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How do new funding providers address
the information asymmetry issues?
Carlos Mauricio Beltran Garcia
Student Number: S3877884 March 2020
Master Thesis1
MSc Small Business & Entrepreneurship Faculty of Economics and Business
Supervisor: dr. Maryse Brand Co-assessor: dr. Evelien Croonen
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ABSTRACT
The disruption of new funding providers as crowdfunding platforms and accelerators has reshaped the entrepreneurial finance landscape. However, the comprehension of how they are offsetting the information asymmetry, which from the economic theory is what impedes new and young ventures to effectively connect with potential funding providers, remains scarce. In this regard, this research paper aims to contribute to the literature by answering “How do new funding providers address the information asymmetry issues?”. Accordingly, a literature review is conducted, followed by eight case studies through semi-structured interviews within the Colombian entrepreneurial finance ecosystem, including actors such as investors, experts, and entrepreneurs. The analysis shows that the aforementioned new funding providers heavily rely on social and reputational aspects to remove information asymmetry barriers. As a result, several propositions can be used for academic and managerial purposes.
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TABLE OF CONTENT
1. INTRODUCTION ... 5
2. THEORETICAL FRAMEWORK ... 7
2.1 The market for financing ventures ... 7
2.2 Information asymmetry in the market for financing ventures ... 8
2.2.1 Agency theory and information asymmetry problems ... 8
2.3 Entrepreneurial finance literature review ... 11
2.3.1 Literature in entrepreneurial finance ... 11
2.3.2 Levels of analysis in the entrepreneurial financial literature ... 11
2.3.3 Theories in the financial literature ... 13
2.3.4 Theories in entrepreneurial finance literature... 14
2.4 New finance providers and information asymmetry problems ... 16
2.4.1 Crowdfunding outline and parties involved ... 16
2.4.2 Accelerators outline and parties involved ... 17
2.4.3 Crowdfunding mitigation of information asymmetry problems ... 19
2.4.4 Accelerators mitigation of information asymmetry problems ... 23
3 METHODOLOGY ... 27
3.1 Case selection ... 27
3.2 Data Collection ... 28
3.3 Controllability, reliability and validity ... 29
4 RESULTS AND DISCUSSION ... 30
4.1 Results (within case analysis) ... 30
4.1.1 Internal Funds ... 30
4.1.2 Crowdfunding ... 31
4.1.3 Accelerators ... 36
4.2 Discussion (cross case analysis) ... 40
4.2.1 Entrepreneurial finance market view ... 40
4.2.2 Suitability of existent theories ... 41
4.2.3 Adverse selection mechanisms... 41
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5 CONCLUSION ... 45
5.1 Findings ... 45
5.2 Theoretical implications ... 46
5.3 Managerial implications ... 46
5.4 Limitations and future research ... 47
6 REFERENCES ... 48
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1.
INTRODUCTION
Small and medium enterprises (SME’s) play an essential role in economic growth and innovation generation (Storey & Greene, 2010; Hirsch & Walz, 2019). Firstly, due to their creation of new jobs and secondly for the radical innovations brought to the market by them (Bellavitis et al., 2017; Block et al., 2018). However, SME’s face many liabilities at the mere beginning of their existence threatening their survival, thus the first years are critical and challenging. Many new businesses do not manage to survive and tend to disappear in a short period after their establishment (Koelinger et al., 2007)2.
According to literature, resource scarcity is one of the main reasons for closing at the early stages (Brüderl, & Schüßler, 1990; Drover et al., 2017; Vaznyte & Andries, 2019). Indeed, a recent Forbes article reveals “Running out of cash” as the second of all possible reasons for a startup to shut down (McCarthy, 2017). In their study, Cooper, Gimeno-Gascon & Woo (1994) argue that the likelihood of survival of new businesses is positively related to the primary resources of entrepreneurs such as financial capital. Additionally, they suggest that young ventures’ resource limitations restrict them in carrying out growth plans, changing the course of activities, and meeting the financing demands imposed by the business. Gimmon & Levie (2010), state that finding funds is essential as financial limitations play a significant role in the subsistence of new companies due to short-term cash flow problems. Since financial resources are crucial for a business to prosper, it is necessary to understand why SME’s struggle to find the necessary resources from funding providers at their earliest stages.
From the classic economic view, the reason is grounded on information asymmetries and agency theory (Storey & Greene, 2010). This theory suggests that the relationship between entrepreneurs and capital providers can be regarded as a principal (Finance provider) and agent relationship (Entrepreneur) in which parties do not have access to the same and precise information, arising adverse selection and moral hazard problems.
Under this framework, the market for new ventures and funding providers is “opaque”; a term used to state the uncertainty for both parties within the market. In that regard, initial resources for running new businesses rely mostly on internal sources: the entrepreneur's savings or loans from family and friends (Fraser 2009;
2 It should be noted that not all business closures are failure associated. Research on business exits also
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Berger and Udell, 1998; Storey & Greene, 2010). However, as a business runs and signals a certain stability to the market, the information asymmetry problems decrease and traditional funding providers, such as banks and venture capital, enter the landscape providing financial alternatives for entrepreneurs extend their businesses (Berger and Udell, 1998; Storey & Greene, 2010). As described in the theoretical framework section, there are different theories and levels of analysis aiming to explain the interplay between the businesses and traditional funding providers within an "opaque" entrepreneurial finance market.
Over the last few years, the landscape of entrepreneurial finance has shifted. Many new players have emerged, and there has been a growing presence of finance providers who have not historically played a significant market role or did not exist before. These players are very heterogeneous and include crowdfunding, accelerators, family offices, and venture debt funds (Block et al., 2018; Bellavitis et al., 2017). The research on new finance providers has only "skimmed the surface" in terms of the advantages and disadvantages of those new sources compared with more traditional sources (Bellavitis et al., 2017), and the reasons for their recent appearance in the market (Block et al., 2018; Cumming et al., 2019).
To date, the entrepreneurial finance literature has built substantial work on traditional financers (mostly venture capital); however, the understanding of the recent-born financial instruments3 and its potential for filling the financial gap remain
scarce (Bellavitis et al., 2017).
In this regard, this research paper aims to contribute to the scarce literature in this field by exploring how the new funding providers fit in this “new entrepreneurial finance market”. Specifically, how are the new instruments addressing the information asymmetry problems and how is that different from the traditional ones.
Therefore, this paper focuses on the following research question:
How do new funding providers address the information asymmetry issues?
