An Entrepreneurs’ Choice:
The Equity Crowdfunding Model.
The$effect$of$value-creation,$control$preferences,$risk$and$legal$issues$Master’s Thesis
Business Administration: Entrepreneurship & Innovation
Name Floor Albertus de Joode
Student number 10896953
Date 28th of August 2015
Study Msc. Business Administration
Specialization Entrepreneurship & Innovation
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Table of Contents
Statement of Originality ... 5! Abstract ... 6! Introduction ... 7! Theoretic Framework ... 11! Literature!on!Crowdfunding:!definition!and!models!...!11! Donation'...'12! Reward'...'13! Debt'...'13! Equity'...'14! Motivations!for!Crowdfunding!...!15! Hypotheses!...!20! Conceptual!model!...!22! Research Design ... 26! Sample!...!26! Survey!Design!...!27! Economic'and'social'value'...'28! Control'preference'and'Risk'...'28! Legal'issues'...'30! Statistical!tests!...!32! Results ... 34! Sample!description!...!34! Correlation!matrices!...!36!4 Economic'and'social'value'...'36! Control'preference'and'risk'...'36! Legal'variables'...'37! Regression!analysis!...!39! Conclusion ... 41! Hypothesis!1:!The!effect!of!perceived!economic!and!social!value!...!43! Hypothesis!2:!The!effect!of!control!preference!and!risk!...!43! Hypothesis!3:!The!effect!of!legal!environment!and!legal!expertise!...!43! Discussion ... 45! References ... 48! Appendix I: Survey ... 53!
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Statement of Originality
This document is written by Student Floor Albertus de Joode who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Abstract
This study identifies several important factors and motivations that may influence entrepreneurs’ to choose for specifically equity-based crowdfunding as a means to raise capital for their company or project in the literature. These factors and motivations are then used to make a theoretical framework, aimed to explore what factors and motivations influence entrepreneurs to choose the equity-based crowdfunding model. The three main categories of these factors and motivations are: value-creation, control preferences vs. risk and legal issues. By sending out a survey to entrepreneurs, data are collected to measure to what extent and how these factors have influenced entrepreneurs in their search for capital raising. The data shows that entrepreneurs that believe their venture has low social value are more likely to choose equity crowdfunding. The legal environment plays a very important role, in that it enables entrepreneurs to choose equity-based crowdfunding, by allowing equity crowdfunding platforms to arise. Control preference and risk did not have significant effect on the choice for equity-based crowdfunding.
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Introduction
Over the last years, crowdfunding has emerged as a new method of raising capital for entrepreneurial ventures. As a relatively young method of raising capital, the amount of academic literature on the topic is still forming and further developing its academic foundation. It is therefore interesting to find existing gaps in literature on crowdfunding in order to help the development of academic knowledge, and ultimately completely understanding the concept of crowdfunding.
Crowdfunding is defined in literature as the solicitation of external capital from the ‘crowd’ (Cosh et al., 2009; Giudici et al., 2012; Lamert & Schwienbacher, 2010). Contrary to traditional funding methods the investors, often called ‘backers’, ‘crowd investors’ or simply ‘participants’ are a high number of individuals of the general public, and often each individual backer only contributes a small amount of capital (Belleflamme et al., 2014). At its infancy, crowdfunding was mostly used to finance creative and arts projects (Agrawal et al., 2013) and creative crowdfunding platforms were among the first to be conceived (Moritz & Block, 2014). Since 2010, crowdfunding has caught interest not only of the scientific community but also practitioners as a means of filling the ‘funding gap’. A funding gap occurs when a venture does not acquire sufficient funds between investment rounds, inhibiting the company’s progress and sometimes causing it to go bankrupt (Lam, 2010). Young companies often encounter a funding gap after the initial seed funding by the founder himself, friends and family and sometimes an angel investor (Collins & Pierrakis,
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2012). Figure 1 displays a typical life cycle of a venture and typical funding options. Note that crowdfunding ‘closes’ the initial funding gap previously mentioned.
Figure 1: Typical company life cycle and investor types (Source: Lasrado, 2013)
Several types of crowdfunding exist, differing in the return investors receive for their financial support. Four main types of crowdfunding currently exist: donation-based where the investor does not get a return; reward-based where the investor receives a specific reward, sometimes pre-ordering the product; lending-based, where the investor gets its money back later plus interest, basically debt issuance; and equity-based, where the investor buys an equity share in the company (de Buysere et al., 2012). These different models of crowdfunding will be discussed more thoroughly in a later section. Equity-based crowdfunding, also called just equity crowdfunding or
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crowdinvesting, is the most complex type of crowdfunding as it involves issuance of equity in privately held firms, bringing legal issues with it (Hemer, 2011). Regulations regarding equity crowdfunding differ between countries and are very heterogeneous (Moritz & Block, 2014). Equity crowdfunding received attention mostly from a legal perspective.
This research paper will focus on equity-based crowdfunding from but the perspective will not lie on the legal aspects involved. Therefore, this research will focus on equity-based crowdfunding from an entrepreneurial perspective. There is some research on the motivations of entrepreneurs and the factors that influence their decision on what funding to employ. However, no research has yet been done specifically on the factors and motivations behind the decision to seek funding via equity-based crowdfunding. Therefore, the research question this thesis will aim to answer is:
What relevant factors and/or motivations influence the decision of entrepreneurs to choose specifically for equity-based crowdfunding as a means to financing their venture or project?
To answer this question, relevant factors and motivations that influence the funding decision of the entrepreneur have to be identified. This study then aims to find out what factors and motivations, and in which configuration they make entrepreneurs more likely to choose specifically for the equity-based crowdfunding model to raise capital, effectively answering the research question.
