The Spillover Effect of Equity Crowdfunding (Journal of Applied Business and Economics)

Summary

• An estimated 49.4% of new businesses close within their first five years, with financial strain and capital shortages accounting for 38% of venture failures.p.1
• The study analyzes a multi-country dataset of 648 startups across 38 countries and 160 industries to evaluate cross-market financing spillovers.p.6
• The sample is geographically dominated by the United Kingdom with 386 companies representing 59.57% of all observed startups, followed by the United States at 11.73%.p.6
• Startups in the sample secured an average non-crowdfunded institutional investment of $21,553,770 alongside a median equity crowdfunding raise of $876,202.p.8
• Empirical regression results demonstrate that a 1% increase in equity crowdfunding capital is associated with a 0.219% increase in subsequent non-crowdfunded institutional financing.p.8
• The positive spillover effect of crowdfunding is larger in traditional non-technical sectors with a 0.34% increase in later financing per 1% raised, compared to a 0.25% increase in high-tech sectors.p.11

Key insights

1. Early-stage equity crowdfunding success is positively linked to the volume of subsequent non-crowdfunded capital raised from venture capitalists and institutional investors.p.1
2. Financial strain accounts for 38% of startup failures, highlighting widespread vulnerability in early-stage venture financing options.p.1
3. Public crowd participation generates quantifiable external market signals that bridge information asymmetry between early-stage founders and outside institutional investors.p.3
4. The positive impact of equity crowdfunding on subsequent funding shows no statistically significant difference between developed and developing economies.p.9
5. Equity crowdfunding signals produce a stronger positive effect on subsequent financing rounds in individualistic cultural environments than in collectivist societies.p.10
6. Venture capitalists in traditional consumer-facing sectors rely more heavily on public crowdfunding validation signals than venture capitalists evaluating complex high-tech ventures.p.11
7. Equity crowdfunding has a more pronounced positive impact on subsequent financing during funding winters when market capital is scarce.p.1