In order to answer the research question, a literature review is conducted, followed by multiple case studies through semi-structured interviews with different actors within the entrepreneurial finance market such as funding providers, experts, and entrepreneurs. As a result, the developed statements built from theory will be empirically validated from the information obtained in the case studies.
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2.
THEORETICAL FRAMEWORK
Firstly, this section aims to review the definition of the market for financing ventures, where finance suppliers and companies looking for funds to meet. Secondly, it is intended to describe how the information asymmetry and agency theory feed adverse selection and moral hazard problems in the market for financing ventures. The third aim is to provide the reader with a comprehensive compilation of the entrepreneurial finance literature. Finally, to illustrate how new financial providers, such as accelerators and crowdfunding, which are the main subject of this research, are mitigating these problems based on the existent literature.
2.1 The market for financing ventures
A market is any place where vendors of certain goods or services may reach customers for those goods or services. This gives rise to the opportunity of a trade to take place. To create a successful trade, customers must have something they can offer in exchange for the good or service (Moffatt, 2019). That being said, the financial market for ventures works by the interaction of suppliers: financial organizations seeking to provide money in exchange for payback in the form of interests (debt) or ownership (equity), and buyers: companies seeking resources to operate or to grow. An important definition by this means is market failure, which takes place when there is a supply-demand imbalance. In other words, more is needed than is required, or more is required than is made (Moffatt, 2019).
Graph 1. Representation of the Market for financing ventures
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In addition, it is important to highlight that the simplistic view of the market for financing ventures presented on graph 1 does not portray its complexity. In fact, other factors play important roles and affect the market behavior and outcomes as shown in the next sections.
2.2 Information asymmetry in the market for financing ventures
In an ideal world, it is assumed that information is shared equally and transparently among parties (suppliers and buyers). In the real world, though, due to lack of communication channels and implicit opportunities to exchange or hide information between parties, information is usually spread asymmetrically, because one side has more accurate information than the other (Butter et al., 2010). In the market context of financing ventures, the information is not shared equally between the sellers (funding organizations) and buyers (companies) since entrepreneurs often have better information than potential investors about the likelihood of success of the company (Hall et al.,2010). Therefore, the information on new ventures on the market is typically very limited, creating an opaque and complex environment for making deals between the two parties (Storey and Greene 2010). In this regard, asymmetric information helps to explain market failure, in which companies fail to fund their operations/growth, and funding providers are unsuccessful in allocating their resources (Glücksman, 2019). That effect is harmful for SME´s which typically possess few initial resources, do not have backing assets (collaterals), and have no tracking information/reputation business-wise. However, as the business is able to show the market some signs of stability in their operation, the information asymmetry issues decrease and the market better connects ventures seeking resources with a broader group of funding providers that were initially not interested in that project due to uncertainty (Storey and Greene, 2010).
2.2.1 Agency theory and information asymmetry problems
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bearing little or no risks because the principal suffers all the losses4. Since the agent and the principal do not have access to the same information (asymmetric information) and have different interests, entrepreneurs could take part in opportunistic behavior. For instance, finance providers are unaware of the quality of the project compared to the entrepreneur; therefore, the latter might take advantage of this situation, overestimating the real value of the project to increase the likelihood of acquiring resources from the money provider. This situation leads to the first information asymmetry problem called adverse selection, which occurs when the finance provider agrees to fund the businesses which are less likely to pay back either in the form of interest (debt) or profits/growth (equity) and reject the profitable and good projects (Christensen et al., 2009; Storey and Greene, 2010) or when entrepreneurs refuse to pay what they consider to be an expensive price asked by the funding provider.
Briefly, as the funding providers do not know the real potential nor the quality of the project/business, they either discard the project or request a premium on the capital, making it too costly for small firms to take this option. This situation leads to a significant number of good projects lacking the necessary funding as they are not able to disclose the right information to persuade the financers to invest in the project or are just not profitable enough to make up for the costly premium required by the financer (Pawlina & Renneboog 2005). Therefore, firms that do not have access to funding due to these circumstances may not have a choice but to use internal funds to finance their operation and growth plans (Storey and Greene, 2010). Nonetheless, if these difficulties are overcome and the principal agrees to provide funding to the agent (entrepreneur´s projects), another important problem arises when entrepreneurs mismanage the resources given by the financer, using them for their own interest. This problem is called moral hazard. (Christensen et al., 2009).
4 Information asymmetry problems between funding providers and investors may also arise but are not
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Graph 2. Representation of the agency relationship and information asymmetry problems.
Moral Hazard occurs when one of the parties decides to undertake extra risks in order to attain internal, exclusive benefits and adversely affects the other party, which is not able to monitor these actions (Glücksman, 2019). In other words, when a party obtains an advantage by not acting in line with the principle as agreed in a contract/agreement, morally hazardous behavior occurs. As moral hazard only takes place right after sealing a deal with finance providers (either debt or equity), the entrepreneur can engage in opportunistic behavior by spending firms’ resources on personal matters or by diminishing effort and non-commitment with the company tasks (Glücksman, 2019). Hence, a focal issue for funding providers has been the assessment of the correct incentives and controls to align their objectives with entrepreneurs (Christensen, 2009).
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2.3 Entrepreneurial finance literature review
Entrepreneurial finance is the study of finance within new ventures and startups. This field differs from classical financial approaches, although both new and incumbent ventures face similar problems (Dennis, 2004; Vaznyte & Andries, 2019). In fact, scholars have claimed that the entrepreneurial finance market deals with the same two central core issues of corporate finance theory: information asymmetries and agency problems. The essential difference between both approaches comes down to the fact that information asymmetry problems are higher in entrepreneurial finance settings (Denis 2004; Cumming et al.,2019). Likewise, both corporate and entrepreneurial finance differ on the type of ventures and financers within each group. Cumming et al.,(2019, p.1) point that as follows: "corporate finance focuses on established listed corporations, while entrepreneurial finance largely focuses on younger, privately-owned firms. Entrepreneurial finance encompasses a variety of finance types and providers, including venture capital, private equity, private debt, trade credit, IPOs, business angel finance, and crowdfunding, among other forms of finance, such as grants, funding from incubators or accelerators, and support from family and friends".