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The next section will discuss relevant theories on crowdfunding, mainly focusing on equity-based crowdfunding. Previous relevant literature will be discussed and a relevant framework will be developed defining relevant factors and motivations for entrepreneurs. The relevant factors and motivations are then translated into testable hypotheses. This section will also develop a conceptual model based on the relevant theory that will help to shape the research in answering the research question. In the section thereafter, the research method and methodology are discussed. This section will cover how and what data will be gathered and analyzed to test the hypotheses. The data are then discussed in the results section. In order to test the hypotheses and ultimately answer the research question, the data analysis section will test the hypotheses by using statistical tests on the acquired data. Finally, a conclusion and discussion section will go over the implications of the results and discuss the relevancy and reliability of this research as well as implications of further research.
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Theoretic Framework
This section will explore the literature on crowdfunding and the identified factors that control entrepreneurs’ choice for crowdfunding. First, crowdfunding in general will be discussed. Then motivations and factors that influence the choice of entrepreneurs on crowdfunding are identified. These findings are then applied specifically to equity crowdfunding, resulting in hypotheses that aim to support in answering the research question. Finally, the conceptual model is discussed that shows the expected relations of the variables on the choice for funding. This model will help guide the research to find adequate data for the hypotheses, ultimately answering the research question.
Literature on Crowdfunding: definition and models
The term crowdfunding is derived from the concept of crowdsourcing and stands in relation to entrepreneurial finance (Hemer, 2012) as can be seen in Figure 2. Crowdfunding can be seen as a form of crowdsourcing where specifically capital is raised from the ‘crowd’. The terms investor, backer, donator and participant are used to describe the individuals in the crowd.
Figure 2: Relation between crowdsourcing, crowdfunding and different types/models of crowdfunding. Source: Brodersson et al. 2014 [Edited]
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Overall, there is consensus on the definition of crowdfunding among scholars as the phenomenon at its core isn’t very complex. Giudici and his colleagues define crowdfunding as “getting [a] large group of people to finance a project by using a website or other online tool to solicit funds” (2012) this definition is in accordance to the previously mentioned definition of Mollick (2014), and scholars normally refer to the online tool as the ‘platform’. While the Internet is explicitly mentioned in Giudici’s definition, some scholars argue that crowdfunding as an extension or rather a form of crowdsourcing isn’t reliant on the Internet: offline crowdfunding is indeed possible (Macht & Weatherston, 2014: Mollick, 2014). Still, since crowdfunding and its various types have emerged with Web 2.0 and most research is done on online crowdfunding, this research will do the same.
In literature there is a distinction made between various types, or sometimes coined models, of crowdfunding as shortly discussed in the previous section. Meyskens & Bird (2015) explore these different types of crowdfunding and as stated before scholars have identified four distinct types of crowdfunding based on the incentives for participants to donate. These four models will be discussed in the following sub-sections.
Donation
The first type that occurred at the beginning of crowdfunding is the donation model (Meyskens & Bird, 2015; Mollick, 2014). Participants receive no tangible return on their investment, but rather donate to support a cause with high social value. Indeed, Lehner (2013) argues that donation-based crowdfunding is most popular among social
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entrepreneurial ventures. The reason donation crowdfunding is so well-suited for social ventures is because contrary to professional investors, crowd investors typically look at the core values and ideas of the venture (Ekedahl and Wengström 2010). Therefore, companies with high social value such as charitable causes often employ the donation model of crowdfunding. Contrary to the other models of crowdfunding, crowd investors do not receive a tangible return on their investment.
Reward
The second and most common type of crowdfunding is reward-based crowdfunding (Massolution, 2013). Popularized by two major crowdfunding platforms Kickstarter and Indiegogo, this type of crowdfunding offers a certain reward to participants. The scope of rewards can be vey broad and is often dependent on the amount participants donate. For example, a video game developer may name a character in the game after a backer that has donated above a certain amount, or make the backers names appear in the end-credits. Some reward-based projects may offer an early-release of their product to their backers; in these cases the model is sometimes called pre-purchase crowdfunding (Frydrych et al., 2014).
Debt
Donation and reward-based crowdfunding do not return actual money, but rather intangible social value and a product/service respectively. Contrary to this, debt-based crowdfunding or lending crowdfunding raises money from crowd investors that is later paid back with a certain interest rate depending on the platform and project (Outlaw, 2013). This model allows entrepreneurs to raise capital that may not qualify
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or be eligible for a traditional bank loan due to e.g. not having sufficient collateral or having a financial track record. The debt crowdfunding model can therefore serve as a bridge over the finance gap, which often occurs in the early stages of new ventures (Brodersson et al., 2014).
Equity
The last type to be discussed is equity-based crowdfunding or equity crowdfunding. Equity crowdfunding is the least common model (Mollick, 2014; Meyskens & Bird, 2015; Massolution, 2013). Participants in equity-based crowdfunding projects become shareholders in the company in the hopes of receiving dividends or selling their share later for a higher price as the company grows (Futko, 2014). Mollick (2014) states that equity crowdfunding is the most complex and cumbersome model of crowdfunding, since it is subject to high levels of regulations. Hemingway & Hoffman (2010) illustrate this in their legal paper for the United States, but this is also true for European countries, especially since regulation can differ greatly from country to country. Equity crowdfunding has been subject mostly to legal academic research, especially in the United States, along with the JOBS act, that allowed some companies to legally sell their shares to investors. For more information on the JOBS act and a United States legal perspective, please refer to Hemingway & Hofman (2010). This study will not discuss the legal issues in depth, not only because this is not a legal study but also since the scope of this study encompasses different countries and regions with different rules and regulations. However, legal issues are recognized
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as an important factor influencing whether entrepreneurs employ equity-based crowdfunding.
We have seen that scholars see crowdfunding as a novel and innovative way to bridge a funding gap for entrepreneurial ventures and that there are four distinct types or models of crowdfunding identified. But why do entrepreneurs choose for crowdfunding?
