Problem statement & research gap
Studies have shown that ventures have to deal with a variety of challenges rooting in their age and size, called liabilities of newness and smallness (Stinchcombe 1965, Freeman 1983, Gruber 2003). One of the most critical resources is capital (Mason and Harrison 2000), which is traditionally provided by investors who are specialized to cope with the involved risk of loss. These investors, e.g., business angels and venture capitalist firms, also provide non-monetary resources such as management know-how, contacts, and facilities (e.g., Gompers and Lerner 2001, Denis 2004) to secure the growth of the start-up firm.
Fostered by tightening bank loans and a rising demand for venture capital, equity-based crowdfunding, also called crowdinvesting, has become a viable alternative or complementary form of funding entrepreneurial projects in the last years (Belleflamme et al. 2014). In this sub-form of crowdfunding individuals invest via an online-platform in a venture in return for shares of the company or its profits (Hornuf and Schwienbacher 2014).
Crowdinvesting platforms and entrepreneurship blogs and magazines often claim that crowdinvestors would also provide resources beyond capital (“smart money”), as traditional risk investors do. They report that the crowd would engage in marketing activities, act as multiplier or give feedback on the start-ups product or service. However, this claim seems somewhat counter-intuitive, considering that in crowdinvesting the amounts invested are substantially lower compared to business angel or venture capital investment, the number of co-investors is considerably higher, and there is no personal relationship between the investor and the management team.
It is therefore the goal of this study to empirically examine the claim of the crowdinvestors’ additional engagement beyond the so far anecdotal evidence. The guiding research questions of this study are: (1) Which roles do crowdinvestors take that go beyond funding and (2) what are the antecedents of this role engagement? Providing first insights with regard to the answers to these questions will improve our understanding of this new form of venture finance and contribute to the literature on the power of the crowd. Results are supposed to be of interest not only for research, but also for start-ups that are interested in raising capital via the crowd as well as crowdinvesting platforms.
Theoretical background
The provision of non-monetary resources to an entrepreneur or venture is not specific to the investment context, but has also been studied in the area of new product development (Coviello and Joseph 2012), user communities (Hienerth and Lettl 2012, Franke and Shah 2003), and viral marketing (De Bruyn and Lilien, 2008). In these areas one or several individuals, be it customers or users, assist and help an innovator, start-up, or venture by giving feedback, testing a product, or promoting it. Findings of the role engagement of users or customers are combined with observed roles of informal and formal venture capital investors. Antecedents of the role engagement of users, customers, and investors are then used to develop a theoretical framework, in which we propose that the role engagement of crowdinvestors can be associated with investor-related and investment-related factors.
Method
To explore the role behavior of crowdinvestors and its antecedents we conducted an online survey among German-speaking crowdinvestors (n=97). For measuring the role engagement of investors, we asked participants to indicate how often they had provided feedback, ideas or contacts to the company they had invested in at last and how often they had used, tested or promoted the product of this company. The investment-related variables we measured were the investment amount of the last investment, the total investment amount, and the size of the crowdinvesting portfolio. The investor-related variables were knowledge background, entrepreneurial experience, fit of experience and investment preference, entrepreneurial traits, and motivation to invest. We decided to run a negative binomial regression because the dependent variable is based on count data, highly skewed, and over-dispersed.
Results
Concerning the role engagement of crowdinvestors our results show that a vast majority, namely 91.80% of the participants, engages for the company beyond funding. More than half of the investors (51.50%) have provided feedback at least once, and 40.00% have provided at least one idea. 28.90% of participants reported to have established at least one contact for example to a potential customer or employee. Also testing or using the product or service is quite common among investors, with 45.50% of respondents that have engaged in the role of a tester one or more times and 57.70% becoming user of the product or service.
Results of the regression revealed that investment-related factors such as the absolute and relative amount of an investment and the size of the overall portfolio seem to be more relevant for the role engagement of an investor than his or her knowledge background, personality, or motivation to invest.
Discussion
This study delivers empirical support for the claim that crowdinvestors would engage in roles beyond the mere provision of capital. Engagement in “indirect roles”, in which the investor does not have to get in contact with the company, such as promotion, testing or using the product or service seems to be more common than engagement in “direct roles” such as providing ideas, feedback, or establishing contacts for the company. In addition our research gives first insights on the antecedents of this role engagement. The antecedents can be rather found in the amount of investment and size of portfolio than in factors related to the investor’s person. For start-ups this would imply to attract higher individual investments of experienced crowdinvestors.
By August 2016 we expect to have drafted a full paper on this study.
Exploring_roles_of_crowdinvestors_Moser_Garaus_Lettl.pdf 