Equity crowdfunding, shareholder structures, and firm performance

• Author: Xavier Walthoff‐Borm,Veroniek Collewaert,Tom Vanacker
• DOI: http://doi.org/10.1111/corg.12259
• Date: 01 September 2018
• Published date: 01 September 2018

SPECIAL ISSUE ARTICLE

Equity crowdfunding, shareholder structures, and firm

performance

Xavier Walthoff‐Borm

1

|Tom Vanacker

1

|Veroniek Collewaert

2,3

1

Faculty of Economics and Business

Administration, Ghent University, Ghent,

Belgium

2

Area Entrepreneurship, Governance and

Strategy, Vlerick Business School, Ghent,

Belgium

3

Department Managerial Economics, Strategy

and Innovation, Katholieke Universiteit

Leuven, Leuven, Belgium

Correspondence

Xavier Walthoff‐Borm, Ghent University,

Ghent, Belgium.

Email: xavier.walthoffborm@ugent.be

Funding information

Research Foundation—Flanders, Grant/Award

Number: G012716N

Abstract

Research question/issue: This paper provides a first‐time glimpse into the

postcampaign financial and innovative performance of equity‐crowdfunded (ECF)

and matched nonequity‐crowdfunded (NECF) firms. We further investigate how

direct and nominee shareholder structures in ECF firms are associated with firm

performance.

Research findings/insights: We find that ECF firms have 8.5 times higher failure

rates than matched NECF firms. However, 3.4 times more ECF firms have patent

applications than matched NECF firms. Within the group of ECF firms, we find that

ECF firms financed through a nominee structure make smaller losses, whereas ECF

firms financed through a direct shareholder structure have more new patent applica-

tions, including foreign patent applications.

Theoretical/academic implications: Our findings suggest that there are important

adverse selection issues on equity crowdfunding platforms, although these platforms

also serve as a catalyst for innovative activities. Moreover, our findings suggest that

there is a more complex relationship between dispersed versus concentrated crowd

shareholders and firm performance than currently assumed in the literature.

Practitioner/policy implications: For policy makers and crowdfunding platforms,

investor protection against adverse selection will be important to ensure the sustain-

ability of equity crowdfunding markets. For entrepreneurs and crowd investors, our

study highlights how equity crowdfunding and the adopted shareholder structure

relate to short‐term firm performance.

KEYWORDS

Corporate Governance, equity crowdfunding, directshareholder structure, nomineestructure, firm

performance

1|INTRODUCTION

Entrepreneurs require financial resources to form and grow their firms,

yet internal funds are rarely sufficient to fuel entrepreneurs' aspired

growth (e.g., Cassar, 2004; Cosh, Cumming, & Hughes, 2009;

Vanacker & Manigart, 2010). Moreover, young and small firms often

experience significant problems in acquiring external funds (Berger &

Udell, 1998; Carpenter & Petersen, 2002)—problems that have

worsened after the global financial crisis (Block & Sandner, 2009;

Cowling, Liu, & Ledger, 2012). More recently, crowdfunding repre-

sents a “new”source of financing that plays a progressively more

important role in the financing of entrepreneurial firms (Bellavitis,

Filatotchev, Kamuriwo, & Vanacker, 2017; Block et al., 2018; Bruton,

Khavul, Siegel, & Wright, 2015; Cumming & Vismara, 2017; Fleming

& Sorenson, 2016; Short, Ketchen, McKenny, Allison, & Ireland, 2017).

In line with the increasing popularity of crowdfunding, scholarly

research has followed suit with early research mainly focusing on (a)

identifying success factors in raising different types of crowdfunding

Received: 31 July 2017 Revised: 29 May 2018 Accepted: 8 July 2018

DOI: 10.1111/corg.12259

314 © 2018 John Wiley & Sons Ltd Corp Govern Int Rev. 2018;26:314–330.wileyonlinelibrary.com/journal/corg

and (b) funding dynamics on crowdfunding platforms (e.g., Ahlers,

Cumming, Günther, & Schweizer, 2015; Allison, Davis, Short, & Webb,

2015; Allison, Davis, Webb, & Short, 2017; Block et al., 2018; Butticè,

Colombo, & Wright, 2017; Chan & Parhankangas, 2017; Colombo,

Franzoni, & Rossi‐Lamastra, 2015; Courtney, Dutta, & Li, 2017; Davis,

Hmieleski, Webb, & Coombs, 2017; Giudici, Guerini, & Rossi‐

Lamastra, 2018; Mollick, 2014; Vismara, 2016, 2018; Vulkan, Åstebro,

& Sierra, 2016). Scholars have also started exploring postcampaign

outcomes, with a primary focus on the follow‐on funding and survival

of projects funded through reward‐based crowdfunding platforms

(e.g., Butticè et al., 2017; Colombo & Shafi, 2016; Mollick, 2014;

Mollick & Kuppuswamy, 2014).

Few studies, however, have focused on the outcomes of firms

funded through equity crowdfunding,

1

which is fundamentally differ-

ent from reward‐based crowdfunding (Vismara, 2018). Notable excep-

tions include Drover, Wood, and Zacharakis (2017); Hornuf and

Schmitt (2017); and Signori and Vismara (2018). In particular, these

studies have examined follow‐on fundraising, failures, and exits.

