Equity crowdfunding in Germany and the United Kingdom: Follow‐up funding and firm failure

• DOI: http://doi.org/10.1111/corg.12260
• Author: Lars Hornuf,Eliza Stenzhorn,Matthias Schmitt
• Date: 01 September 2018
• Published date: 01 September 2018

SPECIAL ISSUE ARTICLE

Equity crowdfunding in Germany and the United Kingdom:

Follow‐up funding and firm failure

Lars Hornuf

1,2,3

|Matthias Schmitt

2

|Eliza Stenzhorn

1

1

University of Bremen, Bremen, Germany

2

Max Planck Institute for Innovation and

Competition, Munich, Germany

3

CESifo, Munich, Germany

Correspondence

Lars Hornuf, University of Bremen, Wilhelm‐

Herbst‐Str. 5, Bremen 28359, Germany.

Email: hornuf@uni-bremen.de

Funding information

Deutsche Forschungsgemeinschaft (DFG),

Grant/Award Number: HO 5296/1‐1

JEL Classification: G24; M13

Abstract

Manuscript type: Empirical

Research question/issue: Today, startups frequently obtain financing via the Inter-

net through many small contributions of nonsophisticated investors. Yet, little is

known whether these startups can ultimately build enduring businesses. This study

investigates the determinants of follow‐up funding and firm failure after an equity

crowdfunding campaign has taken place.

Research findings/insights: We use hand‐collected data from 13 different equity

crowdfunding portals and 413 firms that ran at least one successful equity

crowdfunding campaign in Germany or the United Kingdom between 2011 and

2016. Our findings show that German firms that received equity crowdfunding stood

a higher chance of obtaining follow‐up funding through business angels or venture

capitalists but also had a higher likelihood of failure. The number of senior managers

and the number of initial venture capital investors both had a positive impact on

obtaining postcampaign financing, whereas the average age of the senior manage-

ment team had a negative impact. The number of initial venture capital investors

and the valuation of the firm were significant predictors increasing the hazard of firm

failure, whereas the number of senior managers and the amount raised during

previous equity crowdfunding campaigns had a negative impact.

Theoretical/academic implications: This study provides some first empirical

evidence regarding the firm and campaign characteristics that determine follow‐up

funding and firm failure after an equity crowdfunding campaign has taken place.

Given the absence of research on this topic so far, this study inevitably remains

original and exploratory to some extent. The empirical findings suggest various

avenues of research for human capital theory, organizational ecology, and the

comparative corporate governance literature.

Practitioner/policy implications: Identifying influencing factors of follow‐up

funding and firm survival is important to make this new and potentially welfare

enhancing form of entrepreneurial finance more predictable by decreasing the risk

of individual investments. Furthermore, this study offers insights to policy makers,

which are currently expected to implement appropriate regulations for this new

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This is an open access article under the terms of the Creative Commons Attribution License, which permitsuse, distribution and reproduction in any medium, provided

the original work is properly cited.

© 2018 The Authors Corporate Governance: An International Review Published by John Wiley & Sons Ltd

Received: 2 August 2017 Revised: 25 June 2018 Accepted: 31 July 2018

DOI: 10.1111/corg.12260

Corp Govern Int Rev. 2018;26:331–354. wileyonlinelibrary.com/journal/corg 331

market segment. In addition, it provides important insights for portal managers as well

as firms raising capital via equity crowdfunding, which may learn about their chances

to build an enduring business. https://youtu.be/w_4lIfnOaQY

KEYWORDS

corporate governance, equity crowdfunding, follow‐up funding, firm survival

1|INTRODUCTION

During the past decade, equity crowdfunding (ECF) has provideda new

way for nonsophisticated investors to finance startup firms via the

Internet by makingmany small contributions.Although only a few years

ago, this new way of financing was largely considered a niche

phenomenon,in many countries, it has now become an ordinarysource

of early‐stage financing for startup firms. In the United Kingdom, for

example, the ECF market has even reached the size of the early‐stage

business angel (BA) and venture capital (VC) market (Zhang, Baeck,

Ziegler, Bone, & Garvey, 2016). ECF has also recently received consid-

erable attention in the academic literature. Until now, most research

has focusedon the success factors of ECFcampaigns (Ahlers, Cumming,

Guenther,& Schweizer, 2015; Hornuf & Schwienbacher, 2018a; Hornuf

& Schwienbacher , 2018b; Ralcheva & Roosenbo om, 2016; Vismara,

2018; Vulkan, Åstebro, & Sierra, 2016) and the determinants of crowd

engagement (Agrawal, Catalini, & Goldfarb, 2015; Block, Hornuf, &

Moritz, 2018; Hornuf & Neuenkirch, 2017; Vismara, 2016). Little is

known, however, about the ability of crowdfunded firms to build

enduringbusinesses. This article extendsthe existing literatureby inves-

tigating the determinants of follow‐up funding and firm failure after an

ECF campaign has taken place. We focus on Germany and the United

Kingdom because they are among the largest crowdfunding markets

in the world (Dushnitsky, Guerini, Piva, & Rossi‐Lamastra, 2016).