Motivations for Crowdfunding
Research on motivations for crowdfunding can be separated into two categories: motivations of entrepreneurs to choose crowdfunding as a means to raise capital and motivations of the ‘crowd’ to invest in crowdfunded projects or companies. Since this research is aimed at the factors and motivations of entrepreneurs’, this section will only focus on the entrepreneurs’ perspective. Additionally, research on the motivations of crowdfunding up until now often does not distinguished between the types or models of crowdfunding. Meyskens & Bird (2015) do in some extent differentiate the four models in their framework to ‘…help social ventures and social investors best choose which type of crowdfunding (reward, donation, equity, debt) might make most sense to them given their economic and social value creation goals’ (pp. 155). In their model they describe the crowdfunding process as follows: First a venture starts up and develops a crowdfunding campaign. They then choose which platform to use and solicit participation from the crowd on social media. The money they raise is then applied towards their project or product. The final step of the process is to distribute the rewards (or other form of return, depending on the
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crowdfunding model) to their backers. They argue that in order to find the right fit the entrepreneur needs to establish the relative social and economic value of their venture, and adapt their crowdfunding model accordingly. Figure 3 displays which model of crowdfunding is recommended as a best fit for the relative economic and social value of the project or venture.
Figure 3: Crowdfunding model fit to value creation Source: Meyskens & Bird (2015) pp. 163
The donation model is best suited for ventures with high social value and relatively low economic value. Backers of these ventures act as philanthropists that want to support a social cause and do not expect to receive compensation for themselves (Lehner, 2013). If the social and economic value are both relatively low, Meyskens & Bird (2015) argue that a reward model is best suited. This model provides capital as well as a track record for the venture but it may cost valuable time to distribute the rewards once their campaign is completed. The debt or loan model fits well with ventures that have both high social and high economic value. Here, backers do not only support a social cause, but also one that may have substantial economic returns. By lending money, they support the cause and also gain an often pre-determined
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return on investment. Equity-based crowdfunding lastly, is best suited for ventures that have relatively low social value but high economic value. Equity investors are most concerned in economic return than in social value. For social ventures, this is least favorable since the venture needs to be able to legally sell equity to investors, and this is often a cumbersome process (Mollick, 2014; Meyskens & Bird, 2015). Other scholars also support this claim such as Valanciene & Jegeleviciute (2013) who state that one of the drawbacks of entrepreneurship in general are administrative challenges. This is especially the case with equity crowdfunding.
There has been an empirical study on factors that influence successful acquisition of equity capital by Hustedde & Pulver (1992). They categorize these factors into four categories: “(1) characteristics of the entrepreneurs including education, experience, and age; (2) characteristics of the enterprise including stage, industry type, and location (e.g., rural or urban); (3) characteristics of the request including amount, business plan, and prospective capital source; and (4) sources of advice including technology”. While these factors have shown to influence success, the question remains whether they influence the actual choice of an entrepreneur for the type of funding. However, Schwienbacher & Larralde (2010) distinguish seven factors that influence an entrepreneur’s choice for funding, that are somewhat related to Hustedde & Pulvers (1992). (1) Lack of pre-existing resources: Not only the need for capital, but also other resources such as the entrepreneur’s skills and network are taken into account. Entrepreneurs may lack in some managerial functions or experience, this resource may be provided by venture capitalists or other traditional equity funds. (2) Risk, moral hazard and information asymmetry: This factor is especially applicable to
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crowdfunding. As Short (1994) states, all shareholders, in this case crowdfunders share the risks of the project. This is in sharp contrast to reward- or lending-based crowdfunding where the entrepreneur him- or herself bears all the risk. Moral hazard is another issue defined in the literature and is strongly tied to risk. Entrepreneurs may be inclined to take more risk, as they are no longer carrying the risk alone. Lastly, information asymmetry between the crowdfunders and entrepreneur can be seen as the root to these problems. Crowdfunders may not have complete information on the entrepreneur and its project, which may result in both more risk for them and moral hazard as a result. Valanciene & Jegeleviciute’s (2013) work sheds another light on the moral hazard issue: the danger that the idea of the entrepreneur may be stolen. (3) Organizational form: Specifically, this factor distinguishes between for-profit and non-profit organizations. Lambert & Schwienbacher (2010) claim that non-profit organizations are more successful in finding funding since they are prone to produce higher quality products, while for-profit organizations seek to maximize profits with a middle-ground between cost and quality. As seen before, Meyskens & Bird (2015) make a similar statement that the social and economic aim of a venture influences what model of funding they should employ (4) Control preferences Czarnitzki & Kraft (2002) found that managers or entrepreneurs might not always want to maximize profits, while shareholders do. Entrepreneurs are often inclined to deliver high quality, innovative products rather than just earning a lot of money. This is an important factor regarding equity-based crowdfunding since entrepreneurs may share the risk with the backers; they are still in full control over their project. (5) Amounts required by entrepreneurs: The amount required is of course of influence on the
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choice of funding. The range can vary for crowdfunding projects (Brodersson et al., 2014; Figure 2). (6) Legal issues: Legal issues are an inherent problem with equity-based crowdfunding. Recently however legislation is less strict for private equity trade in a crowdfunding context (e.g. the JOBS-act). In the Netherlands specifically, crowdfunding platform Symbid has a unique legal construction enabling entrepreneurs to easily make use of equity-based crowdfunding. (7) Wisdom of the Crowd: As stated previously, crowdfunders may not provide skills or advice the entrepreneur needs in order to be successful, still, the wisdom of the crowd argument states that the big crowd might know more than a few traditional investors. This factor however only comes into play when the crowdfunders form a community and have adequate communication channels with the entrepreneur (Schwienbacher & Larralde, 2010).
Not every factor identified in the literature will be integrated in the theoretical framework of this research. Literature is not always clear on how the factor may influence the entrepreneur’s choice for funding, e.g. it does not always define clearly how a factor exactly results in one choice or another. The factors mentioned by Hustedde & Pulver (2013) are not defined in such a way that one can discriminate for example the characteristics of an entrepreneur (the first factor) that has chosen for equity crowdfunding or an entrepreneur that has chosen another form of financing. Therefore, these characteristics are merely used as a control variable. The more interesting factors are considered in the next section.
