1 Introduction
In a perfect world, entrepreneurs and small- and medium-sized enterprises (SMEs) would have easy access to finance, which would stimulate innovation and drive subsequent growth (OECD
2012). However, in reality, a disparity exists between the supply and demand for financing
1; this disparity is mainly driven by financial institutions, such as commercial and investment banks, that financially under-serve small firms. The contention is that SMEs demonstrate inherent riskiness and weaknesses such as a lack of robust business plans and insufficient capital. Nonetheless, with SMEs typically representing a major business segment, they form the backbone of an economy and represent an essential source of economic growth; it is thus imperative to provide alternative financing options for this business segment (Robu
2013; Gros
2016). Crowdfunding is a recent phenomenon within financial services; in particular, the global financial crisis of 2008 gave impetus for banks to retrench from riskier financing (loans to new businesses), and provided traction toward crowdfunding as an alternative to traditional bank-financing (Ahlstrom et al.
2018; Dunkley
2016).
2 An expansive volume of literature has highlighted this phenomenon and how it is closing the financing gap (Belleflamme et al.
2014; Cichy and Gradon
2015), including studies that examine any possible mismatches between firm characteristics and financing instrument(s) (Naudé
2010).
Against this background, prior research on equity crowdfunding (ECF) has focused on issues that are tied to information asymmetry concerns, since investment in this area characterizes decision-making under extreme risk. Ahlers et al. (
2015) argue that information asymmetries prevalent in equity investments exacerbate adverse selection risk for investors in young firms. In addition, limited investor expertise means that there is greater uncertainty associated with equity investments, resulting in both adverse selection risks and moral hazard problems (Steinberg
2012; Mohammadi and Shafi
2018; Fama and Jensen
1983). Researchers also explored various avenues within the crowdfunding environment such as crowdfunding as a value-creation tool (Baumgardner et al.
2015; Ahlers et al.
2015), with social capital identified as a key factor in how entrepreneurs succeed in their crowdfunding campaigns (Vismara
2016; Agrawal et al.
2015) and achieve crowdfunding success through the start-up life cycle stages (Paschen
2017; Hornuf and Schmitt
2016). A further area of research that has only recently attracted researchers’ attention is post-offering outcome of ECF campaigns or what happens after a successful crowdfunding campaign. For instance, Signori and Vismara (
2018) emphasize the role of investor participation and the presence of qualified investors as important determinants of post-campaign success, although, as they found, most current exits in equity crowdfunding are bankruptcies.
Moreover, as Signori and Vismara (
2018) showed, a significant proportion of companies that raised funds through crowdfunding went on to raise further capital, indicating that the prospect of a monetary return existed for initial crowdfunding investors. Hornuf et al. (
2018) found that both the number of senior managers and the number of initial venture capital investors had a positive impact on likelihood to obtain post-campaign financing, although they also found that the average age of the senior management team had a negative impact. Walthoff-Borm et al. (
2018) compared the performance of equity-crowdfunded firms to similar firms that raised capital from other sources. While equity-crowdfunded firms exhibited significantly higher failure rates than matched firms, they found that nominee shareholder structures in ECF were positively associated with firm financial performance. Studies have also examined how investors’ access to a two-sided online social media platform (Cumming and Zhang
2016; Evans and Schmalensee
2016; Rossi and Vismara
2017) can become a market-maker (Estrin et al.
2018). For example, social media marketplaces may facilitate the transfer of knowledge through the use of various social network instruments such as posts, followers, and comments. We build on this research stream and evaluate whether ECF has an impact on innovation and growth opportunity (GO), thus further contributing to our understanding of what happens to ECF firms after a successful crowdfunding campaign. Although a few studies exist on the link between crowdfunding and SMEs research on the crowdfunding-innovation relationship is limited, with publications emphasizing (i) cost of crowdfunding for SMEs (Kuzma
2015), (ii) crowdfunding as a mechanism for SME financing (Cichy and Gradon
2015), and (iii) the model of crowdfunding to best support SMEs (Naudé
2010).
The growing significance of ECF, combined with the potential benefits to SMEs and a lack of empirical research, highlights a gap for research (Kuzma
2015; Bruton et al.
