On the Shoulders of Giants: Quality signalling in Venture Capital and Equity Crowdfunding

Abstract: The latest years, Equity Crowdfunding has experienced exponential growth as a way of financing new ventures. This study explores whether equity crowdfunding investors, or ''the crowd'', interpret signals of venture quality in a way similar to professional Venture Capitalists ("VCs") and also if their investment decisions are subject to similar constraints and biases. For the purpose of this research the relevant literature streams related to Venture Capital investment decision-making processes were explored. Data for 288 successfully completed projects on Crowdcube, a UK platform for equity crowdfunding, was collected and OLS regressions were utilized. The findings were mixed and indicate that, to a certain extent, the crowd interprets signals regarding the quality of the investment proposition in a similar way as VCs. These signals were related to the entrepreneurial and professional background of the founder and the management team, the third party endorsements they have received, their commitment and level of preparation as well as the overall attractiveness of the business idea. Also Equity Crowdfunding was found to relax investment decision biases related to gender factors.