Elites vs Masses: Expanding Entrepreneurial Finance through Equity Crowdfunding

Equity crowdfunding (CF) platforms that connect startups with a multitude of investors online are fast emerging as an important source of entrepreneurial finance. In this study, we examine how equity crowdfunded (CF) startups perform relative to startups funded by traditional venture capital(ists) (VC). Controlling for the selection of startups, we find that CF startups raise less money and are less likely to funded by more successful investors in the subsequent round. They are also less likely to strike a successful exit. Such inferior performance of crowdfunded startups is explained by the attributes of investors who participate on CF platforms. CF investors tend to be less experienced and less successful than an average VC. The performance of the crowdfunded startups is at least at par with those funded by VCs with less of a track record. In fact, relative to less experienced and less successful VC-funding, CF is more likely to be followed by investment from more successful investors. Our results indicate that CF investors while substituting for less experienced and less successful VCs and expanding the reach of more successful VCs, are less able to provide value-added services to startups relative to VCs with a better track record.