2.3.1 Literature in entrepreneurial finance
The literature on entrepreneurial finance is scarce and vastly segmented across journals in management, entrepreneurship, and finance (Cumming & Johan, 2017). Due to the increase in entrepreneurial activity and the arrival of new funding providers such as crowdfunding and accelerators, only after 2006, there has been an increased interest in studying the phenomena in this field (Cumming & Johan, 2017). Taking the dearth in literature into account, it might be grounded on the reduced data availability and quality and on the non-mandatory information disclosures for SME´S in most countries and regions (Cumming & Johan, 2017). Paré et al.,(2009) show in their study that research in this field displays a double orientation: the first emphasizes in venture capital, whereas the second is geared towards all the other finance providers such as banks, business angels, and internal funds. In this regard, venture capital accounts for the vast majority of entrepreneurial finance research despite it only represents a small fraction compared to other financial providers in terms of the amount of resources invested/lent and the number of companies funded (Paré et al.,2009; Storey & Greene,2010).
2.3.2 Levels of analysis in the entrepreneurial financial literature
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field can be classified (based on their studied variables), into one of the following four levels of analysis: External, Market, Entrepreneur, and Investor:
Graph 2. Levels of analysis of the market for financing ventures.
External level
At this level, all the research considering variables from external issues as PESTEL factors (Politics, Economics, Social, Technological, Environment, and Legal) can be clustered. A great example is Cowling et al., (2012), who conduct a study measuring the flows of external finance (both debt and equity) to SME´S following the financial crisis.
Market level
Another strand of literature analyzes the interplay between supply (funding providers) and demand (SME´S) and the outcomes/consequences derived from this relationship. For instance, Levratto et al.,(2018) study the influence of business angels’ investments on firm’s performance. Likewise, Chemmanur et al.,(2011) analyze how venture capital financing improves efficiency in private companies, concluding that it assists the firms in gaining efficiency and increases the likelihood of a successful exit (selling the ownership and making profit of it).
Entrepreneur (Founder) level
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Bertrand and Schoar (2003) show that entrepreneur's management style significantly influences the financial decisions in the firm.
Investor level
This stream of research focuses on the investor side, analyzing their traits and the relation to the financial decisions. A useful example is Mohammadi and Shafi (2017) study, which examines the gender differences between crowdfunding investors in Sweden. They find that women are less inclined to invest in high tech or youth team projects.
2.3.3 Theories in the financial literature
In order to understand how firms and finance providers behave and interact within the market, scholars have developed different theories and approaches. In that regard, pecking order theory and trade-off theory are commonly brought to the agenda when explaining enterprises financing decisions and are frequently mentioned. Additionally, both theories are often seen as competing approaches, and significant research has been oriented to accept or reject their principles (Vaznyte & Andries, 2019). To discuss the main contributions of each theory, they are briefly reviewed.
Pecking order theory
This theory developed by Myers (1984), states that entrepreneurs may have preferences when choosing the financing source. Shortly, it suggests that companies give priority to the least expensive funding source, which is internal finance, and only when this is depleted, they look for external providers. The critical factor for internal finance to be cheaper and more accessible for entrepreneurs is the information asymmetry problem of adverse selection in which external funding providers cannot efficiently evaluate the worth of the firm, and thus require expensive premiums that entrepreneurs are not willing to agree. Since adverse selection problems do not exist for internal funding, the entrepreneurs might incline towards it avoiding external sources. Likewise, as debt usually is cheaper than equity, this theory predicts that when going for external funding, ventures will go for debt first, and regard equity only as a last option (Vaznyte & Andries, 2019).
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salaries, or using their own credit cards, etc. (Storey & Greene, 2010). If the firm manages to finance its operations through the use of internal funds, it is also able to diversify as managers can invest in projects that they would not otherwise because of information asymmetry problems with external financers (Besanko et al., 2009).
In short, the preferred use of internal resources by entrepreneurs at their ventures first stages are explained in the pecking order theory by their inclination to keep ownership and control over the company and their preference for the cheapest source. The latter is reinforced by the barriers built due to information asymmetries with external financers.
Trade off theory
This theory claims that firms select their capital structure based on a cost/benefit trade-off. The precursors of this theory are Kraus and Litzenberger (1973), and the theory has had different adaptions and approaches since then. Briefly, the trade-off theory proposes that firms search for an optimal debt/equity ratio (capital structure), in which they borrow up to the point where the marginal benefits of debt, as tax savings, are compensated by the marginal cost (bankruptcy costs) (Vaznyte & Andries, 2019). In other words, firms will attempt a level of debt that optimizes the tax shield advantage and the bankruptcy risks (Serrasqueiro & Caetano, 2015).
Competitiveness between Pecking order theory and Trade-off theory
Although numerous empirical studies attempted to test the applicability of one theory over the other, there is no agreement in the literature on which of the two best explain the rationale when it comes to firms choosing the capital provider (Serrasqueiro & Caetano, 2015). In fact, both theories are considered not to be mutually exclusive or fully capable of explaining the company’s financial behavior (Frank & Goyal, 2008). Therefore, a company that follows the principles of the pecking order theory is not excluded from following the trade-off theory at any point
2.3.4 Theories in entrepreneurial finance literature
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companies find themselves in, they opt for different sources of financing (Berger & Udell, 1998; Storey & Greene, 2010).
Nevertheless, within this stream it is necessary to point out the distinction between the traditional SME's (normal growth business) and the startups (high growth companies), which behave differently in their financial path and capital structure. In general, new normal growth ventures (traditional business) rely mostly on internal funds in which personal savings seem to be the most used source, and only a small share of the new firms (around 13%) go to external funding, where bank loans take the highest proportion (Fraser, 2009). Hirsch and Wals (2019) also present bank debt (e.g. loans, credit cards, overdraft) as the most relevant source of funding of new ventures other than founder’s wealth. As a result, equity financing is less considered for normal business; only about 3% of new firms rely on equity funders like business angels and venture capital (Storey and Greene, 2010).
However, the funding path for high growth startups seems to be different. Based on Berger and Udell research (1998), the funding path of these successful ventures is summarized by Cumming et al.,(2019) as the "finance escalator" in which at early stages the money is typically raised from own savings, family, friends or grants. When businesses are at a growing stage, the financial funds are received from business angels or venture capital. Finally, when they are ready for an exit, they opt for private equity or going to the public market (IPOs). In sum, it can be inferred that within the entrepreneurial finance literature, the high growth ventures rely heavily on equity while "normal growth" new ventures follow a path where internal funding and debt are mainly chosen.