2017). Accordingly, in this study, we examine whether the utilization of crowdfunding leads to an increase in innovation and GO, ultimately posing as a catalyst for SME growth. In the domain of equity crowdfunding, tapping the crowd for financial resources entails a spectrum of related processes between the entrepreneurs and the crowd. For example, investors can use their communication with peers and entrepreneurs as a learning tool. Therefore, entrepreneurs can realize several goals, like testing products in order to develop their brand and promoting a loyal customer base (Ordanini et al.
2011; Schwienbacher and Larralde
2012; Estrin et al.
2018). Moreover, information cascades that emerge when network participants can watch the investment decisions of other investors may allow for the speedy and costless transfer of knowledge from customers to the entrepreneurs (Vismara
2018). We thus investigate the extent to which ECF impacts performance and growth opportunity of SMEs through the influence mechanism of the wisdom-of-crowd effect (Polzin et al.
2017; Herve and Schwienbacher
2018). Our analysis of data collected through the Fame BVD database for SMEs operating in the UK for the 2014–2017 period suggests that ECF does not improve SME innovation; however, SMEs exhibited an increase in growth opportunity (GO) following the use of crowdfunding. Return on assets (ROA) regression results provided further support for a positive impact of ECF on SME performance. To address the potential issues of endogeneity and self-selection, we use propensity score and controlled firm-matching methodologies to eliminate any unobserved factors which may simultaneously determine crowdfunding and SME performance.
The paper proceeds as follows. The following section explores the existing literature on the emergence of crowdfunding, utilization of crowdfunding by SMEs, and determinants of SME growth. With numerous publications on crowdfunding and SMEs, a literature review is deemed imperative to highlight the existing research gap and validate the significance of our study. Moreover, we identify the hypotheses which will be examined in this paper. The next section explains the selected research methodology, and describes and discusses the sample data, test results, and findings. The final section concludes with the limitations and implications of this study, along with solutions for overcoming existing problems when undertaking future research.
3 Research methodology
The global crowdfunding market has gained serious propulsion following technological developments, disruptive innovation, and financial disintermediation, as well as the events of the global financial crisis of 2008 (Ahlstrom et al.
2018). To track the performance of ECF firms, we employed multiple sources of information. We first used Crowdcube and TechCrunch to find information about SMEs with equity crowdfunding. We then obtained longitudinal accounting data on these firms from Bureau Van Dijk (BVD) Fame, which allowed us to use accounting data on all of our sample firms. All privately held firms in the UK are required to publish annual accounting data on Companies House. We collected patent data from BVD Orbis Europe; BVD acquires the patent data from the PATSTAT database—a worldwide database that contains bibliographical and legal status patent data. Four years of data were employed in this study; we started collating data on crowdfunding campaigns that were completed in 2013, with the following 4 years being assessed (Bureau Van Dijk
2017). ECF platforms in the UK have generated large financial flows for entrepreneurs, which accounted for nearly 40% of the global equity crowdfunding market in 2016 (Dushnitsky et al.
2016). It is estimated that, by 2016, ECF supplied more than 15% of the UK’s early-stage finance (Nesta
2016). Moreover, by June 2017, drawing on more than 400,000 registered potential investors, crowdfunding platforms including Crowdcube had supplied equity funds of almost £500 million for 1538 entrepreneurial pitches. It is important to mention that the percentage of ECF as a proportion of the total UK seed and venture stage equity investment has grown rapidly from just 0.3% in 2011 to 9.6% in 2014 and 15.6% in 2015 (Nesta
2016; Vulkan et al.
2016).
Because crowdfunding is still in its growth phase and has not yet been assessed as a metric on financial databases, selected companies were sourced from the Business Cloud (
2016),
6 which highlighted companies that had successfully utilized crowdfunding on the UK Crowdfunding platform, Crowdcube. Consequently, our initial sample included 240 UK SMEs. The SMEs had fulfilled the SME criteria as outlined by the European Union (
2004) of having a maximum revenue of £25 ($30) million, and also had Fame BVD’s SME indicator. However, several companies had to be eliminated from the data sample for numerous reasons. With the most recent financial data required for companies in our sample size, we decided to exclude 10 companies from our sample, resulting in a sample size of 230 companies. This would ensure a more balanced dataset, thus increasing the reliability of our results. During the data collection process, income statement data, which were required for regression testing between crowdfunding and innovation, were not available for five (out of the available 230) companies. Therefore, these five companies were excluded from the linear regression testing between crowdfunding and innovation. However, as they included data relevant for the regression testing between crowdfunding and GO, they were included in the sample size.
