Observational learning and willingness to pay in equity crowdfunding
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Observational learning and willingness to pay in equity crowdfunding Martin Walther1 • Marco Bade1
Received: 22 July 2019 / Accepted: 17 December 2019 The Author(s) 2020
Abstract This study examines interdependencies between investments of equity crowdfunders. Based on hand-collected data from a well-established equitycrowdfunding platform, we find strong indication that investors observe previous investments to determine their willingness to pay for equity shares. Furthermore, the investment behavior of predecessors may lead investors to deviate from average investment behavior. In particular, investors are willing to pay more than the average investment, when the focal campaign is hot or there have been many large investments in the campaign. Remarkably, a high number of all previous investments over the entire period of the campaign as well as co-financing by presumably sophisticated investors negatively influence willingness to pay. This suggests that crowd investors are subject to partial crowding-out. These findings are different on the platform level, which suggests that investors’ behavior is rather information than sentiment-driven. Keywords Equity crowdfunding Observational learning Crowding out Investment interdependencies Individual investment behavior
& Marco Bade [email protected] Martin Walther [email protected] 1
Technische Universitaet Berlin, Chair of Finance and Investment, Sec. H 64, Straße des 17. Juni 135, 10623 Berlin, Germany
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Business Research
1 Introduction Two of the most important questions entrepreneurs face in crowdfunding are how to get crowdfunders to invest in their campaign and how to make them invest as much as possible. The first question has been studied in the recent past (e.g., Ordanini et al. 2011; Schwienbacher and Larralde 2012; Burtch et al. 2013; Cumming and Johan 2013; Gerber and Hui 2013; Hong et al. 2015). To address the second question, entrepreneurs have to understand which factors influence the investment volumes of crowdfunders. This paper aims to contribute to this growing literature and investigates the factors influencing crowdfunders’ willingness to pay for equity shares. In particular, we focus on interdependencies between investments by considering several observables related to previous investments. We, therefore, examine the questions of what motivates an investor to deviate from the typical investment behavior on the platform, and what role conspicuous investment behavior of predecessors plays. Consider an entrepreneur starting a venture with an innovative service or product. In many cases, traditional funding, such as bank loan, is not feasible due to uncertainty concerning venture success. In addition, before raising venture capital for growth, early-stage funding is required. This is where crowdfunding as a complement to other funding sources typically comes into play. The procedure is as follows: the entrepreneur designs a campaign (including venture/product/service description, entrepreneurial team description, goa
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