The subjective perception of hybrid ventures and the funding decision of crowdfunding investors

This paper presents an empirical analysis of the influence of investors’ identity and motivations on the subjective perception of hybrid organizations and the investment decision in an equity crowdfunding context. In doing... [ view full abstract ]

This paper presents an empirical analysis of the influence of investors’ identity and motivations on the subjective perception of hybrid organizations and the investment decision in an equity crowdfunding context. In doing so, this paper focuses on the subjective perception of hybrid organisations by external audiences and highlights investor’s characteristics that increase the likelihood of hybrid venture financing. The results raise the question of whether social entrepreneurs need to stress the hybrid nature of their venture to attract investor’s with specific identities and motivations.

Introduction

Crowdfunding is becoming an important source of financing for early stage ventures and a tool for raising seed capital (Cholakova and Clarysse, 2014). Crowdfunding is the practice of funding a venture by raising monetary contributions from a large number of people, typically via Internet platfoms. Equity crowdfunding is one form of crowdfunding in which entrepreneurs make open calls to sell a certain amount of shares in the company. Despite a scholarlly attention in crowdfunding as a new tool of entrepreneurial finance, individual factors influencing the decision criteria of equity crowdfunding investors are not yet well understood (Griffin, 2012 ; Ahlers et al. 2015).

Previous research suggested that the way entrepreneurs present their ventures is an important predictor of the investment decision-making process (Moss et al., 2014; Ahlers et al., 2015). In a lending micro-finance context, Moss et al., (2014) suggested that the use of an “entrepreneurial language” (narratives signaling autonomy, competitive aggressiveness, and risk-taking) help to get funding, and to receive it more quickly.

What about hybrid ventures, those ventures combining a social mission (an opportunity to solve social problems) and an entrepreneurial logic that requires profits (an opportunity for wealth creation)? Is the entrepreneurial language positively judged in this context? More precisely, how do investors perceive hybrid organisations? and how investors’ subjective perceptions are influencing their investment decision?

In this study, we extend the identity theory (Ashforth and Mael, 1989; Tajfel and Turner, 1986) and the self-Determination theory (Ryan and Deci, 2000) to the crowdfunding literature and argue that the investor’s identity and his motivation are influencing the way he perceives the social or the commercial orientation of hybrid ventures. These subjective perceptions are influencing the final decision to invest in the project.

To test these hypotheses, experiments are conducted with investors registered to an equity platform. Participants are presented with a survey to gather information about their investment profile (novice investors or habitual ones; specialised investors or diversified ones, etc.), their motivation to subscribe to the crowdfunding platform and to invest in projects (intrinsic or extrinsic motivation) and their identity as investors (hybrid identity, entrepreneurial identity, prosocial identity). After completing a survey, participants are presented with a campaign describing a hybrid project. Within the campaign, narratives are scrupulously chosen to signal both the entrepreneurial and the social orientation of the venture. Investors are then invited to decide whether to invest in the project or not and to justify their specific motivations to invest or not in the project.

Given the dual information about the entrepreneurial and the social identity of the venture, we believe that the investment decision of crowdfunding investors will be significantly influenced by their subjective perception about the venture’s identity. This perception will vary according to the identity of the crowdfunding investor and his initial motivation.

This understanding will help social ventures to adjust the discourse about their venture to attract investors in adequation with their social mission and/or their entrepreneurial orientation.

References

Ahlers, Cumming, Günther, C. Schweizer. (2015) “Signaling in Equity Crowdfunding”. Entrepreneurship Theory and Practice

Ashforth, B.E., Mael, F., 1989. Social identity theory and the organization. Academy of Management Review 14 (1), 20–39.

Austin, J., Stevenson, H., & Wei-Skillern, J. (2006). Social and commercial entrepreneurship: Same, different, or both? Entrepreneurship Theory and Practice, 30, 1–22.

Battilana, J., Dorado, S. (2010) “Building Sustainable Hybrid Organizations: The Case Of Commercial Microfinance Organizations”. The Academy Of Management Journal, Vol. 53, No. 6

Cholakova, M., Clarysse, B. (2014). “Does the Possibility to Make Equity Investments in Crowdfunding Projects Crowd Out Reward-Based Investments?” Entrepreneurship Theory and Practice

Miller and Wesley (2011). “Assessing Mission and Resources for Social Change: An Organizational Identity Perspective on Social Venture Capitalists’ Decision Criteria”. Entrepreneurship Theory and Practice.

Moss, Neubaum and Meyskens (2014). “The Effect of Virtuous and Entrepreneurial Orientations on Microfinance Lending and Repayment: A Signaling Theory Perspective”. Entrepreneurship Theory and Practice

Moss, T.W., Short, J.C., Payne, G.T., & Lumpkin, G.T. (2011). Dual identities in social ventures: An exploratory study. Entrepreneurship Theory and Practice, 35(4), 805–830.

Ryan, R. & Deci, E. (2000). Self-determination theory and the facilitation of intrinsic motivation, social development, and well-being. American Psychologist, 55, 68–78.

Tajfel, H., Turner, J.C., 1986. The social identity theory of intergroup behavior, In: Worchel, S., Austin, W. (Eds.), Psychology of Intergroup Relations, 2nd ed. Nelson-Hall, Chicago, pp. 7–24.