3.1 Variables selection
In this study, we examine the impact of crowdfunding as the independent variable, and gauge its impact on the dependent variables,
innovation and
GO. Table
1 presents the study’s variables and their definitions/operationalization. Crowdfunding has a goal to gather money for investment usually via an online platform (Ahlers et al.
2015; Vismara
2016). The fundraising typically targets a small group of specific investors; however, the product or service of the entrepreneur needs not to be a niche one. This is because the online public audiences are large and can be from any part of the world and not restricted to a particular country. Each individual investor can deliver a relatively small amount of money to the company or entrepreneur and the total amount of money ultimately funded could be huge in terms of the size of the target audience (Belleflamme et al.
2014). It is in this context that Decarre and Wetterhag’s (
2014) study on the post-funding impact of crowdfunding used funds raised as a percentage of crowdfunding goal as a proxy for crowdfunding. However, the amount raised as a percentage of total equity (shareholders’ funds plus money raised) could also be utilized as a proxy for crowdfunding, as it is viewed as a more encompassing and indicative measure than that highlighted by Decarre and Wetterhag (
2014) and others. Cefis and Marsili (
2005) suggest that innovation can simultaneously allow new firms to enter the market while helping established firms secure their competitive positions and thus their survival. Zhou and Li (
2012) explain radical technological innovation in terms of the state of the internal knowledge base of an organization, combined with strategies for augmenting that knowledge to spark innovation. In particular, they find that firms with broad knowledge bases (knowledge of many topics), benefit most from internal knowledge sharing processes.
Table 1
Variables definition
Innovation | Net income growth rate |
Patent | Patent is the number of granted patents |
GO | Growth opportunity refers to the annual sales growth to total asset growth. The growth of sales and total assets are calculated by the difference of closing balance and opening balance in corresponding accounts in one accounting year |
CROWDF | Amount raised as a percentage of total equity (shareholders’ funds plus money raised) |
AGE | Firm age is the numbers of years since the firm’s establishment |
TECH | Technology firms is a dummy variable, which is set to 1 for firms operating in the technology sector; otherwise, it is zero |
SEED | SEED takes value one if a firm has received governmental seed investment; otherwise, it is zero |
VC | If the SME introduced a lead investor (VC or angel), it takes value one; otherwise, it is zero |
MGT | Number of directors and managers on each firm’s board |
On the other hand, firms with deep knowledge (narrow expertise) benefit most from acquiring knowledge from outside the firm and integrating it—enhancing the wisdom-of-crowd effect (Herve and Schwienbacher
2018; Polzin et al.
2017). This is a sophisticated and networked view of the knowledge process for innovation generation. It considers how external knowledge might be captured, although the emphasis is also placed on the internal combination of knowledge. Understandably, innovation can be a difficult concept to measure due to its abstract nature; nonetheless, among many researchers, it is viewed as a component of competitiveness (Bruton et al.