New theoretical approaches
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2.4 New finance providers and information asymmetry problems
For the purpose of this research, new providers are defined as those financial instruments that have a scarce presence in the literature and were created recently. This assumption is based on Drover et al., (2017), who divide their study of financial providers by stages, starting from the 1980 to 2003 period where the literature is extensive and concentrates mostly on traditional capital providers, to 2004 onwards where other financial forms are mirrored in the literature. On this subject, Block et al., (2018) point out the importance of differentiating the new instruments from the traditional ones since the latter, like venture capital and banks, have been extensively researched, whereas the literature on crowdfunding, accelerators, angels’ networks, and family offices, is limited.
Correspondingly, this section firstly contains a brief description of crowdfunding and accelerators, the new financial instruments subject of this research, secondly a comparative table between traditional and new financial instruments is developed to summarize their main features. Finally, a review (based on the existent literature) of the mechanisms that crowdfunding and accelerators are using to mitigate the information asymmetry problems.
2.4.1 Crowdfunding outline and parties involved
People raising small amount of money from a crowd is an ancient practice. However, technologies and specifically the internet, have the power to sponsor the request of funds through digital channels, which have the potential to spread broadly (Giudici et al., 2013); this practice is called crowdfunding. Briefly, in crowdfunding, three direct parties interact: The entrepreneur looking for funds (project), the backer (investor), and the platform which connects both and acts as the funding provider intermediary. The mechanism is simple as the backer signs up in the platform, reads the project terms (financial and legal) and adds payment details in case of willingness to support the entrepreneur5. However, the deal does not take place
instantaneously; the funds remains “frozen” in the account and cannot be used. The requirement for the money to be debited from the backers’ “wallet” is that at the end of the campaign, which generally lasts up to 2 months, the project reaches its funding goal. The projects that do not reach that threshold do not get any capital, and the money of the people who backed them will not be withdrawn while the projects that surpasses the funding target will receive all the money and will be considered successful campaigns (Courtney, 2017). The benefits of crowdfunding have been broadly mentioned in the literature as they allow the entrepreneurs to finance and
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introduce innovative products/services to the market, although they are not finished and verified. Furthermore, entrepreneurs can test the potential demand of the product under uncertain environments by relying on the “wisdom of the crowd”. Finally, new companies are also able to sell a massive number of items without requiring the underlying investment to manufacture/create them beforehand. (Courtney et al.,2017; Bellavitis, 2017).
In that respect, two types of Crowdfunding can be distinguished: Financial and non- financial. Through the first, the investor expects monetary returns in form of equity (revenues, profits, or growth for a potential cash out) or debt (interests), while the second accounts for non-monetary rewards (products, gadgets etc.) or merely personal satisfaction. Each group can be classified as shown in table 1.
Financial
Non-Financial
Equity
Reward
Lending (Debt)
Donation
Table 1. Crowdfunding typesFinally, addressing the view of the market for financing ventures under the framework presented in section 2.1 (see graph 1) for this research purposes, three parties can be identified in crowdfunding settings. The entrepreneur, who launches a campaign on behalf of his/her company, the investor, the backer of the project, and the funding instrument (which is the vehicle to invest the money) is the platform.
2.4.2 Accelerators outline and parties involved
Accelerators are organizations created for helping new ventures to established their business models and to get the funds, knowledge, networking and technology necessary to be successful (Dempwolf et al., 2014; Forrest, C. 2019). Cohen & Hochberg (2014, p. 4), accurately define them as a “fixed-term, cohort-based
program, including mentorship and educational components, that culminates in a public pitch event or demo day”. Forrest, (2019) added that accelerators have
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There is a significant misapprehension about accelerators and incubators in the literature where both organizations are taken and considered the same. In fact, scholars and stakeholders in the entrepreneurial ecosystem tend to treat them as equal (Dempwolf et al., 2014). Considering accelerators are a relevant actor in this research and are in fact finance providers while incubators are not, key differences between both need to be addressed. Incubators were established more than 60 years ago in the United States, and support new and young businesses’ ideas by providing physical space, consultancy, and other coaching services. Additionally, incubator programs allow entrepreneurs to enter networks of experienced business people and potential investors (Forrest, 2019; Regmi et al., 2015) but are not funding providers per se.
At first glance, incubators and accelerators are very similar, however they have structural differences that are summarized in the table below:
Incubators Accelerators
Clients
All kind of business, primarily in their early
stages.
Scalable business, mostly technological, mobile apps,
cloud-based, software etc. Orientation Coaching, Idea
development,
Validating of ideas, networking, training, growth Selection process
Low competitive selection. Mostly on firms from the
local community
Competitive selection over firms from different regions Program duration 1 year or more (Open) Short Periods, from 3 weeks to 6
months Capital Providers No
Yes, in form on equity taking from 4% to 8% of the venture
(average)
Sponsored by Universities, Government, Venture Capital Venture Capital, Angel Investors, institutional investors
Profit orientation No Yes
Table 2. Incubators vs. Accelerators: main characteristics developed from Dempwolf et al., (2014), Forrest, (2019), and Regmi et al., (2015).
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After reviewing the basic definitions of both crowdfunding and accelerators, a table intended to summarize all the main financial instruments and their main characteristics mentioned thus far is developed:
Financial instruments overview Group Finance instrument Investors Investment type Capital Investment Goal Investment approach Investment Target Traditional instruments
Personal wealth Entrepreneur Internal Equity Financial,
survival Active
Ventures at Early stage
Banks Bank shareholders External Debt Financial Passive Ventures at Any stage
Business Angels
Wealthy/experienced
individuals External Equity Financial Active
Ventures at Early stage Venture Capital Pension funds, banks, formal investors
External Equity Financial Very active
Ventures at Growth stage New instruments
F-Crowdfunding Ordinary people External Debt/ Equity Financial Passive
Ventures at Any stage
NF-
Crowdfunding Ordinary people External Reward/Donation Product / Social Passive
Ventures at Early stage mostly Accelerators Venture Capitalists, Angel Investors, Large companies, Government
External Equity Financial/political Active Ventures at Early stage
Table 3. developed from Storey and Greene (2010), Block and Colombo (2018), Dempwolf et al., (2014),
2.4.3 Crowdfunding mitigation of information asymmetry problems
This subsection aims to explore and illustrate from the existent literature, how is crowdfunding mitigating the information asymmetry problems.