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Hypotheses
This section will discuss the motivations and factors identified in literature, and distill three separate hypotheses. The hypotheses each have two sub-hypotheses to be tested. It has become clear that according to the literature, the equity model of crowdfunding is best suited for ventures that are expected to grant a high economic return but have relatively low social value (Schwienbacher & Larralde, 2010; Meyskens & Bird, 2015). Therefore, it can be expected that entrepreneurs that believe their venture has high economic potential value but low social value, are more likely to employ equity-based crowdfunding as a means to acquire capital:
H1: Entrepreneurs that choose equity-based crowdfunding are more likely to believe their venture has a relatively low and social and high economic value
H1a: Entrepreneurs that choose equity-based crowdfunding are more likely to believe their venture has relatively low social value
H1b: Entrepreneurs that choose equity-based crowdfunding believe are more likely to believe their venture has relatively high economic value
Looking at the specific differences between equity-based crowdfunding and other funding types, it is characterized by the spread of risk between the entrepreneur and the crowd, but ultimately the control mostly remains with the entrepreneur (Wilson & Testoni, 2014). Therefore this model of crowdfunding is an excellent fundraising tool where the entrepreneur can reduce risk without giving up too much control. The risk-reducing aspect of this hypothesis applies to all kinds of equity capital raising.
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H2: Entrepreneurs that want to remain in control as much as possible but also wish to reduce risk are more likely to use equity-based crowdfunding.
H2a: Entrepreneurs that have a high tendency to remain in as much control as possible in their venture are more likely to choose equity-based crowdfunding
H2b: Entrepreneurs that want to reduce risk are more likely to choose equity-based crowdfunding
This research does not discuss legal issues, because as we will see later, the entrepreneurs in the research population are from different countries. Therefore the specific legal issues differ per entrepreneur. However, legal issues in general are a for entrepreneurs to choose for equity-based crowdfunding. A mitigation of these issues, whether it be due to the companies own expertise or the enabling environment, is expected to support entrepreneurs to choose equity-based crowdfunding:
H3: Entrepreneurs that either internally or externally mitigate the legal issues and associated with equity-based crowdfunding, and are positioned in a favorable legal environment are also more likely to choose equity-based crowdfunding
H3a: Entrepreneurs in an environment where legal issues are mitigated externally are more likely to choose equity-based crowdfunding
H3b: Entrepreneurs that are able to internally mitigate legal issues are also more likely to choose equity-based crowdfunding
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H3c: The legal environment influences the extent to which the expertise of either the entrepreneur or the platform can enable equity-based crowdfunding.
An example of an external mitigation is the JOBS-act in the United States which allowed companies to sell their shares to private investors via equity crowdfunding. Another example is the Symbid platform in the Netherlands. The Symbid platform enables entrepreneurs to sell their equity to the crowd via a special legal construction (for more information see the Symbid website). In other words, external mitigation is the mitigation of institutions or organizations that are not the entrepreneur him- or herself or their business. An internal mitigation is where the entrepreneur him- or herself can mitigate the legal issues. For example, if the entrepreneur can set up a legal construction that allows the sale of equity shares with the expertise available within their firm. Finally, it is expected that the legal environment influences whether it is at all possible to mitigate legal issues. If equity-based crowdfunding is downright illegal in a country, even the highest levels of legal expertise cannot enable firms to employ equity crowdfunding. If regulations allows it under some conditions, legal expertise becomes much more important.
Conceptual model
Figure 4 displays the conceptual model. The model was constructed based on the literature previously discussed, and displays the expected relations between the relevant factors and motivations and the choice of an entrepreneur for funding. This
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choice has been specified to relate to this research: the choice for equity-based crowdfunding.
Arrows indicate either a moderating or mediating effect of a dependent variable. The dependent variables are the different factors and motivations. The minus and plus signs next to the arrow indicate a positive or negative relation respectively. A positive mediating relation means that when the independent variable increases, the dependent variable is expected to increase as well. The same goes for a decrease. For a negative mediating relation, the effect is opposite: an increase of the independent variable is expected to result in a decrease of the dependent variable. Moderating effects are effects of a variable on the relation between an independent variable and the dependent variable. The circle in the middle represents the independent variable: the entrepreneurs’ choice for equity-based crowdfunding.
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Figure 4: Conceptual model
On the left side the social and economic value are shown to mediate the independent variable: entrepreneurs’ choice for equity crowdfunding. Social value is expected to have a negative mediating effect on the choice (if social value rises, the likeliness of the entrepreneurs choice for equity-based crowdfunding is expected to decrease and vice versa) while the effect of economic value is positive. The first hypothesis supports this part of the conceptual model.
On the bottom side, the control preference and perceived risk are displayed. The risk-reducing propensity of the entrepreneur, has a positive mediating effect on the choice of funding, this variable captures both the risk perceived by the entrepreneur, and his propensity to reduce this risk form him- or herself. Control preference is also expected to positively moderate the choice, since the more the entrepreneur wants to stay in control of the venture, the more likely it will be he/she chooses for equity
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crowdfunding. This part of the conceptual model is encompassed by the second hypothesis.
Lastly, the right part of the model considers the legal issues. While legal issues are a broad term, the main focus of this research lies on whether the legal environment is supportive and allows entrepreneurs to sell an equity-stake of their venture to the crowd. Therefore the legal environment has a direct mediating effect. Moreover, the legal environment moderates the effect of the expertise of either the entrepreneur or the platform that may enable equity-based crowdfunding.
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Research Design
In this section the research design will be discussed. First, the sample of this research is discussed. Following is the description of the survey and its’ questions. Lastly, the statistical tests are discussed that will be done on the acquired data.