2017; Herve and Schwienbacher
2018). A growth predictive system for SMEs may include innovation measures such as (1) innovation input ratio (innovation expenditure as a percentage of sales) and (2) net income growth rate (net income in current period less net income in previous period, as a percentage of net income in previous period). This is an indicator of the level of innovation in a company. Moreover, patents can be used as another proxy for a small firm’s innovation effort as these show the technical and R&D capabilities of the firm. Patents are also viewed as a valuable positive signal decreasing information asymmetry for investors (Hsu and Ziedonis
2013). For example, Walthoff-Borm et al. (
2018) examined the post-campaign financial and innovative performance of ECF firms, and found that the equity-crowdfunded firms make 3.4 times more patent applications than matched non-ECF firms. In terms of measuring small firm growth, we can create a growth predictive system, which involves a plethora of growth indicators, such as solvency capabilities (gearing ratio), innovation (net income growth) and firm assets (TA or employees). As aforementioned, we identified numerous measures of firm growth, including sales revenue, total assets, employees, profit, and more. However, in this study, we used growth opportunity (GO) as it indicates firm growth within the context of sales performance, which is linked to our argument that ECF could be a channel through which the wisdom-of-crowd effect prevails.We include several control variables in our regression models, as described in Table
1. Age of firm can be observed directly as it means the number of years in operation. It is well known that nascent firms suffer from liabilities of newness and smallness (Stinchcombe
1965) and they also have short track records (Mohammadi and Shafi
2018). In our data, crowdfunders invest in firms that are 3.7 years old. It is also well known that technology firms are more engaged in developing and commercializing innovative projects than are other firms (Hall and Lerner
2012). Technology firms comprise 33% of the total firms. The involvement of prestigious external stakeholders (e.g., reputable VCs) may increase the legitimacy of the new firm. Several studies including Stuart et al. (
1999) argued that small firms can borrow the reputation and legitimacy of those firms. We also control for governmental seed investment; and whether the SME introduces a lead investor (VC or angel). We control for location in some of our analyses. As discussed, it is likely that entrepreneurs have a richer endowment of social capital from their home country (Dahl and Sorenson
2012). Hornuf et al. (
2018) investigate whether follow-up equity crowdfunding campaigns impact funding by outside BAs/VCs. They showed that the number of senior managers is a significant predictor, among other factors, for increasing BA/VC follow-up funding after the latest successful equity crowdfunding campaign. Cumming et al. (
2019) suggest that an ECF firm’s formal board of directors with prominent directors may have more substantive effects on its behavior and success after the investment. In our analysis, we thus include the number of directors and managers on each firm’s board. To capture possible temporal trends, we insert year fixed-effect in all models.
5 Results
Our empirical analyses are divided into two aspects—the first one is the investigation among five crowdsourcing-related factors on the whole through ordinary least-squares regression and the second one is the influence of these factors on firms’ growth opportunity. The regression results are presented in Table
4. The adjusted R squares in Table
4 indicate that all of the five independent variables explain 6.1% of innovation and 2.7% of patent-related activities.
Table 4
Estimated ordinary least-squares regression results
CROWDF | − 1.136* | 0.046 | 0.267*** | 0.067 | 1.563 | 0.000 | − 2.263 | 0.025 | − 0.564 | 0.043 | − 1.289 | 0.187 |
AGE | 3.867 | 0.026 | 2.395 | 0.031 | 1.498 | 0.225 | 1.617 | 0.121 | 7.683*** | 0.024 | − 3.864 | 0.000 |
TECH | 0.000 | 0.001 | 0.163 | 0.052 | 1.634 | 0.583 | 0.231 | 0.720 | .003* | 0.001 | 2.371 | 0.046 |
SEED | 16.583* | 0.071 | 0.138* | 0.075 | 3.842 | 0.009 | 2.570 | 0.009 | 6.789 | 0.066 | 1.036 | 0.291 |
VC | − 0.243 | 0.001 | 0.286 | 0.084 | 1.538 | 0.753 | − 0.426 | 0.653 | − 0.115 | 0.001 | − 0.242 | 0.752 |
MGT | 1.531 | 0.036 | 0.156 | 0.053 | 1.376 | 0.482 | 1.387 | 0.325 | 1.789 | 0.078 | 1.378 | 0.462 |
(Constant) | − 10.555 | 0.109 | − 11.677 | 0.126 | − 0.923 | 0.563 | − 0.965 | 0.335 | 53.473*** | 0.100 | 5.367 | 0.000 |
R2 | 0.041 | 0.076 | 0.067 | | | |
Adjusted R square | 0.061 | 0.027 | 0.048 | | | |
F | 2.734* | 5.398*** | 2.753* | | | |
Regression SS | 0.968 | 1.548 | 0.962 | | | |
Residual SS | 21.173 | 17.372 | 21.387 | | | |
Hypothesis 1 (H
1) assumes the positive relationship between crowdfunding and both the innovation proxies. As indicated in Table
4, crowdfunding is negatively related to innovation (model I) with statistical significance (− 1.13) but in the patents model (model II), the relationship is negative without significance (− 0.56). In short, the negative relationship exists in two innovation measures and crowdfunding, disconfirming H
1. Interestingly, these findings contradict Paschen (
2017) and Stanko and Henard (
2016) who posited that crowdfunding leads to an increase in innovation, through increased idea generation and feedback from backers (i.e., the wisdom-of-crowd effect). Likewise, Walthoff-Borm et al. (
2018) had earlier found that the ECF firms made 3.4 times more patent applications than matched non-ECF firms. The second row in Table
4 reflects the influence of age on innovation and patents. The coefficient of age with innovation is positive and non-significant, while the magnitude of its economic effect is 4.03.