2.4.3.1 Adverse selection
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Table 4. Problems caused by adverse selection in crowdfunding settings
However, the three parties involved in the crowdfunding settings can contribute to break those information barriers and thus, mitigate the adverse selection problem. For instance, the entrepreneur, can send signals of credibility to influence backers’ perception of trustworthiness and success of the project (Courtney et al., 2017). Conversely, the investor can check the entrepreneur’s reputation and peers’ comments. Finally, the platform, as the funding provider intermediary, might also contribute in narrowing the information barrier between entrepreneurs and backers by enhancing their project selection processes and their feedback/review systems within the website (Agrawal, 2014).
To tie it together, each of the three parties can contribute by some means to mitigate the adverse selection problem derived from the information asymmetry. Table 5 summarizes what scholars have yet proposed in the literature, although there is no strong consensus between many of them.
Entrepreneur (Project)
•Funding required is too expensive •Not obtaining the
required funds
Investor (Backer)
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Who Mechanisms Description Sources
Entrepreneur
Build a strong reputation
Past success, interact with the backer in the platform, Third party endorsements and quality signal approvals as certifications.
Agrawal (2014)
Project quality signals
High quality Media (photos and video), high founder education background, possess patents or any kind of Intellectual property. Courtney et al (2017) , Agrawal (2014), Fraser (2015) External Social capital
Develop close ties with family, friends and closer
people who may be the first backers of the project. Gudici (2013) Internal Social
capital
Develop close ties within the crowdfunding community (other projects, entrepreneurs and backers) .
Gudici (2013), Colombo et al (2015), Courtney et al (2017) Securing Early supporters
Getting early backers send "an indirect clue about project quality that triggers imitating behavior".
Gudici (2013), Colombo et al (2015) Investor (Backer) Good selection process
Choose a platform and a project aligned with their preferences assessing its quality.
Bellavitis et al (2017), Agrawal
(2014)
Crowd due diligence Interaction with the project, write honest comments,
report unethical behavior. Agrawal (2014)
Platform
Build a strong reputation
Choose right projects to keep investors on the platform.
Bellavitis et al (2017), Agrawal
(2014)
Third party endorsement and quality signal approvals
as certifications . Agrawal (2014) Feedback and
review systems
Develop mechanism that allow backers to interact with the project and leave reviews-feedback.
Bellavitis et al (2017); Agrawal
(2014)
Table 5. Crowdfunding mechanisms to reduce information asymmetries before reaching a deal
2.4.3.2 Moral hazard
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Table 6. Problems caused by moral hazard in crowdfunding settings
However, to control this issue, each of the three parties can contribute by some means to mitigate the moral hazard issue derived from the information asymmetry. First, and rather obvious, the entrepreneur must not behave opportunistically. Investors, on the other hand, cannot mitigate the issue by the use of contracts (as theory claims). Instead they could use the same mechanisms of adverse selection to avoid choosing a bad project and consequently diminishing the risk of not having the expected payback. For instance, by the use of the power of social networks as being informed about other backers' decisions and thoughts on the project/entrepreneur, investors can judge whether the project is trustworthy or not. Moreover, they can assess projects and the entrepreneur's reputation and quality by relying on certifications made by reputed external parties (Agrawal, 2014). Finally, the platforms help to mitigate this problem by establishing the "all or nothing" system in which only the projects which manage to surpass the funding goal receive the money (Giudici et al., 2013).
Additionally, they can also rely on adverse selection mechanisms by filtering out bad projects and thoroughly promoting the selection process of the good promising projects (Agrawal, 2014) and by facilitating the information flows between the parties allowing the investors to improve monitoring and governance (Fraser, 2015). In that regard, they might develop feedback or communication systems on their website, allowing investors to stay updated about the general project information and assess peer reviews and feedback, which are crucial in building trust with the entrepreneur. Lastly, Strausz (2017) mention that platforms can split the projects into small milestones and consequently allocate the payments made by the investor to these milestones. This conditional deferment of payments gives the backer additional information on the project while not committing all of the investment in one shot, hence reducing the risk of fraud.
Entrepreneur (Project)
•Reputation is harmed, social capital affected (Crucial for further campaigns)
Investor (Backer)
•The projects do not deliver, the money is misused.
Platform
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2.4.4 Accelerators mitigation of information asymmetry problems
This subsection aims to explore and illustrate from the existent literature, how are accelerators mitigating the information asymmetry problems.
2.4.4.1 Adverse selection
Information asymmetry impedes good projects to meet with potential financiers as accelerators. As with any other financial instrument, the information problem arises in adverse selection in which accelerators struggle to choose good projects and entrepreneurs to find a reasonable cost of financing. Under the accelerator ecosystem, the accelerator acts on behalf of the investors interest (as in other funding forms as venture capital) and the entrepreneur on behalf of his company. Accordingly, Table 7 displays the problems adverse selection brings to the parties in this setting.
Table 7. Problems caused by adverse selection in accelerators settings
However, its broadly mentioned in the literature that accelerator programs provide additional value, apart from merely the resources, as they allow entrepreneurs to access into a privileged network of mentors and potential investors (Dempwolf et al., 2014). This fact may affect how both entrepreneurs and accelerators attempt to mitigate the information asymmetry issue. For instance, accelerators perform robust selection processes to ensure that great ideas and teams will enter their programs (Radojevich-Kelley & Hoffman, 2012). Besides, as seen in empirical studies, accelerators positively affect startups survival and performance, so entrepreneurs might relax their finance-cost expectations in exchange for gaining social capital in the programs. However, due to the scarce literature in this specific field, the last claim only constitutes an assumption that is empirically validated in this study.
Nevertheless, on the side of the accelerator, the factors behind accepting or rejecting entrepreneurial ideas have been broadly discussed in the literature. Firstly, these organizations only select startups: scalable ventures with high growth potential (no investments in traditional or highly niched/localized business, such as restaurants). Secondly, there should be sector-match since accelerators are often industry specialized, meaning they exclusively consider projects in the same area of
Entrepreneur (Company)
•Funding required is too expensive •Not obtaining the
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expertise. Linked to that is the fact that accelerators only accept projects in which they see a possibility to add value. In other words, they may also reject good projects due to the lack of value they can add (Radojevich-Kelley & Hoffman, 2012).
When entrepreneurial projects fulfill those requirements, the decision criteria rely on assessing the Entrepreneurial characteristics (human capital, social capital, leadership and skills of the team) and idea characteristics (product-market fit, growth potential) Bergek & Norrman (2008). Another stream in the literature sees a minimum viable product already tested (market validation) as the decisive fact to be accepted in these programs (Radojevich-Kelley & Hoffman, 2012; Yin & Luo, 2018).
