Be Careful What You Ask For: Fundraising Strategies in Equity Crowdfunding

The so-called “FinTech revolution” is beginning to have a significant impact on the way new companies are financed. In the UK alone, it is estimated that at least 40% of early stage financing is now received via Equity Crowdfunding platforms, where the public (i.e., unaccredited investors, aka the crowd) invest in start-ups in return for equity. The UK is widely acknowledged as the most developed market, largely because the Financial Conduct Authority (the relevant regulator) adopted a laissez-faire approach in the early days of the industry. A 2017 report estimated over 300 successful investment campaigns in 2017, making crowdfunding the second largest investor category in the UK (by number of companies), after venture capital, but ahead of corporate investors or angel networks. Equity crowdfunding platforms are increasingly favoured by angel investors who contribute a substantial fraction of investments. Many regulators around the world are now following the FCA model, and equity crowdfunding is growing fast in much of the developed world.

Our central research question is what determines fundraising campaign outcomes in equity crowdfunding? We are not just interested in whether campaigns succeed or not, but how much money entrepreneurs actually raise for their ventures. A central theme is to distinguish whether certain entrepreneurs want to raise less money, a choice made by the entrepreneur, versus receive less money, a choice made collectively by the investors. The unique strength of our data is that in addition to the usual information about the amounts actually raised, we also observe specific choices made by the entrepreneur. First, at the beginning of the campaign, the entrepreneur sets a campaign goal, which is a signal of what s/he wants. S/he also specifies how much equity is issued in return. Second, at the end of a successful campaign that has met its campaign goal, the entrepreneur decides when to close the campaign. This decision reveals further information about the amount of money the entrepreneur truly wants, beyond what s/he asked for at the start. Our research therefore speaks to the importance of how entrepreneurs set their fundraising goals.

We find that teams with more entrepreneurial experience ask for more money upfront, have a higher probability of success, end up raising more money. Interestingly, the additional funding amount is fully reflected in the higher campaign goals, so once we control for goals, there is no more significant experience effect. This suggests that experienced entrepreneurs fully take their strengths into account when setting their investment goals. As far as business education, we measure it by whether founders have an MBA, although the results are very similar using other measures of business education. We find that teams with more business education ask for more money and higher valuations. Their success probability is the same, but the total amount of funding raised is significantly higher. Again, we find that this higher amount is fully reflected in their higher initial fundraising goals.

Concerning gender effects, the fraction of females in the team is associated with lower fundraising goals and lower valuations. This effect is driven by both female-only and mixed gender teams. We find that gender does not have a significant effect on campaign success. However, the amounts of money eventually raised are significantly lower for female teams. Even after we account for their lower investment goals and lower valuations, all-female and mixed gender teams still raise less money.

In a panel model based on daily investment flows, we jointly estimate investors’ investment and entrepreneurs’ stopping decisions, to further explain this last finding. We find that all-female start-ups attract lower daily investment flows, both before and after reaching their targets. Importantly, we find that female teams hold out for longer, i.e., they prolong their campaigns to raise additional money. While the evidence for this last finding is statistically not very strong, it hints at the possibility that even though female founders ask for less, they actually do want more funding. Overall, we note that it matters what entrepreneurs ask for, since the final amount of money raised is largely determined by their initial ask. Hence the title of the paper: “Be careful what you ask for, as you may get it.”