This result follows the agency theory which indicates that firms are able to reduce information asymmetries between investors and managers over time (Fama and Jensen
1983). This is also important as Ahlers et al. (
2015) and others have argued that information asymmetries prevalent in equity investments may exacerbate adverse selection risk for investors in young firms. The relationship between technology companies and patents is positive but not significant. From the perspective of a technology company strategy, innovation-related activities are essentially their core operations and must be performed to retain their competitive position in the market (Hall and Lerner
2012). However, it is not necessary for them to patent all their innovations. Consequently, considering the innovative nature and flexibility of their operations, the positive effect of innovation is tenable but not obvious in the patent model. In addition, there is a notable positive correlation between seed funding and innovation while the economic magnitude of the effect is 0.970 (the corresponding coefficient is 16.58 and is statistically significant at the 10% level*). According to the statistics in Table
4, there is an adverse association of VC to innovation and patents with the coefficient values of − 0.24 and − 0.11, respectively. In theory, they support the crowdfunding literature which indicates that, from the perspective of the firm, social financing is superior to venture finance.
As a result, SME firms are able to rely more on ECF financing but meanwhile decrease the dependence on venture capital. In this section, the last hypothesis we test is the relationship between crowdfunding and SME growth opportunity. The influence of crowdfunding on the GO model is described next in Table
4; the model presents the estimates of OLS model predicting growth opportunity (model III). The coefficient of crowdfunding is positive and statistically significant, suggesting that crowdfunders are more likely to be associated with a SME that is pursuing a growth path. The association of crowdfunding to GO is statistically significant at the 1% level, supporting H
2. It is concluded that, compared to innovation, firms pursuing a growth strategy that offers flexibility and low cost are more likely to be influenced by crowdfunding. This is potentially due to the provision of crowdfunding funds as an enabler to invest in long-term research and development and capital, which will further propound growth in later stages of the SME life cycle—for instance, at the expansion stage. Similar to Hornuf et al.’s (
2018) result, we also find that management team has a positive influence on the growth opportunity of SME firms, as the coefficient of management team is positive and statistically significant. Although Hornuf et al. (
2018) are more concerned with the question of follow-up equity crowdfunding campaigns and how they impact funding by outside BAs/VCs, our results suggest that SME management teams can play an important role in how new funds may be effectively utilized toward achieving growth and development.
We also checked for potential multicollinearity problems in the model. Per definition, when two variables have a correlation of 1 or − 1, they measure the same thing; thus, multicollinearity occurs. To check multicollinearity, we implemented the “collinearity diagnostic” as part of the “coefficients” table. A VIF (variance inflation factor) value above 10 also suggests multicollinearity, and we found a low value of VIF. We calculated the VIF excluding the time dummy. Thus, in conclusion, all independent variables have correlations with the dependent variable but no multicollinearity exists (VIF = 1.190 for crowdfunding amount, 1.041 for firm age, 1.193 for technology firms, 1.036 for seed investment, 1.012 for VC firms, 1.191 for management teams). The first goal of this study was to explore the area of crowdfunding and its relationship with innovation and growth in the province of SMEs. As previously stated, hypothesis testing was undertaken to assess whether there is a relationship between crowdfunding and innovation, and between crowdfunding and GO. After performing OLS regression analysis, H
1 (use of crowdfunding by a SME will increase the level of innovation) was rejected and H
2 (use of crowdfunding by a SME will increase GO) was accepted, providing an indication on the role of crowdfunding and how it supports SMEs through the idea generation, provision of feedback from backers, and the subsequent impact on firm growth. Previous studies conducted by Paschen (
2017) and Stanko and Henard (
2016) concluded that crowdfunding affords a value proposition to SMEs, through enhancing a valuable organization base and also through non-monetary benefits such as learning from external feedback, leading to innovation; however, the results produced in this study do not verify this argument. On the other hand, we find support for the argument that, with GO used as a proxy for firm growth, the use of crowdfunding leads to an increase in firm growth, through a reduction in the cost of financing and the provision of knowledge from external backers. Combining the findings of previous studies (Ordanini et al.