To summarize, scholars end up mentioning similar aspects (as the abovementioned) regarding how accelerators choose entrepreneurial projects. However, a crucial fact to highlight is that the competitiveness and toughness to enter these programs intrinsically mitigate choosing bad projects (Gonzalez-Uribe & Leatherbee, 2015; Radojevich-Kelley & Hoffman, 2012; Dempwolf et al., 2014).
2.4.4.2 Moral hazard
Once entrepreneurs and accelerators reach deal, the moral hazard and opportunism behavior arises. As seen, under this scenario, the risk is mostly faced by the investors, while the entrepreneurs have control of the resources. Furthermore, as point out by Bernthal (2015), in accelerators environments, parties exchange high volumes of relevant information without formal contracts or mechanisms to prevent opportunism. Moreover, when enrolled in the programs, entrepreneurs get exclusive data and information from highly skilled and experienced people who contribute their time and networks to increase entrepreneurial chances of success. However, that valuable information can eventually be used for the personal benefit of the entrepreneur hurting accelerators, and therefore investor interests. As a result, the issues derived from moral hazard are shown in Table 8.
Table 8. Problems caused by moral hazard in crowdfunding settings
To mitigate the moral hazard issues, existent literature is not conclusive. In this regard, Bernthal (2015) claims that since entrepreneurs are reluctant to share
Entrepreneur (Company)
•Reputation is
harmed, social capital affected
Accelerator (Investor)
•Information leakages •Projects are not
profitable.
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information concerning opportunism during the accelerator programs, conducting studies on this issue is problematic. However, Bernthal (2015) highlights the robust networks and social connections within the accelerator programs as an intrinsic mechanism to offset the opportunism incentives. As a result, none of the parties have developed a specific mechanism per se, but the closeness and interaction of both within the accelerator program set a barrier for the entrepreneur to commit fraud with the funds given.
To summarize the literature review on the mechanisms discussed, Table 9 compresses all the relevant information found, and as an additional insight, includes some of the mechanisms other funding providers use to mitigate the information asymmetry issues mentioned in the literature.
Finance
instrument Who Adverse Selection Moral Hazard
Internal Finance - NA NA
Banks Banks
managers
Scoring databases and historical data
Monitoring financial sheets and payment dates Business Angels BA investors
Ties with the entrepreneur. Broad experience and knowledge in the
industry/region/market
Personal involvement in the company Venture Capital VC managers
Seeking experts view, due diligence, specialization in
sectors, syndication
Non-executive directors, staging the investment, Aligning entrepreneur income to
performance
Crowdfunding
Investors
Crowd diligence: Interact, comment and report unethical behavior. Choose wisely platform
and project
Crowd diligence: Interact, comment and report unethical
behavior Platforms
Get third party quality signals as endorsements and certifications. Choose the projects carefully.
Campaign threshold (all or nothing), conditional deferment of
the investment. Develop a fluent communication channel within the
platform Entrepreneurs:
Build a strong reputation , high quality content in the campaign (video and information), Get early backers and close ties within the people from the crowdfunding
environments
NA
Accelerators
Accelerator managers
Develop thoroughly selection processes
The social networking, mentoring and close interaction with the
participants Entrepreneurs:
Choose an accelerator that fits
their industry NA
Table 9. Mechanisms and signals parties involved use to mitigate information asymmetry problems
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accelerators) is scarce and segmented. Therefore, this study aims to contribute to the field by clarifying the present mechanisms each party relies on for mitigating information asymmetry problems (adverse selection and moral hazard) in the market for financing entrepreneurs.
Finally, as a further contribution, this study also complements the analysis by taking into account the entrepreneurial market for financing ventures and entrepreneurial finance theories (see section 2.3) throughout the empirical testing. To be conceptually consistent, the methodology and results section follows the same structure as the literature review provided above.
Graph 4. Theoretical framework used in the empirical testing
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3
METHODOLOGY
According to Yin (2003), the research question type must define the used method for theory development and since the research question is conceptualized as a “How-question”, a case study is the ideal approach. Since, case studies are especially convenient when the research needs a descriptive analysis of the situation/phenomena. Additionally, this approach permits depth explorations of complex issues being suitable for business settings. (Crowe et al., 2011). As a result, this paper is grounded on qualitative data gained from a case study on multiple cases.
3.1 Case selection
Since this study is oriented towards problems presented during the early stages of funding ventures, the required qualitative information to answer the research question is mainly obtained from semi-structured interviews with the three main actors involved in the entrepreneurial finance environment (also known as an ecosystem). Such actors are investors, entrepreneurs, and experts. As the latter is not in the demand or supply side, they are meant to see the full picture of the market, adding valuable information to the study. Each of those actors within the funding instrument represents a case. Besides that, this research also takes secondary data into account, if possible, such as studies, websites, and articles related to each of the cases.
In order to reach relevant interviewees in the field, the data collection is performed in Colombia6, taking advantage of the broad social network of the researcher. By
relevant interviewees, it is meant people in high positions within each of the instruments and roles. For instance, speaking of the entrepreneur role, only CEOs of young ventures (no more than 4 years in the market) were considered. From the experts’ side, only high experience respondents in leading positions were sought. Table 10 summarizes the required interviewees per role and instrument. Consequently, there are eight cases, and thus eight interviewees in total for this study purposes. Finally, as all of the interviewees are linked with the Colombian entrepreneur ecosystem regardless of their role, they are representative of the Colombian and thus, for a developing country context.
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Investor
Entrepreneurs
Experts
Internal NA Internal funded
company founder NA Crowdfunding Reward Crowdfunding Financer Financial Crowdfunding Financer Crowdfunded company founder Crowdfunding expert
Accelerator Accelerator Financer Accelerator funded company founder
Accelerator expert Table 10. Criteria for the interviewees to be chosen.
3.2 Data Collection
As stated above, primary data is mainly relied upon to answer the research question. In this regard, the data was collected by carrying out personal and remote interviews with the respondents who were initially contacted through different channels as email and mobile phone. The period required to conduct all the interviews was six weeks. A total of eight participants and interviews were performed with people from different organizations and backgrounds that fit in the criteria previously described. A summary of the cases is shown in Table11.
