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Research Highlights: When equity crowdfunding becomes more than a last resort for entrepreneurs

When equity crowdfunding becomes more than a last resort for entrepreneurs
Raising capital is a challenging process for most entrepreneurs, leading some to pursue equity crowdfunding. While it has been regarded as a last resort in prior literature, recent research shows that some highly capable entrepreneurs prefer to seek equity crowdfunding, even when more established options, such as angel investments or venture capital, are available to them. Prior studies that explore equity crowdfunding have predominantly focused on the decision-making of potential investors, rather than the role of the entrepreneur, in initiating the equity crowdfunding process. Regan Stevenson, Sean McMahon, Chaim Letwin, and Michael Ciuchta seek to address this gap in their recent Small Business Economics article entitled “Entrepreneur fund-seeking: toward a theory of funding fit in the era of equity crowdfunding.”
What motivated the authors to explore the antecedents of equity crowdfunding from the fund-seeker’s perspective was that, “the funding literature has yet to fully embrace the entrepreneur’s point of view, at least in part because … funding over the prior few decades has been more of a buyer’s market so to speak – the investors generally got to choose due to the marketplace dynamics and there were fairly narrow paths by which to get funding for entrepreneurs” (Sean). Regan expanded that “a lot of the prior funding research that has been widely cited … relates to how VCs make decisions, how angels make decisions, these types of things. But what about how entrepreneurs make decisions? … In reality, it’s a two-sided marketplace: if an entrepreneur does not decide to opt into the fund-seeking process, well then no angel or VC investment will ever close. So we wanted to understand how entrepreneurs make that decision to opt into the fund-seeking process.”

Given the relative novelty of equity crowdfunding, the authors did not know for sure what drives entrepreneurs to pursue this source of capital. As Regan described, many equity crowdfunders are “novice funders who don't necessarily have a lot of managerial experience. They’re not as likely as angels or VCs to bring managerial connections to the table, but they may bring something else to the table.” As to what that something else would be, he noted “the data reveals that entrepreneurs are drawn to equity crowdfunding to gain access to demand-side resources, which are unique complementary resources that are more likely to be part of dispersed crowd-based transactions.”
According to Regan, they also found that “in certain circumstances, entrepreneurs prefer equity crowdfunding because the transaction can be more efficient for the entrepreneur, such that they can create videos [and] a one-off website that they can post on ECF rather than having to, in the old model, you know, literally fly to San Francisco or New York or Boston to have to take meetings over and over again until finally somebody decides to give them a chance …. Also in terms of power, not having to deal with first right of refusal on future rounds or demands on shifting the strategic focus of the venture.” Furthermore, the authors discovered that “value is actually created through the [equity crowdfunding] transaction. What I mean by that is the entrepreneur … has the potential to learn from the process itself. As funders are evaluating the deal, they’re providing feedback, they’re providing insights as to where the product might be most successful, how the entrepreneur might think about rolling it out” (Regan).
Since the model the authors developed in their study is an “early step towards a theory of ‘funding fit’” (Regan), they are eager to encourage others to join them on their journey. As Regan explained, “we are making the first step of what could become an interesting line of research so, if other scholars want to consider ‘funding fit’ from the perspective of the entrepreneur in other areas, including new funding markets, SPACs, etc., we think that there’s a potential opportunity here” for future research.