2011; Estrin et al.
2018) and results of this study, we can determine that ECF does act as a catalyst for growth, thus confirming the impact of the wisdom-of-crowd effect (Polzin et al.
2017; Herve and Schwienbacher
2018). Per the principle of the wisdom-of-crowd, the crowd can solve problems or make decisions with more wisdom than an individual (Schwienbacher and Larralde
2012).
We now shed light on the impact of crowdfunding on SME performance. In this section, our goal is simply to show that, like the above analysis, ECF plays a major role in how SMEs can achieve their performance-related goals. In this sense, our current analysis complements the OLS regression tests that are used to predict whether a company has been effective in achieving innovation-/growth opportunity–related considerations. Prior empirical studies have sometimes used both market-based measures and traditional accounting ratios as predictors of performance. We use return on assets (ROA) as our performance measure, which is the net income as a percentage of total assets. The regression model is as follows:
$$ {\displaystyle \begin{array}{c}{\mathrm{ROA}}_{\mathrm{i}}=\upbeta 0+\upbeta 1{\mathrm{CROWDF}}_{\mathrm{i},\mathrm{t}}+\upbeta 2{\mathrm{AGE}}_{\mathrm{i},\mathrm{t}}+\upbeta 3{\mathrm{TECH}}_{\mathrm{i},\mathrm{t}}+\upbeta 4{\mathrm{SEED}}_{\mathrm{i},\mathrm{t}}\\ {}\upbeta 5{\mathrm{VC}}_{\mathrm{i},\mathrm{t}}+\upvarepsilon \end{array}} $$
(2)
where CROWDF is the crowdfunding amount raised as a percentage of total equity (shareholders’ funds plus money raised); AGE is the number of years in operation; TECH is set to one for firms operating in the technology sector; otherwise, it is zero; and SEED takes the value of one if a firm has received governmental seed investment; otherwise, it is zero. If the SME introduced a lead investor (VC or angel), it takes the value of one; otherwise, it is zero; and
ε is the error term.
From Table
5, it can be observed that crowdfunding has the largest coefficient value; this means the predictor makes the overwhelming contribution to describe the variance of the dependent variable. The economic magnitude of the effect (0.970) confirms this trend, as well as the contribution of the other independent variables. We thus find support for H
3. For age, the economic magnitude of the effect (19.665) shows the trend to be on an upward trajectory. Meanwhile, the independent variable VC has the smallest economic effect (0.074), which means venture capital has the weakest contribution to demonstrate the variance of the dependent variable. Continuing this analysis, the other independent variables with influence on ROA, in descending order, are seed and technology companies. The R square value of 0.262 (the adjusted R square value is 0.253) indicates that 26% of the variance in ROA can be explained by the combination of crowdfunding, age, technology company, seed funding, and venture capital.