Investors
Entrepreneurs
Experts
INTERNAL FUNDS Name NA Jorge Diaz NA Company/Organization GMCPosition Founder and CEO
CROWDFUNDING
Name Erika
Davila
William
Camacho Weymar Garcia Daniel Aguilera Company/Organization Kickstarter Investlatam Pura pulpa BVC (A2censo)
Position Backer
(reward)
Backer
(debt) Founder and CEO Project Leader ACCELERATORS
Name Didier Quiroz Sebastian Baquero America Castiblanco Company/Organization 500 startups Ruedata Innpulsa Position Venture Partner Founder and CEO Vice-president of
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block was intended to test, if possible, the suitability of the financial theories with the interviewee’s experience and knowledge. The third block of questions was aimed to identify the adverse selection concerns, signals, and solutions from the interviewee´s point of view. Likewise, the fourth and last block of questions deal with the concerns, signals and potential solutions for moral hazard issues.
3.3 Controllability, reliability and validity
In order to ensure the quality of the research, controllability, reliability, and validity need to be met. Controllability is necessary to guarantee that this study can be replicated. Therefore, electronic memos will be used in order to highlight the essential aspects identified during the conversation and observations. Besides that, recording equipment is used during the interviews, allowing for re-listening the conversations and identifying relevant elements that remained unnoticed during the first analysis (Eisenhardt, 1989).
To ensure reliability, the study needs to be replicable in other studies despite the independence of specific characteristics. In that regard, it is essential to make sure that the data collection instruments are systematically structured. To mitigate researcher bias (the researcher influencing the respondents to get desired answers) it is recommended to establish a clear structure for the interviews and its outcomes (Yin 2003). To accomplish those, a standardized protocol and questionnaire which was developed based on the theoretical structure Graph 4. The complete questionnaire made for each case can be found in Appendix A.
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4
RESULTS AND DISCUSSION
In this chapter, the data obtained from each interview will be presented starting with within-case analysis in section 4.1 and followed by a cross-case analysis in section 4.2 in which the analysis and findings are shown and discussed based on the theoretical framework developed (see Graph 5).
Graph 5. Questionnaire and results framework
4.1 Results (within case analysis)
Within this subsection each presented case follows the same structure beginning with an introduction aimed to provide basic information of the interviewee’s background and followed by a thorough review and analysis of each interviewees' thoughts and answers.
4.1.1 Internal Funds
Jorge Diaz (GMC International)-Entrepreneur Introductory information
Jorge Diaz is a Colombian entrepreneur who is currently settled in China due to his business activities. He is the CEO and founder of GMC International, a luxury jewelry company established in 2016. With his company, he targets when he identified that foreigners, especially Chinese people, love who to come to shop purchase emeralds at his family shop in Bogota, capital of Colombia. After establishing important social connections with Chinese executives and organizations settled in Colombia who connect him with potential clients in the Asian country, he decided to travel to Beijing, to commercialize luxury emerald-made jewelry. Nowadays, GMC International is a
Introductory information
Entrepreneurial finance market view
Suitability of existant theories
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four-employee company specialized in trading certified Colombian Emeralds in the Chinese market.
Case analysis
Jorge refers to the entrepreneurial market as "complex," stating that the financial instruments are hard to reach, especially for him, whose business is operating in a "very capital-intensive market" making the financing options scarce. In this regard, the capital intensity of the businesses is barely mentioned in the literature when it comes to the discussion of the information asymmetry problems between funders and entrepreneurs. The latter is supported as Jorge states "there is no chance to insure my merchandise, banks and other credit entities do not bet on me and in general in these kinds of projects”. Considering that difficulty in raising the funds, GMC international financial scenario was limited only to strong ties; FFF (Family, fools and friends). Another relevant actor brought up several times in the conversation, were the business angels, individuals that Jorge referred to as “wealthy with high knowledge in this industry”. Since they understand the dynamics and particularities of the business, the information asymmetry barriers were low and thus, they were willing to invest in the project. However, as Jorge was fully confident on the project’s success, he decided to fund his project only with its personal and family savings. This decision leads the project to an underinvestment problem, an issue often mentioned in the entrepreneurial literature, threatening the firm’s existence. Despite Jorge claims the benefits from Internal funding as "there are no transaction cost, no bureaucracy, and no endless procedures”, it is inferable that the main driver for him to prefer internal funds over external ones was the over-optimism concerning the project returns as he did not want to share the potential revenues. Finally, as Jorge was risking its own capital, his behavior towards the money expenditure was very conscious and thrifty. This outcome was expected, since moral hazard problems only occur when one party (agent) uses the money on behalf of the other (principal).
4.1.2 Crowdfunding
Weymar Garcia (Pura Pulpa)-Entrepreneur Introductory information
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with a company which imports fruit pulp and frozen vegetable extracts from Colombia and commercialized them through retail supermarket chains in Chile.
Case analysis
His experience and kind personality, as well as wide-ranging social connections is likely the reason why Weymar's view of the entrepreneurial finance market is not as opaque as it is for other entrepreneurs. In fact, he is fully updated with new financial instruments as accelerators, different crowdfunding platforms and even government programs and grants from Chilean and Colombian entities. However, this social aspect of his personality was not enough for him to getting funds from those sources at his venture early stage as "there were many requirements and procedures before getting the money". As stated in theory, those referred requirements were the natural mechanisms used by finance providers to decrease information asymmetry issues but it seems he couldn’t get a signal back to them. As a result, the resources needed to ramp up production at his company at a very early stage were only gotten from a business angel. This individual had specific knowledge and experience in the retail industry that wreck information asymmetry barriers and made the deal possible. When the company required further capital, he decided to apply for crowdfunding as a suggestion from a close friend who has experience in the entrepreneurial field. As this individual introduced him to the founder of the Broota crowdfunding platform, Weymar estimated the process to get the funds to be easy. Although that was not the case and he had to apply for the funds as any other project, it was a signal that encouraged and made him believe he had higher chances of success. In this regard, the social interaction between the parties was a remarkable signal that made the approximation between parties (entrepreneur and funding provider) possible.
More attention is needed regarding the fact that Broota crowdfunding platform required all projects to raise 30% upfront of the total amount they were asking in the platform from other finance providers. This requirement follows the theory of social proof and validation, and also seeks to assess the entrepreneurial team capacities of selling their projects. Therefore, for Broota platform this is apparently an effective filter concerning the project selection and for the entrepreneur it acts as a first and useful step to test the idea viability.
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Weymar mentioned several times that one’s reputation is crucially important as within these ecosystems you end up getting to know everyone.