2

We

build on and extend this stream of research by providing a dynamic

picture of firm financial and innovative performance and by comparing

the performance of equity‐crowdfunded firms to similar firms that

have raised other sources of capital. Finally, equity crowdfunding

platforms adopt different shareholder structures (Hornuf &

Schwienbacher, 2018), but we lack an insight on how this heterogene-

ity relates to firm performance (Cumming & Wright, 2017).

We address these gaps and ask the following related research

questions: How do equity crowdfunded (ECF) firms perform relative

to matched nonequity crowdfunded (NECF) firms that raised other

forms of capital? And, how do ECF firms financed through a direct

shareholder structure perform relative to ECF firms financed through

a nominee structure? How ECF firms perform is a critical question

because corporate governance issues may be particularly important

in this setting. Indeed, equity crowdfunding is the only form of

crowdfunding where a potentially large number of new shareholders

enter the firm (Bruton et al., 2015). Moreover, contrary to reward‐

based campaigns that are launched mostly by individuals and often

represent artistic projects that generally do not relate to a firm, in

equity crowdfunding, the proponent is always a firm (Vismara, 2018).

Finally, the equity crowdfunding context is characterized by significant

information asymmetries, where small crowd investors may have lim-

ited resources and incentives to perform detailed due diligence and

monitoring activities (Ahlers et al., 2015).

Our research also connects and contributes to a broader litera-

ture. First, a large literature has shown that ownership type and struc-

ture may substantially affect firm performance (e.g., Dalton, Daily,

Certo, & Roengpitya, 2003; Kumar & Zattoni, 2017). Within the

domain of equity financing, for instance, studies have shown that

there are significant differences in the postinvestment growth and fail-

ure rates of venture capital‐backed versus nonventure‐capital‐backed

firms (Manigart, Baeyens, & Van Hyfte, 2002; Puri & Zarutskie, 2012).

Similarly, others have shown differences in the postinvestment evolu-

tion of angel‐backed versus non‐angel‐backed firms (Collewaert,

Manigart, & Aernoudt, 2010). However, findings from these studies

are not necessarily generalizable to ECF firms because various differ-

ences exist between traditional outside equity financing and equity

crowdfunding. For example, while traditional outside equity investors

often rely on detailed due diligence to reduce adverse selection issues,

equity crowdfunding relies on the wisdom of the crowd

(Schwienbacher & Larralde, 2012). Moreover, while outside equity

investors are often actively involved in their portfolio firms to reduce

potential moral hazard issues and to add value, equity crowd investors

are more passive within the firms they finance (Block, Colombo, et al.,

2018). Still, equity crowd investors may provide valuable feedback and

become brand ambassadors for the firm and its products

(Schwienbacher & Larralde, 2012). In this paper, we will thus provide

a first‐time glimpse into how ECF firms perform relative to NECF firms

that raised other forms of capital.

3

Second, not all equity crowdfunding is the same, and the equity

crowdfunding context provides a unique context for examining differ-

ent shareholder structures in young entrepreneurial firms (e.g.,

Cumming & Wright, 2017). As Filatotchev and Wright (2017: 11)

observe “in studies on entrepreneurial firms there is oftentimes a lack

of recognition of the different ownership structures and goals which

may affect the structure and processes of governance.”In this paper,

we compare the performance of firms that received equity

crowdfunding through a direct shareholder structure, wherein crowd

investors become legal shareholders of the business they support, to

the performance of firms that received equity crowdfunding through

a nominee structure, wherein equity crowdfunding platforms hold

and manage the shares of the supported firms on behalf of the crowd

investors. This comparison will further allow us to provide new

insights into the benefits of concentrated versus dispersed crowd

shareholders (e.g., Kumar & Zattoni, 2017).

2|HYPOTHESES

2.1 |Equity crowdfunding and firm performance

There are several reasons to expect that ECF firms might outperform

NECF firms that raised other sources of capital. These reasons include

equity crowdfunding's unique selection mechanism—“the wisdom of

crowds”—and extra‐financial benefits.

First, firms that successfully raise equity crowdfunding survived

“the wisdom of the crowd”; this principle entails that the crowd dis-

plays more wisdom than an individual (even an expert) when solving

problems or making decisions (Schwienbacher & Larralde, 2012;

Surowiecki, 2005). The wisdom of the crowd effect relies on filtering

out noise in individual problem solving, by averaging over large num-

bers and thereby canceling out the effect of individual noise

(Surowiecki, 2005). Although wisdom of the crowd effects have been

primarily examined for relatively simple problems that require single

estimates, there is evidence that this effect is also valid for problems

or decision making that require the coordination of multiple pieces

of information (Yi, Steyvers, Lee, & Dry, 2012), such as investment

decision making.

Moreover, recently, there is also evidence of wisdom of crowd

effects in reward‐based crowdfunding (Mollick & Nanda, 2016) and

lending‐based crowdfunding (Iyer, Khwaja, Luttmer, & Shue, 2015)

contexts. Mollick and Nanda (2016), for instance, find large

WALTHOFF‐BORM ET AL.315