Every entrepreneur raising equity from investors faces a fundamental trade-off between retaining greater ownership in the company versus raising more funds. While the benefits of ownership are a greater share in the returns at the time of exit, the benefits of investment are more resources for the entrepreneurial venture.
In recent years crowdfunding has emerged as a viable and popular alternative channel for entrepreneurs to fund their early stage businesses. According to Massolution, funds raised via global crowdfunding expanded by 167 per cent in 2014 to reach $16.2 billion, up from $6.1 billion in 2013, and up again to $34.4 billion in 2015.
Equity crowdfunding is a recent FinTech innovation, allowing entrepreneurs to raise funding from “crowd” investors who can individually invest in a campaign, in return for equity shares. After reaching their minimum goal, entrepreneurs decide when to close the campaign, and this decision provides a unique setting for studying the trade-off between ownership and investment.
Raising money from the crowds is different from more traditional methods, say angels and VCs: Entrepreneurs are clearly under pressure to set a realistic target, one that they can achieve within the fixed deadline set by the platform. Typically, investors invest a small amount so it is harder to raise large amounts of money. However, once the goal is reached the deadline is revoked and the entrepreneurs are free to accept overfunding.
We created a unique dataset from three main data sources: SEEDRS, an equity crowdfunding platform; Beauhurst, a company data platform; and LinkedIn profiles of entrepreneurs. Beauhurst data allows us to see not just the names of the entrepreneurs
but also their exact share ownership in the start-up firm, and whether the company had previous or further funding rounds. Finally, we added LinkedIn information about each of the entrepreneurs in our dataset, viz. their education, experience, gender and more.
Raising money from the crowds is now a standard part of most new enterprises. Raising significant amounts over what was the original target is often seen as a success. While this may make sense in reward-based platforms such as Kickstarter, this is more difficult to justify in equity crowdfunding.
In this project, we set out to try and understand what factors explain the decision of entrepreneurs to take overfunding.
We find that entrepreneurs whose campaigns raise money quickly (and meet the target early) are not significantly more likely to take overfunding. Neither do preferences for control explain the reluctance to accept overfunding (and therefore dilute more).
Turning to the characteristics of the entrepreneurs behind the campaigns we find that two factors can predict overfunding: experience and gender. Experienced entrepreneurs and teams who are not made up of all male entrepreneurs are far less likely to accept overfunding. Both these results are robust.
In addition, education, and in particular, having an MBA or a degree in economics or finance does matter – and in the way we would expect, i.e. more financially trained individuals are less likely to accept overfunding (or better at asking what they actually need) but this result is not very strong.
This research by Nir Vulkan and Thomas Hellmann (Saïd Business School, Oxford University) was partially funded by a Coller Institute of Venture Research Grant, awarded in 2015. The research is part of Financing Venture, a new CIV Research Strand.
Nir Vulkan is Associate Professor of Business Economics at Saïd Business School and Fellow of Worcester College, both at the University of Oxford. He is a leading authority on e-commerce and market design, and on applied research and teaching on hedge funds. Nir was the executive and then Academic Director of the Oxford Centre for Entrepreneurship and Innovation (OxCEI) and the co-founder and Director of OxLab, a laboratory for social science experiments, both at Saїd Business School.