Table 5
Performance regressions
CROWDF | 0.238*** | 0.054 | 1.284 | 0.000 | 0.267*** | 0.061 | 1.487 | 0.000 |
AGE | 0.671*** | 0.041 | 2.672 | 0.000 | 0.221*** | 0.041 | 1.331 | 0.000 |
TECH | 0.151 | 0.025 | 0.271 | 0.672 | 0.022 | 0.001 | 0.041 | 0.658 |
SEED | 0.173* | 0.086 | 1.362 | 0.007 | 5.816 | 0.041 | 0.167 | 0.441 |
VC | 0.054 | 0.019 | 0.467 | 0.853 | 0.003* | 0.031 | 1.245 | 0.583 |
MGT | 0.136 | 0.049 | 0.372 | 0.629 | 0.026 | 0.047 | 1.179 | 0.486 |
(Constant) | − 11.873 | 0.263 | − 0.872 | 0.489 | − 10.648 | 0.284 | − 0.623 | 0.487 |
R2 | 0.262 | 0.251 |
Adjusted R square | 0.253 | 0.258 |
F | 2.483* | 2.583* |
Regression SS | 0.956 | 0.872 |
Residual SS | 22.583 | 18.637 |
When examining firm performance outcomes, endogeneity can be a potential concern, as crowdfunding investments are not randomly determined. We employed the following methodological approach to deal with the potential issue of endogeneity. It is likely that crowdfunding investments are made in SMEs that are perceived as less risky and having higher growth and better performance. We first implemented a propensity score-matching method to eliminate heterogeneities between firms with high and low crowdfunding. Accordingly, we pair-matched firms with high versus low crowdfunding, based on the following criteria: performance (proxied by ROA), firm age (i.e., years since incorporation), and firm assets (total assets). We re-ran Eq. (
2) using the propensity score-matched sample to deal with potential heterogeneities between SMEs with high and low crowdfunding. The results are reported in Table
5 (model II). The estimated coefficient of the key explanatory variable,
crowdfunding, remains positive and significant when it is lagged by t-1 years. These findings demonstrate that the results in model 1 are not driven by endogeneity or self-selection. In this procedure, we used crowdfunding as an explanatory variable which may have biased our results. We therefore created a new sample of non-ECF SMEs that matched our ECF SMEs on key firm dimensions (see Table
3). We used this control sample of non-ECF SMEs to test their characteristics against our ECF SME characteristics. However, for the tests to be representative of a real environment each ECF SME had to be matched against a non-ECF SME. For choosing appropriate samples in empirical studies of VC/crowdfunding effects, many scholars prefer to use the paired comparison method by matching a sample group of VC/crowdfunded firms with another group of non-VC/crowdfunded firms as closely as possible by the firm characteristics and size. The paired comparison method or matching firm approach in VC research is mainly to give priority to similar operational scales and then divide enterprises by VC/crowdfunding backing and non-VC/crowdfunding backing.
Likewise, in this paper, based on the statistical stream in the previous part of the discussion, samples are divided into two comparison groups—namely the ECF SMEs and the non-ECF SMEs. We acquired matched SME data from fame, yielding a sample of 230 ECF SMEs and 225 non-ECF SMEs because it was not possible to find a good match for all ECF SMEs. To construct the matched sample, we first identified those firms that raised capital, but did not do so through ECF (i.e., non-ECF firms); that is these firms did not raise capital from Crowdcube or any other platform. We matched each ECF SME based on performance (proxied by ROA), firm age (i.e., years since incorporation), and firm assets (i.e., total assets) in the year of the first ECF campaign. Table
6 (model I for ECF SMEs and model II for non-ECF SMEs) reports our findings. The comparison results show that ECF firms have very different performance profiles from those of the non-ECF firms.
Table 6
Propensity score and controlled firm-matching results
AGE | 0.223*** | 0.067 | 2.362 | 0.000 | 0.116*** | 0.056 | 1.539 | 0.000 |
Tech | 0.167 | 0.018 | 0.189 | 0.542 | 0.034 | 0.001 | 0.028 | 0.673 |
Seed | 0.163* | 0.072 | 1.293 | 0.007 | 0.143 | 0.026 | 0.168 | 0.621 |
VC | 0.028 | 0.023 | 0.427 | 0.562 | 0.001* | 0.017 | 0.182 | 0.547 |
MGT | 0.137 | 0.024 | 0.374 | 0.536 | 0.048 | 0.063 | 0.125 | 0.684 |
(Constant) | − 13.764 | 0.356 | − 0.769 | 0.378 | − 13.374 | 0.328 | − 0.727 | 0.632 |
R2 | 0.256 | 0.232 |
Adjusted R square | 0.249 | 0.247 |
F | 2.372* | 2.138* |
Regression SS | 0.968 | 0.843 |
Residual SS | 23.537 | 17.694 |
6 Conclusion
With the recent phenomenon of crowdfunding disrupting the financial ecosphere, this paper set out to understand the dynamics behind equity crowdfunding. More specifically, it aimed to understand the relationship between equity crowdfunding and innovation, equity crowdfunding and GO, and ultimately, whether equity crowdfunding acts as a catalyst for SME performance. By building on and extending the extant research on equity crowdfunding, we examine its role in SME financial and innovative performance. The presence of asymmetric information for funders in equity-based crowdfunding means that investors face a number of risks, which can translate into moral hazard or adverse selection problems (Ahlers et al.