Sample
The sample for this research comprises of all the entrepreneurs listed in the Crunchbase database. Crunchbase is a company that accrues and provides information about companies and investors. They have an extensive, freely available database with currently close to 60.000 listed organizations. They keep track of funding rounds and investment amounts of companies, as well as mergers & acquisitions and start-up funding. Companies that had employed crowdfunding were searched for first in the database and approached first, companies that used other types of funding were contacted later. Since not all companies listed in their database are relevant to this study, and not all companies have opted to receive unsolicited e-mails, not every company listed in the database was eligible for this study. In addition, only firms that were created in the last 4 years are included, since the aim of this study is to be topical and the entrepreneurs are still in or nearly passed the start-up phase of their business. Additionally, some companies that are listed on European equity-crowdfunding platforms with freely available contact information (e.g. on their website) were also contacted via e-mail with a survey solicitation. These platforms were found through Luzar (2013). The following platforms were searched through: Seedmatch, Bihoop, Crowdcube, CrowfundMe. After the selection criteria were applied and several
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companies were added to the sample via the search on crowdfunding platforms, a total of 9,121 e-mails were sent over the period of approximately one month. Since the entrepreneurs were approached ‘cold’ and there were no tangible rewards for filling out the survey the response rate was expected to be low (Scheaffer & Dillman, 1998; Bryman, 2008). In addition, the survey was sent out relatively late. Still, since the high number of entrepreneurs in the sample even a low response rate may result in sufficient data to test the hypotheses. The solicitation e-mail that was sent can be found in Appendix II.
Survey Design
This study aims to collect data from many different entrepreneurs to include as many different environments and business types. Since the hypotheses in this research are mostly about the entrepreneurs’ own motivations and perception on the relevant factors, a self-completion questionnaire design, or survey, is most suitable (Bryman. 2008). As mentioned earlier, the sample will be discussed in a later section. Since there hasn’t been extensive research on the relevant factors and motivations yet, it may prove difficult to find adequate measures for the factors. The measures must therefore be extracted from conceptual arguments found in literature. In order to keep the reliability of the survey as high as possible, objective questions were designed. The survey could be used to research another sample of entrepreneurs and it can be expected that the results will be about the same.
The survey consists of two parts. The first part contained 7 questions about various demographics of the entrepreneur and his or her company. The entrepreneur is also
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asked here to specify what kinds of funding have been used. The second part was aimed to measure the variables of the three distinct categories of relevant factors: the perceived economic and social value, control preference and risk, legal issues. This way, data can be compared between varying funding types.
The variable that will measure the dependent variable will be a dichotomous dummy variable: EQUITYDUMMY can take on value 0 or 1, for entrepreneurs that did not and did employ equity crowdfunding respectively.
Economic and social value
Two questions were used to gauge the perceived relative economic and social value of the entrepreneurs’ business. Entrepreneurs were asked to rate the economic and social value on a 5-point Likert scale raging from Very Low to Very High. The ‘true’ social and economic value of a company is not necessary for this research. Not only is it hard to determine these values, the expected effect is caused by perceived value. These two questions generated two items: EconV and SocV, standing for economic value and social value respectively. The range of possible values for both items is 1 through 5, standing for Very Low through Very High respectively.
Control preference and Risk
A total of 11 questions were asked to entrepreneurs to measure their control preference and how they perceive and deal with the risk associated with owning a business. The questions were asked in a multiple question matrix format, asking the entrepreneur on a 5-point Likert scale whether they agreed or disagreed with statements regarding control preference and risk. 5 items measuring risk-reducing
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propensity of the entrepreneur were called RISK_RED1 through RISK_RED5 and the 4 items measuring control preference were called CONT_P1 through CONT_P4. Two statements measured both control preference and risk reducing propensity, these were items were labeled CONT_RISK1 and 2. State Table 1 shows which items represent which statements in the survey.
Table 1: Statements measuring risk and control preference and their corresponding item names The$main$goal$of$raising$capital$is$reducing$risk$by$diluting$ (dividing)$the$risk$among$investors$ RISK_RED1$ The$main$goal$of$raising$capital$is$to$acquire$funds$in$order$for$the$ business$to$develop$further$ nRISK_RED2$ I$do$not$take$risk$in$consideration$when$looking$for$ways$to$fund$ my$business$ nRISK_RED3$ I$strongly$prefer$funding$types$where$I$do$not$have$to$give$up$any$ ownership$share$of$my$company$(such$as$debt$financing)$ CONT_P1$ Being$in$full$control$of$my$business$is$my$one$of$my$biggest$ priorities$ CONT_P2$ I$do$not$mind$giving$up$some$control$to$people$in$return$for$their$ expertise$or$funds$ nCONT_P3$ I$wish$to$retain$control$of$my$company$even$if$this$brings$great$ risks$with$it$ CONT_RISKR1$ Except$capital,$I$wish$to$benefit$from$the$expertise$and$ knowledge$of$investors$in$helping$make$corporate$decisions$ nRISK_RED4$ I$do$not$mind$giving$up$some$control$of$my$company$when$raising$ capital$ nCONT_P4$ I$am$willing$to$bear$a$significant$amount$of$risk,$as$long$as$I$am$in$ full$control$of$my$company$ CONT_RISKR2$ Except$capital,$I$wish$to$dilute$or$decrease$the$risk$I$am$bearing$ when$finding$investors$ RISK_RED5$
Five of these items were counter indicative (these items were labeled by adding an n in front of their name, e.g.: nRISK_RED2 and nCONT_P3). The counter indicative items were transformed to reverse their score. Now that the items measure in the same direction, the internal reliability can be tested with Cronbach’s α. For the control
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variables, the reported α had a value of .624, not very high but still acceptable. The Risk reduction variables had an α of .754. Both variables are within acceptable levels of consistency, so the scale means of both variables control preference and risk reducing propensity were computed into two new variables: CONT_TOT and RISKR_TOT respectively. The CONT_RISK variables are discussed further in the results section.
Legal issues
Three separate variables were defined to measure the different aspects of legal issues: the legal environment, the legal expertise of the entrepreneur (and within its’ company) and the legal expertise of the crowdfunding platform. A total of 10 questions were used resulting in 10 corresponding items, again consisting of statements with a 5-point Likert agreeability scale. The 6 items measuring the legal environment were labeled LGL_ENV1 through LGL_ENV6. The items are designed that a higher score represents a more enabling legal environment for equity crowdfunding, so that counter indicative terms would have a low score for a more enabling legal environment. For the measure of expertise available in the entrepreneurs’ firm and in the crowdfunding platform, 2 items were used for each variable LGL_ENTR1 2 and LGL_PLT1 2. Table 2 shows which statements correspond with which items. Three of the legal questions were only asked to respondents that indicated that they employed equity crowdfunding, these were not included in calculating the scale means when a respondent didn’t answer these questions. The relevant statements are marked with an asterisk.