Erika Davila (Kickstarter)- Investor (donation-based) Introductory information
Erika Davila is a Colombian engineer and MBA candidate from one of the most prestigious universities in the country. She was introduced to the crowdfunding platforms by a friend who asked her for funds towards a campaign that she ended up supporting. To date, Erika is a frequent and active user of reward and donation-based crowdfunding and searches for new campaigns daily. As a result, she has backed around seven projects from various fields such as social, technological, and artistic. By these means, she has used a large number of platforms like Indiegogo, Kickstarter, and kiss kiss bang bang.
Case analysis
Based on the interview, it was clear that Erika’s goals regarding her investment in crowdfunding platforms as Indiegogo and Kickstarter were merely social. In that regard, she was not looking for returns or profits but rather for personal satisfaction. Neither, she was interested in sponsoring projects associated with traditional products and industries. She was, indeed, looking for innovative, disruptive, or green projects, that share her life vision. From this, it is possible to infer that her high degree of enthusiasm could bias her decisions when choosing the project. In other words, as long as she feels connected to the project, she is willing to fund it, no matter if there are high levels of risk involved. However, she mentioned several times, that when choosing a project, she relies on the social-virtual interaction of the project not only within the platform: "I start looking at the people’s comments on the projects, I also stalk the leading team and their reputation from previous campaigns not only in the crowdfunding website but on social media". Additionally, Erika mentioned in different times during the interview, that she is aware of the high risk when investing in projects through its settings, especially because the platforms clearly warns that entrepreneurs might behave opportunistically with her resources, However, she was willing to bear all of them. On this subject, it seems that the potential value the project can deliver to her surpasses the information asymmetry barriers, enabling her to sponsor entrepreneurial projects in the platforms.
William Camacho (Investlatam)- Investor (debt-based) Introductory information
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capital in the retail estate industry, he decided to look for further options in which the capital returns would be more steady than in the properties sector. When doing this investment alternatives search, William accidentally found a website called investlatam, which works as a debt-based crowdfunding platform where the investor is offered interest return rates by borrowing money to different projects. Since then, he has invested in five different companies, all of them at different life stages and operating in diverse industries that offer different return rates.
Case analysis
William is an analytical person who tries to assess and quantify all the facts prior to making a decision, at least when it comes to investing his money. He has a clear idea of how the return/risk ratio needs to be for becoming a “logical investment”. In this regard, he seemed frustrated with not finding a suitable vehicle to invest his capital: "it is not easy to find a good and profitable investment instrument in Colombia; the rates are simply too low". From this statement, it can be deduced that the market for investors in Colombia is dispersed, and perhaps atomized. In other words, it seems that an investor willing to invest his/her resources will struggle to find a suitable investment vehicle as the market is not well connecting supply and demand although there are many actors on both sides. As a result, William's arrival in crowdfunding platforms was random. He liked the fact of having many projects to assess, involving varying return rates and associated risks. As he was given further information on the projects to complete an assessment and do a “wise” selection, he decided to give a certain project a try through the debt-based crowdfunding platform called Investlatam. Two important takeaways can be derived from the previous information. At first William randomly opted for an investment vehicle which apparently suited his financial and personal needs, supporting the idea of a disconnection between the supply and demand side in the Colombian market. Second and equally important, he chose Investlatam among many other platforms because a reputed organization he knew called Uniandinos certified their website. The latter highlights the importance of a third-party endorsement as a quality and trustworthy signaling agent that decreases information asymmetry barriers. Regarding project selection, William mentioned another relevant aspect which was the level of funding already reached by the campaign: "I prefer those projects that many people have already backed" where, again, social proof and validity seemed to play a crucial role to tackle the opaque distribution of information between the parties.
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mechanisms they use and whether they work or not”. From this statement, it is also possible to conclude that for William, and perhaps for many other investors, a good selection process serves as a tool to mitigate both adverse selection and moral hazard issues.
Daniel Aguilera (A2censo) - Expert Introductory information
Daniel Aguilera is a Colombian finance specialist, who has broad working experience in the banking industry and was "hunted" in 2016 by the Colombian stock exchange or BVC (Bolsa de Valores de Colombia), a public company leading the Colombian capital market as the infrastructure operator. Daniel was the appointed leader for an ambitious project; the creation of the first financial crowdfunding platform in Colombia. In that respect, Daniel conducted market research for almost three years, which aimed at understanding the crowdfunding platforms modus operandi and, therefore, to introduce the product into the Colombian market. As a result, As2censo was officially launched in November 2019, the first debt-based crowdfunding platform in Colombia, and Daniel is one of the heads of its operations.
Case analysis
The broad use of microfinance by SMEs in Colombia was commonly mentioned by Daniel during the interview: "35% of our country SMEs use microfinance, that summarizes how inefficient the finance market is". The latter is a statement from which is inferable that the connection between entrepreneurs and financers is hindered by information asymmetry barriers. However, what is eye-opening here is that, as seen in the other cases, those information asymmetry barriers might only be weakened by individuals as mentors, angels or guides. In this regard, it seems that microfinancing is playing a two-sided role as they are closer to entrepreneurs (as mentors), perhaps better understand their businesses, and therefore can offer their financial services (as financers). From the entrepreneur’s point of view, micro financers might be the last resort to get funding from, though they are costly compared to other financing options.
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crowdfunding platform based on its reputation or trustworthiness, and the project based on the attractiveness of the risk/return ratio and the quality of the campaign in which innovation and creativity are highly rewarded.
Finally, since crowdfunding platforms can make use of legal mechanisms in case of any infringement, and can report the entrepreneurs in debt score databases if they are reluctant to pay, it is possible to conclude that moral hazard issues are mitigated first by avoiding adverse selection and second by executing those legal measures. 4.1.3 Accelerators
Sebastián Baquero (Ruedata)- Entrepreneur Introductory information
Sebastian is a Colombian entrepreneur currently based in Mexico City where he is attending the 500 startups accelerator 16th-week program with his company Ruedata, which was unexpectedly created. Briefly after he obtained his bachelor's business administration degree, he recognized a business opportunity, borrowed money from his parents, and established Imfrontier, an importation company that sells low-cost tires to transportation companies. Due to financial problems, the company was shut down five years after the foundation. However, acknowledging his knowledge of the industry, and the broad social network developed while leading Imfrontier, Sebastian decided to found a new venture named Ruedata which, by analyzing the data from the use and waste of fleets tires, provides recommendations to transportation companies aimed at saving fuel and money.
Case analysis
