their signaling value for post-campaign follow-up VC invest- ments. Given the increased popularity amongst commercially-oriented entrepreneurs to use crowdfunding as a new means of entrepreneurial finance (Schwienbacher & Lar- ralde, 2010), this dissertation investigates if and how crowdfunding campaign-related factors influence the decision-making process of venture capitalists in post-campaign follow-up financing rounds. The analysis builds upon a consistent set of hypotheses and the empirical findings are deducted using a dataset comprising data from Kickstarter and Crunchbase.
Within the context of reward-based crowdfunding, amateur investors such as backers share similar objectives compared to experts such as venture capitalists when selecting investment objects (Mollick, 2013). In other words, both individuals face informational asymmetries and share an equal interest by searching for clues that signal quality and thus reduce the investment risk (Mollick, 2013). Hence, this dissertation investigates if informational cues that may influence a large collective of individuals similarly influ- ence the investment decision of professional investors such as venture capitalists. Given this research question, the study contributes to advancing signaling theory against the background of the microfinance literature by showing that the effectiveness of quality signals is similar for expert and amateur investors in some aspects regarding the cam- paign while it differs in others. For instance, the analyses find that a campaign endorse- ment provided by Kickstarter does not only positively influence the campaign’s chances of success (Wessel et al., 2015), but also increases the likelihood of post-campaign fol- low-up investments from a venture capitalist. Further, the analyses conclude that elec- tronic-word-of-mouth also positively influences the receipt of VC after a crowdfunding campaign. This finding is in line with prior research showing that the success of a cam- paign is positively linked to the number of Facebook-shares and comments on the cam- paign website (Thies et al., 2016). One reason for this effect might be the herding be- havior of amateur investors that can be explained by short decision times given the duration of the campaign or the emotional bonding between the amateur investor and his social-media network (Baddeley, 2010; Kuan, Zhong, & Chau, 2014). Apparently, VC investors are also subject to a certain degree of herding behavior given that they are apparently influenced by the fact how successful campaigns are on social media chan- nels. Finally and most importantly, the results find empirical evidence that a successful campaign has a positive impact for the campaign initiator’s chances to receive post- campaign follow-up VC financing. This finding is clearly in line with the expectation that a positive assessment of the potential of a campaign works as a signal for outside investors (Ahlers et al., 2015; Mollick & Kuppuswamy, 2014; Vismara, 2016). In other words, a large group of individuals assessed a project to be worth investing and likely to succeed in the market, an assessment which venture capitalists obviously value. Fur- ther, this dissertation finds an inverted u-shaped relationship between a campaign’s funding received compared to the funding desired and the probability of a follow-up VC investment. Hence, if a campaign achieved a low level of funding success, the need
for capital remains intact, whereas campaigns with a high level of funding success have a reduced need and thus reduced likelihood of acquiring VC funding.
In order to provide novel insights if and how crowdfunding influences the investment behavior of venture capitalists in terms of their need to form syndicates, this dissertation takes the perspective of the venture capitalist in selecting portfolio firms. Following Manigart et al. (2006) and relying on two major motives why venture capitalists form syndicates - deal selection and deal flow - this dissertation shows that crowdfunding does in fact influence both motives. Roma et al. (2017) already pointed out that crowd- funding has a positive and lasting value for technology entrepreneurs in their follow-up financing round after the campaign. This positive effect of a crowdfunding campaign is largely due to the fact that crowdfunding offers entrepreneurs a platform through which they can show a potential investor that there exists a certain degree of demand (Roma et al., 2017). Hence, if the crowd supports a campaign, it simultaneously attests demand which can reduce informational frictions concerning potential market acceptance (Burtch et al., 2012; Mollick & Nanda, 2016). As such, a successful crowdfunding cam- paign may serve as a valuable signal for outside investors since the funded project re- ceived feedback from a large group of individuals that could turn into future customers (Ahlers et al., 2015; Moen, Sørheim, & Erikson, 2008; Mollick & Kuppuswamy, 2014; Vismara, 2016; West & Noel, 2009). Beyond the signaling value the campaign inherits, the entrepreneur additionally collects valuable feedback about the products’ or services’ use from the campaign backers which he can use in the iterative process of product/ser- vice improvement. As such, information asymmetries may be reduced given that the business opportunity received validation from a market perspective (Roma et al., 2017). As one main motive for venture capitalists to syndicate is to assess company-specific risk prior to investing (Brander et al., 2002; Manigart et al., 2006). This dissertation finds that crowdfunding apparently reduces perceived informational frictions and thus also the need to form syndicates. In addition, the findings provide empirical evidence that a previous crowdfunding campaign also alters the composition of syndicates. This dissertation argues that crowdfunding, given its global availability, offers remotely lo- cated investors a channel through which they can increase their deal flow, by forming more internationally oriented syndicates. Contrary to the expectations however, the as- sumed effect of a crowdfunding campaign to attract smaller and thus likely less-experi- enced VC funds could not be confirmed as the analyses do not find strong support for
this hypothesis. Overall, the findings indeed show that crowdfunding does not only in- fluence whether or not expert investors form syndicates, they also show how the com- position of syndicates changes if an investee used crowdfunding before.
Based on these results, the contribution of this work is twofold. First, this dissertation contributes to advancing signaling theory against the background of the microfinance and VC literature. It does so by assessing if signals relevant for amateur investors such as the crowd have an equal value to experts such as venture capitalists. Based on the results derived, the findings show that collective investment decisions from amateur investors indeed influence the decision-making process of expert investors such as ven- ture capitalists. Hence, it can be inferred from the results that the decision of a large crowd to support a product or service supported on Kickstarter may give sufficient evi- dence about the potential of the entrepreneurial initiative. In addition, the suggested potential apparently reduces information asymmetries between the campaign initiator and the investor increasing the chances of a post-campaign follow-up VC investment. In addition to the theoretical contribution this empirical contribution provides, the prac- tical implications for the entrepreneur and venture capitalists are also noteworthy. Given the increasing popularity of crowdfunding amongst entrepreneurs, this source of entrepreneurial finance turned into an important form of funding for commercially- oriented new ventures (Schwienbacher & Larralde, 2010). For instance, 45 out of the 50 largest crowdfunding campaigns in 2012 turned into new firms after they had col- lected their first funds through individual investors (Mollick, 2014). Hence, for those successful crowdfunding entrepreneurs who still need funding in order to expand busi- ness operations further, the findings show that entrepreneurs can use their campaigns as signaling instrument to a) shape awareness in the competitive environment of new ventures seeking VC funding and b), show superiority over other ideas or projects, which increases their chances to finance their growth. In addition, the findings show that syndicated investments are less likely. This implies that the entrepreneur is not necessarily obliged to deal with multiple investors simultaneously and satisfy individual requirements. Furthermore, as his campaign proved to be a valuable signal, the entre- preneur’s bargaining position is greatly enhanced. Another important practical contri- bution is that entrepreneurs seeking expansion can profit from the more internationally oriented syndicates that the results show. In other words, the increased internationality
also increases access to have local expert investors in the network even though they might be remotely located.