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Table 2: Statements measuring the legal variables and their corresponding item names The$legislation$of$my$country$or$region$were$beneficial$to$the$ process$of$equity$crowdfunding*$ LGL_ENV1$ The$crowdfunding$platform$enabled$my$company$to$use$equity$ crowdfunding*$ LGL_PLT1$ My$company$would$have$been$able$to$sell$equity$shares$to$the$ crowd$without$the$help$of$a$crowdfunding$platform*$ LGL_ENTR1$ The$legal$institutions$of$my$country$or$region$are$strict$regarding$the$ sale$of$equityCshares$to$nonCinvestors$ nLGL_ENV2$ A$crowdfunding$platform$that$allows$the$sale$of$equityCshares$to$the$ crowd$is$available$in$my$country$or$region$ LGL_PLT2$ The$legislation$in$my$country$or$region$mostly$allows$the$sale$of$ equity$to$the$crowd$ LGL_ENV3$ It$is$hard$to$sell$equity$shares$to$the$crowd$in$my$current$legal$ environment$ nLGL_ENV4$ The$process$of$using$equityCcrowdfunding$seems$like$a$difficult$and$ cumbersome$process$to$me$ nLGL_ENV5$ My$company$has$enough$legal$expertise$to$employ$equityCbased$ crowdfunding$without$external$help$(e.g.$from$a$crowdfunding$ platform)$ LGL_ENTR2$ The$legislation$in$my$country$or$region$simply$does$not$allow$equity$ crowdfunding$ nLGL_ENV6$
Again, the counter indicative items were recoded and the internal reliability was tested. The α’s reported were .672 for LGL_ENV items; .776 for LGL_PLT variables and .751 for LGL_ENTR variables. Note that for the last two variables, only 2 items were indicative and most cases had a missing value on the first item since this item was only present when the respondent indicated he or she employed equity crowdfunding. Since respondents that did not indicate they used equity crowdfunding did not answer three questions, there were some missing values in most cases. Therefore, an artificial variable was created to account for these cases. The variable
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was computed in the following way: If there was a missing value in LGL_ENV1, the artificial value LGL_ENVA1 was the scale mean of LGL_ENV2 through nLGL_ENV6. If however, LGL_ENV1 did contain a valid value, LGL_ENVA1 would take on this value. In the computation of the scale mean of LGL_ENV items, instead of LGL_ENV1, LGL_ENVA1 was used.$ This way, missing values would not influence the scale mean LGL_ENVTOT. This same process was repeated twice for the platform expertise and entrepreneur expertise value.
Statistical tests
The statistical tests employed in this study are aimed to either support or reject the hypotheses. Since the variables of the independent variables have been constructed as the means of several items, these variables will be treated as continuous variables. The dependent variable is a dichotomous or binary value indicating whether the entrepreneur employed equity crowdfunding. According to Bryman (2008), the best method of bivariate analysis when dealing with a dichotomous and continuous variable is the Spearman’s ρ method. Spearman’s ρ is similar to the Pearson’s r test, but the Pearson’s r method is only suited when dealing with two interval or ratio variables. The Spearman’s ρ method will be used to construct a correlation matrix for each variable group. This will provide the first indication on whether hypotheses will be supported, as well as indicate whether there exists multicollinearity that needs to be accounted for. Next a multiple regression model will be designed. The aim of this model is to test whether the legal environment indeed moderates the interaction
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between the legal expertise of the entrepreneur and the platform (internal and external expertise respectively).
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Results
This section will discuss the acquired data of this study. First the characteristics of the sample are discussed accompanied with some descriptive statistics. Then correlation matrices are given for the three variable groups. For the legal group, the result of the correlation matrix will either support or reject hypothesis H3c. In the second half of this section, the rest of the hypotheses will be tested with aforementioned bivariate analyses.
Sample description
In total, 181 surveys were started of which 177 were fully completed, resulting in an effective response rate of 177/9121 = 1.94%. The low response rate was expected due to reasons mentioned in the previous section, but still sufficient data was available for statistical testing. The high amount of actual survey completion is probably due to the relatively short length of the survey (Bryman, 2008). The respondents in the sample were 39,5 years old on average. 94,9% of the respondents was male. Of all respondents there were 72 (40.68%) cases that employed one or more models of crowdfunding. This high amount can be explained due to the fact that more entrepreneurs that are registered on a crowdfunding platform were approached. Moreover, the entrepreneurs that used crowdfunding were approached first, giving this group more time to respond. Of all the respondents that indicated having used crowdfunding, approximately 57% used equity-based crowdfunding. Again, this is probably not representative with reality. The high number of equity-crowdfunding companies can be explained due to the fact that equity crowdfunding platforms were
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used as a prominent source of respondents. Figure 5 shows the frequencies of each model of crowdfunding. Most entrepreneurs indicated they have a Masters degree (36.2%) or a Bachelors degree (35.0%). Only 2 respondents did not at least finish high school. Entrepreneurs that indicated their company operated in the Technology field had the highest average education. The Technology sector was also the biggest reported sector with 66,2%. The average age of the companies was 2,7 years, this could be expected due to the sample group was selected on their company age and being in an early stage.
Figure 5: Frequency of crowdfunding models in the data
0! 10! 20! 30! 40! 50! 60! 70! 80!
Donation! Reward! Debt! Equity! Total!
Fre que n cy ) Crowdfunding)model)
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Correlation matrices
This subsection will discuss the correlations between the variables on the basis of the correlation matrices. Correlation matrices were generated using Spearman’s ρ method. This is done per subgroup of variables, defined in the conceptual model and generated from the data.
