Internet-Based Entrepreneurial Finance: Lessons from Germany

What is it about?

The Internet-based crowdinvesting market in Europe has developed significantly since its start in 2007 and has become an alternative source of finance for entrepreneurs to sell securities through the Internet to small investors. This market evidences a great variety in platform design and contract forms used by crowdinvesting platforms. By analyzing more detailed, hand-collected data on the complete set of successful and unsuccessful crowdinvesting campaigns run in Germany, this article tests whether different platform and contractual mechanisms affect crowd participation. The results show that crowd participation is largest when the minimum ticket size is small, the crowd is pooled in a financial vehicle, and the crowd is offered investments in the form of profit-participating loans. Moreover, the very same mechanisms increase the chances of achieving successful campaigns and raising a larger amount.

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Why is it important?

------------------------------------------------------- Contribution to Academic Scholarship ------------------------------------------------------- Our study evidences a great variety in platform design and contract forms used by equity crowdfunding platforms. In contrast to other studies, ours offers an analysis across different platforms and thus tests the impact of platform characteristics on crowd investor participation, campaign success and the amount raised. ------------------------------------------------------- Contribution to Management Practice ------------------------------------------------------- Our study offers insights into how entrepreneurs can attract more investors in equity crowdfunding and thereby increase their chances of raising the needed funds. These mechanisms may vary across platforms, since each platform operates differently and offers different contract forms, including minimum ticket size, whether the crowd is pooled in a financial vehicle, and the type of securities offered. ---------------------------- Author Perspective ---------------------------- While equity crowdfunding still has to prove that it is a sustainable form of financing, it also offers new benefits to investors and entrepreneurs. Equity crowdfunding democratizes the way firms are funded and brings a social component in an otherwise hyper-rational way of conducting businesses.