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Innovation and Entrepreneurship Research

Is Wisdom of Crowds a Positive Signal? Effects of Crowdfinancing on Subsequent Venture Capital Selection

Mödl, Michael (2018). Is Wisdom of Crowds a Positive Signal? Effects of Crowdfinancing on Subsequent Venture Capital Selection, Max Planck Institute for Innovation & Competition Research Paper No. 18-15.

The seed funding gap is still a major obstacle for the initiation of new ventures and diffusion of innovation. Crowdfunding – an innovation in the market for startup finance – could offer a new market-based means of partly closing this gap. However, crowdfinancing cannot be regarded as a complete substitute for venture capital funding, e.g. since it is not likely to fully finance a technology-based venture over time and because professional venture investors provide crucial resources besides capital. It therefore appears important to study the interaction between crowdfunding and more traditional forms of start-up finance. We examine the impact and signaling effects that crowd-based funding has on subsequent venture capital financing rounds. Drawing on a choice experimental research design and data on 5,280 decisions of 120 venture investors, our results indicate that “the crowd” generally is a negative signal for professional venture investors, but that they do not ignore positive signals sent by the crowd. We find causal evidence that start-ups with a prior crowd-investing (securities-based crowdfunding) tend to be not selected by venture investors, while high sums of (reward-based) crowdfunding, collected fast by startups with a B2C business model, can have a positive effect on VC managers’ funding decisions. Our results also suggest that traditional forms of pre-funding, i.e., prior business angel investments, by contrast significantly increase the likelihood of subsequent financing rounds. Theoretical and managerial implications are discussed.

Available at SSRN