Economic and social value
According to the data, there is almost no correlation between perceived economic value of the entrepreneur and the choice for equity crowdfunding. An explanation for this could be that all entrepreneurs believe their business has high economic value. Social value however has a moderate negative correlation with the choice of equity crowdfunding that is also highly significant. This means that entrepreneurs that believe their business has a relatively low social value are more likely to choose the equity-based crowdfunding model. There is also a moderately negative and highly significant correlation between social value and economic value. Thus the higher the indicated social value, the lower the economic value and vice versa. This is probably due to the way the question was asked to entrepreneurs: if you enter a low value on one of the specific items, they probably believe that the other item should score relatively higher. Table 3 shows the correlation matrix for economic and social value. Control preference and risk
The correlations of control preference and risk and the choice for equity based crowdfunding were mostly insignificant. The only significant result (on the p < .1 level) was the slight correlation between control preference and the dependent
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variable. This means that if the entrepreneur indicated he prefers to have more control, he was more likely to also have chosen equity crowdfunding as a means to fund his company. The other results of the correlation analysis were highly insignificant, so there are no conclusions that can legitimately be drawn. Table 4 displays the correlation matrix of the control preference and risk variables.
Legal variables
The analysis has shown that the expertise available within the company of the entrepreneur or of the entrepreneur him- or herself (earlier also called simply called internal expertise) did not have a significant correlation with the other variables. The legal environment however, did have positive correlations with both the platform expertise and the dependent variable. The correlation between platform expertise and legal environment is explained by the enabling role the legal environment. If the legal environment enables platforms, it is more likely that these platforms exist and in their turn enable entrepreneurs to employ equity-based crowdfunding. Though the correlation between the platform expertise and the dependent variable is significant, it is not very high. The most important role is that of the legal environment: a highly significant and moderately high correlation value. It becomes clear that the legal environment plays an important role in this framework, not only directly on the dependent choice variable, but also on the platform expertise variable. Please refer to Table 5 for the correlations between the legal variables.
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Table 3: Correlation matrix economic and social value
Variables 1 2 3
1. Employed Equity CF (dependent) -
2. Economic Value -.003 -
3. Social Value -.365** -214** -
**p < .01
Table 4: Correlation matrix control preference and risk reducing propensity
Variables 1 2 3
1. Employed Equity CF (dependent) -
2. Control preference .121* -
3. Risk reducing propensity .049 -.055 - *p < .1
Table 5: Correlation matrix legal variables
Variables 1 2 3 4
1. Employed Equity CF (dependent) -
2. Legal environment .438** -
3. Platform expertise .195** .256** -
4. Entrepreneurial expertise -.047 -.035 -.055 - **p < .01
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Regression analysis
In order to test whether the legal environment moderates the relation between the expertise of the entrepreneur and platform, a hierarchical logistic regression analysis is conducted. The model is constructed as follows. First, the effect of the predicting effect of the expertise variables on the dependent variable: choice for equity-based crowdfunding is analyzed. Then, the mediating effect of the legal environment on these variables is analyzed by looking at the change of predicting power when the legal environment variable is added. Before this model was constructed, the independent variables were first standardized. This was done to avoid issues associated with multicollinearity. Table 6 displays some predicting power variables of the two blocks. The first block only contained the expertise variables. In block 2, the legal environment variable was plugged into the model.
Table 6: Predictive capacity of the regression model
Variables χ2 Percentage correct prediction Nagelkerke R2
Block 1 7.1644 76.8% .060
Block 2 30.339** 83.1% .289**
*p < .01
It becomes clear that the predicting power of the model greatly increases when the legal environment is added. The χ2 value increases greatly and also becomes highly significant. This means that the overall predicting power has increased. The same is reflected in the extra 6.3% of correct predictions. The Nagelkerke R2 is a measure that
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indicates what part of the variance in the dependent variable is explained by the model. This measure also greatly increases to 28,9% of variance explained.
Overall, it has become evident that the legal environment variable greatly influences the effect of both expertise variables. Earlier analysis has also shown a positive correlation between the environment and expertise variables, especially the platform expertise variable.
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Conclusion
This study was aimed to find the motives behind the entrepreneurs’ funding choice for equity-based crowdfunding. The identified factors and motivations that were deemed relevant from literature were then operationalized in a survey research design and the hypotheses were statistically tested against the acquired data. Table 7 provides an overview of which hypotheses were supported and rejected by the data.
Table 7: Summary of results
Hypothesis Observation
H1 Entrepreneurs that choose equity-based crowdfunding are more likely to believe their venture has a relatively low and social and high economic value
Partly supported
H1a Entrepreneurs that choose equity-based crowdfunding are more likely to believe their venture has relatively low social value
Supported
H1b Entrepreneurs that choose equity-based crowdfunding believe are more likely to believe their venture has relatively high economic value
Rejected
H2 Entrepreneurs that want to remain in control as much as possible but also wish to reduce risk are more likely to use equity-based crowdfunding
Rejected
H2a Entrepreneurs that have a high tendency to remain in as much control as possible in their venture are more likely
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to choose equity-based crowdfunding
H2b Entrepreneurs that want to reduce risk are more likely to choose equity-based crowdfunding
Rejected
H3 Entrepreneurs that either internally or externally mitigate the legal issues and associated with equity-based crowdfunding, and are positioned in a favorable legal environment are also more likely to choose equity-based crowdfunding
Partly supported
H3a Entrepreneurs in an environment where legal issues are mitigated externally are more likely to choose equity-based crowdfunding
Supported
H3b Entrepreneurs that are able to internally mitigate legal issues are also more likely to choose equity-based crowdfunding
Rejected
H3c The legal environment influences the extent to which the expertise of either the entrepreneur or the platform can enable equity-based crowdfunding.
Supported
Two main hypotheses were only partly supported by the data and one was fully rejected. They will be discussed in this section one by one, and the section will end with some concluding remarks on this study.
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Hypothesis 1: The effect of perceived economic and social value
Data has shown that among the respondents, entrepreneurs that believe their company has low social value are more likely to choose the equity-based model of crowdfunding. There was no evidence that indicated that entrepreneurs that believe their venture has high economic value are also more inclined to choose equity crowdfunding. Hence, hypothesis 1 is only partly supported. Namely sub-hypothesis 1a is supported and 1b is rejected.