1

In a recent contribution, Signori and Vismara (2018) investigate

follow‐up funding and firm failure for 212 successful ECF campaigns

that obtained financing on Crowdcube. They find that 18% of the

firms failed, whereas 36% obtained one or more seasoned equity

offerings from a private equity injection, from another ECF round on

Crowdcube, or by being the target of a merger or acquisition. The evi-

dence shows that the degree of investor participation and the pres-

ence of qualified investors are both associated with postcampaign

success. Reaching the target capital more quickly had a positive impact

on obtaining postcampaign financing, whereas dispersed ownership

had a negative impact. Hornuf and Schmitt (2016) analyze the success

and failure of crowdfunded firms in Germany and the United Kingdom

and find that more firms in Germany than the United Kingdom

managed a crowd‐exit through a significant VC round, but somewhat

fewer firms ultimately failed in the United Kingdom.

This articleextends on the previous researchin at least three ways.

First, although Signori and Vismara (2018) rely on the Crunchbase

database for seasoned equity offerings,

2

we identify investments of

BAs/VCs by additionally inspecting the shareholder list of the firms,

which improves the quality of our variables of interest considerably.

Second, although earlier studies have investigated all seasoned equity

offerings,we restrict our analysis to outsideinvestors. Existinginvestors

might fund a follow‐upround and possess a direct channelof communi-

cation with the founder team because they often hold a seat at the

board of directors. By restricting our analysis to outside investors, we

identifymore clearly which characteristics of the firmand the respective

ECF campaign help to overcome information asymmetries and

determine follow‐up funding. Third, we investigate follow‐up funding

through BAs/VCs more thoroughly by considering additional explana-

tory variables such as the number and amount raised during previous

ECF campaigns. In doing so, our article contributes to recent findings

by Coakley, Lazos, and Liñares‐Zegarra (2018), who investigate the

determinants of follow‐up ECF campaigns and their probability of

success. Using a sample of 790 firms that ran ECF campaigns on

Crowdcube, Seedrs, and Syndicate Room, they find that 13% of the

firms embarkedon at least one follow‐up ECF campaign.They evidence

that firms overfunding on the initial campaign, campaigns with a lead

investor, andthose with a nominee shareholderaccount structure have

a higher likelihoodto conducting a follow‐upECF campaign. Our article

extends these findings by investigating whether follow‐up ECF

campaigns impact funding by outside BAs/VCs.

To attain evidence with regard to our research questions, we

hand‐collected data on 413 firms that ran at least one successful

ECF campaign on 11 ECF portals in Germany, which cover almost

the entire market, and the two leading portals in the United Kingdom.

Campaign information were continuously collected from August 1,

2011, to September 30, 2016, to reduce missing variable bias due to

the deletion of information by platform operators after a campaign

has taken place. Data on follow‐up funding and firm failure were for

the last time collected on May 1, 2018. We focus on a large set of

potential determinants of follow‐up funding and firm failure, including

the characteristics of the management team, the possession of trade-

marks and patents, and the characteristics of the ECF campaign, while

considering a large set of control variables. Moreover, we run a medi-

ation model to test whether follow‐up funding operates as a mediator

between the explanatory variables and firm failure.

We provide evidence that German firms have a higher chance of

obtaining follow‐up funding through BAs/VCs but have a relatively

higher likelihood of failing than British firms. Our findings with respect

to follow‐up funding reveal that the number of senior managers and

the number of initial VC investors are significant predictors increasing

BA/VC follow‐up funding after the latest successful ECF campaign. By

contrast, the average age of the senior management team is negatively

correlated with follow‐up funding. Regarding firm failure, we find that

1

For a comparison with the United States, see Abrams (2017).

2

Crunchbase incorporates many different sources, but a closer look at the

transactions reveals that small equity injections are not publically reported and

missing in the Crunchbase database.

332 HORNUF ET AL.