Today, start-ups often obtain financing via the Internet. Under the equity crowdfunding (‘ECF’) model, non-sophisticated investors make many small contributions to a company and ultimately expect financial compensation. While only a few years ago this new way of financing was largely considered a niche phenomenon, in many countries it has now become an ordinary source of early-stage financing for start-up firms. In the UK, for example, the ECF market has even approached the size of the early-stage business angel (‘BA’) and venture capital (‘VC’) market. Yet, little is known about how to regulate this new phenomenon properly and whether funded start-ups can ultimately build enduring businesses. To answer this question, our study takes a double-sided approach by investigating the determinants of follow-up funding and firm failure after an ECF campaign has taken place.
In order to empirically analyze firm success, we hand-collected data from 38 different ECF portals and 656 firms that ran at least one successful ECF campaign in Germany or the UK. Overall, these firms ran 778 successful campaigns, 512 of which took place in the UK and 266 in Germany. The average age of the crowdfunded firms at the end of their first successful campaign is 2.8 years. The average amount raised is €340,271 in Germany and €515,575 in the UK. In the UK, on average 207 investors support an ECF campaign, while in Germany, 323 investors do so. Most firms operate in the information and communication industry (26%), followed by the wholesale and retail business (18%) and manufacturing (16%) industries. On average, every second ECF-financed firm received capital from a VC fund, while four out of ten firms received money from a BA.
In line with an earlier study of ours, the evidence shows that German firms that obtain capital from the crowd stand a higher chance of obtaining follow-up funding through business angels or venture capitalists than firms that have received ECF in the UK. However, start-ups that ran a successful ECF campaign in Germany have a relatively lower likelihood to survive. In a second step, we also investigate possible determinants of follow-up funding and firm failure. We find firm age, the average age of the management team, and excessive funding during the ECF campaign all have a negative effect on firms’ likelihood to obtain post-campaign financing. By contrast, the number of senior managers, registered trademarks, subsequent successful ECF campaigns, crowd exits, and the amount of the funding target all have a positive impact. Subsequent successful ECF campaigns, crowd exits, and the number of venture capital investors are significant predictors reducing firm failure. Finally, we find that some of these factors have a differential impact for Germany and the UK. While older firms have a higher likelihood of failure in the UK than in Germany, female senior managers and the number of ECF investors increase the likelihood of firm failure in Germany relative to the UK.
These findings suggest various avenues of research for human capital theory, organizational ecology, and the comparative corporate governance literature. Further analysis of the management team might investigate whether female managers are discriminated against when applying for capital or simply pursue different goals when running a company in Germany and the UK. Furthermore, the number of ECF investors might have a differential impact in Germany and the UK due to differences in the financial instruments used or the governance features of the platforms. As ECF portals in Germany broker mezzanine financial instruments that mimic the returns of equity shares, but come with little or no control rights for investors, the management of the start-up might have a larger leeway when making decisions.
Lars Hornuf is Professor of Finance at the University of Bremen, Affiliated Research Fellow at the Max Planck Institute for Innovation and Competition, and Affiliate Member of the CESifo Network. Matthias Schmitt is Research Fellow at the Max Planck Institute for Innovation and Competition.