Hypothesis 2: The effect of control preference and risk
To measure risk, the entrepreneurs were asked questions to gauge their risk-reducing propensity. This measure is assumed to encompass both the perceived risk of the entrepreneur in combination with how they deal with risk. While the control preference may have been of influence of the choice, the results weren’t significant enough to support the hypothesis. The risk also did not significantly affect the choice of funding according to this dataset.
Hypothesis 3: The effect of legal environment and legal expertise
According to the data, the legal environment plays a major role in the entrepreneurs’ choice of funding. Not only does it directly affect the dependent variable, but also positively mediates the effect of both the entrepreneurs’ expertise and the platform expertise on the choice of funding. However, the effect of the entrepreneurs’ legal expertise did not have a significant effect, a mediating effect still could be shown. The effect of the platform expertise enabling entrepreneurs to choose for equity-based crowdfunding has been shown to directly have an effect on the dependent variable.
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Logically, if an equity-based crowdfunding platform is available, entrepreneurs are more likely to employ equity-based crowdfunding.
The hypotheses were aimed to provide an answer to the research question:
What relevant factors and/or motivations influence the decision of entrepreneurs to choose specifically for equity-based crowdfunding as a means to financing their venture or project?
While the research question is hard to answer, this study has provided some insight into the motivations and factors that steer entrepreneurs’ in the direction of the equity-based crowdfunding model. Entrepreneurs that believe their venture has a relatively small social value are more inclined to choose equity crowdfunding. Second, data suggests that the legal environment is very important to enable entrepreneurs. This effect was of course expected, since without a platform to actually be able to employ equity crowdfunding, it is almost impossible. On the other hand, it was expected that the legal expertise that may be available in the entrepreneurs’ own company may have caused some entrepreneurs to still find a way. There were actually no cases of that in the data, and this may only occur very rarely if at all. Ventures are most often in an early phase when crowdfunding and often do not have the legal resources for such a feat. Control preference and risk did not significantly affect the choice of entrepreneurs according to the data.
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Discussion
This section will discuss some limitations and considerations of this study that need to be regarded when reviewing the results. Then, the implications of this research are discussed and placed within current literature along with some suggestions for future research.
Limitations and considerations
An important note that should be considered is that the conceptual model used in this research most certainly does not paint a complete picture regarding the factors and motivations influencing an entrepreneurs’ choice for funding; specifically equity-based crowdfunding. This research therefore actually only partly answers the research question: just considering value creation, control preferences, risk and legal issues. Still these factors are considered to be the most important and applicable to equity-based crowdfunding (Schwienbacher & Larralde, 2010; Meyskens & Bird, 2015; Cosh et al., 2009). An important factor that was not considered in this study was the creation of legitimacy, since this has already been the focus of Frydrych et al. (2014). Regarding the research design, even though the consistency of most items was within acceptable levels, whether the questions actually measured their relative variables is not completely certain. This is an assumption that has to be made, however, if even one of the questions can be proven to actually measure it’s respective variable, the others are very likely to also be good measures since the internal reliability is so high. To prove this though, a separate methodological study on the items is required.
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Implications and suggestions for future research
The results of this study have contributed to current literature in the following ways. First, while most literature on the subject of factors influencing entrepreneurs’ choice of funding simply identifies these factors, this study examined what state or value of specific factors may result in a certain outcome, specifically the choice for equity-based crowdfunding The only other study found that did this to a small extent was Meyskens & Bird’s (2015) study that suggested that the relative economic and social value constitute which model of crowdfunding best suits a venture. At least the first step has been made to map not only which, but also how relevant factors may influence entrepreneurs in their choice of funding. Future research should be focused on the remaining factors that exist, and the other types of crowdfunding. Second, this research has found that legal environment and legal expertise and the availability of an equity crowdfunding platform can greatly influence the choice of entrepreneurs. This is supported by Hemingway & Hoffman (2010), but this study provides actual empirical data that supports it. The finding that entrepreneurs whom believe their venture has relatively low social value are more likely to employ equity crowdfunding is in accordance with Meyskens & Bird’s (2015) framework. The influence of perceived economic value was however not supported by the results however. Finally, As mentioned earlier the applying the factor ‘legitimacy creation’ specifically to equity-based crowdfunding may also prove an interesting research topic for future studies. Moreover, additional factors and motivations may be found in the future that could be considered. Since the interest in crowdfunding has increased greatly over the last few years, more factors are likely to be identified in the near future. Here lies an
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opportunity for scholars to empirically test what factors or combinations of factors steer to which types of funding entrepreneurs pursue.
All in all, this study has provided new insights in what moves an entrepreneur in their choice of funding, specifically equity-based crowdfunding. However, this research design could be applied to every type of funding in combination with relevant factors as long as these factors can be properly operationalized.
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Appendix I: Survey
Factors Influencing the Entrepreneurs' Choice of Funding
T1 Dear Entrepreneur, Recently, crowdfunding has grown to be an important tool for entrepreneurs to raise capital. One specific type of crowdfunding that has not received much attention in literature yet is equity-based crowdfunding. In this type, a company raises capital from the crowd and in return the crowd receives a small share of the company. This research focuses on the factors and motivations of entrepreneurs to choose specifically for this type of crowdfunding. Please note that even though you yourself have not employed equity crowdfunding, your response is just as useful. The average time to complete this survey is around 7 to 13 minutes. It consists of 2 parts. The first part asks some basic demographic questions. The second part asks about several factors and motivations that you may have considered in your search for funding. The main categories of these factors are: value creation, control preferences & risk, legal issues .At the end of the survey you have the possibility to leave your e-mail address and name should you want to receive the results of my research. Thank you very much for your time to help me with my research!
Kind regards, Floris de Joode
54 ! Male ! Female
Q3 What is your age in years?
Q4 How many years has your company been active in years? (If your company no longer exists please specify how many years it had existed.)
Q5 In which country was your company founded? [Edited: list of all countries]
Q6 What is the highest level of education you have completed? " Less than High School
" High School / GED " Bachelors Degree " Masters Degree " Doctoral Degree