2015). There are also risks for small funders as it is likely that small investors do not hold sufficient financial expertise or acumen to perform due diligence (Steinberg
2012). It is in this context that prior studies have examined insolvencies of successfully funded equity crowdfunding campaigns, follow-up funding and crowd exits (Signori and Vismara
2018; Hornuf et al.
2018). These studies included the role of particular project characteristics (e.g., the share of equity offered or disclosure of financial projections), nominee shareholder structures (Walthoff-Borm et al.
2018), and the size and education of the management team and how they relate to the success of campaigns (Ahlers et al.
2015; Vismara
2016).
We provide new empirical evidence on the crowdfunding domain—specifically, the impact of crowdfunding as an alternative financing source on innovation and GO for UK SMEs in 2014–20. A variety of statistical tests, including OLS regression, were performed to test the hypotheses relating to SMEs’ innovation performance, SMEs’ granted patent, and SMEs’ growth opportunity. The study conveys that equity crowdfunding has an observable impact on SMEs and, more specifically, on the level of GO within the firm. In accordance with the results, we can conclude that crowdfunding has a positive influence on growth opportunity; the evidence suggests that the level of GO within a firm will increase as crowdfunding increases. Conversely, the study rejects Paschen’s (
2017) and Stanko and Henard’s (
2016) findings that crowdfunding leads to an increase in the level of innovation of SMEs. Performance regression results provide further support for a positive impact of crowdfunding on SME performance. Moreover, we used propensity score-matching and controlled firm-matching methodologies to eliminate any unobserved factors which may simultaneously determine crowdfunding and SME performance. Our analysis has revealed that the wisdom-of-crowd effect can be found when firms successfully raise equity crowdfunding. As we documented earlier, there are several investor areas in which there is now convincing evidence that this effect exists, e.g., equity crowdfunding (Walthoff-Borm et al.
2018) and lending-based crowdfunding (Bruton et al.
2017). We further clarify the mechanism through which the wisdom-of-crowd effect prevails in the context of ECF. For instance, tapping the crowd for financial resources induces a spectrum of related processes between the entrepreneurs and the crowd that likely benefit the organization in realizing its market- and performance-related goals (Polzin et al.
2017). As information cascades allow for the speedy and costless transfer of knowledge from customers to the entrepreneurs in crowdfunding-related network situations (Estrin et al.
2018; Ordanini et al.
2011; Vismara
2018), the crowdfunding platforms may influence SME growth through their effects on product and brand development processes. As our findings show, SMEs can successfully exploit these effects when engaging with crowdfunding networks and stakeholders. The existence of such mechanisms ensures that SMEs can not only utilize ECF to overcome their financing constraints but also use it to exploit their growth opportunities and help achieve improved level of performance.
In this study, we determine whether equity crowdfunding impacts innovation and GO, and thus acting as a catalyst for SME growth. Our findings not only provide empirical evidence for the outcome of equity crowdfunding, but also reveal new insights into several ongoing debates in SME performance and the wider field of entrepreneurship. Thus, this paper can be used as a basis for further study; it includes a host of additional variables to produce a more detailed model further clarifying the significance of crowdfunding in a SME-dominated economy (Cichy and Gradon
2015; Naudé
2010). As Cumming et al. (
2019) suggest, problems such as adverse selection could be significantly reduced if firms that provide information on equity crowdfunding platforms represent the facts. SMEs can potentially benefit more by taking such an initiative as this will increase investor confidence in them and, consequently, pave the way for them to achieve more success in post-campaign relationships between entrepreneurs and investors. This can prove to be all the more significant as, otherwise, the surviving ECF firms could eventually develop into “empty shells” or “zombie firms,” as Signori and Vismara (
2018) earlier indicated. Finally, in terms of future research, with companies viewed as living organisms by many, it is not possible to capture all intrinsic characteristics of crowdfunding and its role in financing SME growth through a purely quantitative approach. A qualitative approach should also be taken in conjunction, as it would ensure that the essence of difficult concepts and measures, such as innovation, can be properly captured, thus resulting in a more reliable and comprehensive study.
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