Receiving external equity following successfully crowdfunded technological projects: an informational mechanism

We will survey this literature in Sect. 2.1. A parallel literature has focused on the post-campaign outcome of equity crowdfunding (Coakley et al. 2018; Walthoff-Borm, Vanacker, & Collewaert, 2018), with special interest in the relationship between equity crowdfunding and VC (D. Cumming et al. 2019; Hornuf et al. 2018; Signori and Vismara 2018). As the institutional characteristics and operating mechanisms of equity crowdfunding are different from those of reward-based crowdfunding, it remains an open question whether the results of these studies are generalizable to the context under consideration in the present study.

Ryu et al. (2018) compare the effect of the receipt of crowdfunding and angel investing on subsequent financing by VCs, after controlling for selection into the type of financing. They show that ventures that have gone through a successful CF campaign are more likely than angel-backed ventures to obtain finance from corporate VC investors; however, they are less likely to be financed by independent VC investors.

For instance, according to data from Pitchbook, in the USA in 2013, the average amount of capital raised in series A VC rounds is two times as large as in seed rounds. In series B VC rounds, it is more than five times as large.

While previous work shows that banks are an important source of finance for new ventures (Cassar 2004; Cosh et al. 2009; Robb and Robinson 2014), for technology-based ventures in the early stages of their life, bank debt is not a suitable financing instrument because these ventures are the most informationally opaque, have highly intangible and firm-specific assets with little collateral value, and have a high risk of failure, which bank loans could magnify (Carpenter and Petersen 2002).Therefore, we do not discuss bank financing here and only focus on external equity capital provided by VCs. See M. Colombo and Grilli (2007) for an analysis of the (limited) use of debt by high-tech ventures during founding.

Given the high level of uncertainty involved in investing in early-stage ventures, VCs frequently ask for control rights such as the right to replace founder executives with seasoned professional managers. As was noted by a VC, “our default assumption when we first look at a company is that the founder-CEO cannot lead this company going forward” (cited in Wasserman 2003, p. 154–155). Even if the entrepreneurs are not replaced, VCs usually structure investments with contractual provisions including board rights, voting rights, and other control rights, which allow them active involvement in their portfolio firm’s management (Fried et al. 1998). These provisions could allow VCs to gain full control if the venture performs poorly or fails to meet specific milestones (Kaplan & Strömberg, 2004). VC contracts also frequently include non-compete clauses, which prevent entrepreneurs from starting another venture in the same industry (Barney et al. 1994; Hoffman and Blakely 1987) and vesting clauses, which allow VCs to repurchase departing entrepreneurs’ shares at a low price (Sahlman 1990). Viewed from the entrepreneurs’ perspective, these contractual provisions may be perceived as non-friendly and clearly limit entrepreneurs’ decision autonomy.

Attracting external resources of high quality (notably, highly skilled personnel) in adequate amounts and managing these resources effectively play a crucial role in the commercial success of these large-scale projects. In this situation, the coaching provided by VCs to entrepreneurs (Gorman and Sahlman 1989) and the quality signal associated with affiliation with VC investors (Vanacker and Forbes 2016) are extremely valuable to entrepreneurs, thus making VC a relatively more attractive source of finance when ventures have large-scale projects.

For the sake of clarity, in Fig. 2, we neglect the advance payments provided by backers and the consequent reduction of the demand for capital of the focal venture. That is, we assume K_CF = 0. In other words, we do not consider the campaign as a bootstrapping mechanism, but only as an informational mechanism.

In accordance with this view, Danae Ringelmann, co-founder of Indiegogo, observes that “We do not see crowdfunding and venture capital as mutually exclusive. We’re seeing Indiegogo become an incubation platform for traditional financiers to come in and discover new ideas … A successful crowdfunding campaign helps prove to venture capitalists, angel investors, and banks that there is a demand for a product in a marketplace, removing some of the risk from the equation” (http://​www.​techrepublic.​com/​article/​funding-your-startup-crowdfunding-vs-angel-investment-vs-vc/​).

The following quotation from Mr. Casey Hopkins, the creator of the crowdfunded iPhone holder Elevation Dock, documents the significance of these two measures: “I had this vision: If we ship late or people do not like it, the entire Internet will be outside my house with pitchforks and torches. I cannot even articulate the pressure. It’s not for the faint of heart.” (see http://​money.​cnn.​com/​2012/​12/​18/​technology/​innovation/​kickstarter-ship-delay/​).

Mollick (2014) analyzes 381 projects in the design and technology category. Only less than 5% of these projects failed to deliver products to backers. However, only 24.5% delivered in time. Excluding the projects that at the date of the study had yet to deliver (33% of the total number of projects), the average delay in delivery was 2.4 months.

In the period considered in this study, 3279 hardware-related campaigns were launched on Kickstarter. Out of these, 1282 campaigns (39.66%) were successful (i.e., they reached the target fundraising amount), raising a total of $143 million. Two hundred fifty-two of these campaigns raised $100,000 or more. We do not have the corresponding data from Indiegogo since we do not have a database of all Indiegogo projects.

https://​www.​youtube.​com/​watch?​v=​zDlavV9-La0?​t=​51m. Indiegogo even has created a hardware handbook for entrepreneurs (http://​landing.​indiegogo.​com/​hardwarehandbook​/​). It is also noteworthy to mention that in 2012, Kickstarter tightened its requirements due to delays in product delivery and rejected an increasing number of projects, especially hardware projects (Hurst, 2012) (http://​www.​wired.​com/​2012/​12/​kickstarter-rejects/​). Hardware entrepreneurs have recently turned to Indiegogo as their favorite platform.

Beyond the capital intensity of hardware, as the quote goes, “there is a reason they call it hardware—it is hard” (https://​blogs.​wsj.​com/​tech-europe/​2013/​06/​17/​hardware-is-hard-thats-why-they-call-it-hardware/​). Hardware companies (compared to software ones) face the following challenges: (1) hardware products take a longer development time due to the need to assemble a larger team of specialists with diverse backgrounds, such as mechanical and electrical engineers and industrial designers; (2) the iteration of product designs is difficult, and mistakes and changes are more costly after the initiation of manufacturing; (3) tools are more expensive, and figuring out (4) distribution channels and (5) the number of units to make can be difficult; and, finally, (6) software is needed to make the hardware work. All these factors combine to make hardware “hard.”

Specifically, we interviewed one venture capitalist who is active in investing in hardware companies in the USA with several crowd-funded portfolio companies and the founder-CEO of a VC-backed hardware venture who had gone through crowdfunding.

See page 9 (http://​angelcapitalasso​ciation.​org/​data/​Documents/​ACAatAEBAN09-26-16.​pdf) and page 7 (https://​nvca.​org/​research/​venture-monitor/​). Note also that 29% of the ventures in our sample obtained VC in the observation period. Thies et al. (2018) consider all CF campaign posted in Kickstarter between 2010 and 2015 (261,255 campaigns) and find that only 610 campaigns received VC up to 2016 (610 campaigns). Seventy-one percent of these latter campaigns are in the “technology” and “design” categories.

Industry experts suggest that, for a product aiming for US$100,000, a rough breakdown is as follows: US$30,000 for purchasing materials and US$20,000 for tooling, on average, leaving US$50,000 for salary expenses (http://​techcrunch.​com/​2014/​10/​11/​8-things-about-hardware-crowdfunding-we-learned-from-20-campaigns/​).

Results are robust if we set the threshold for positive (negative) comments at the 75th (25th) or 90th (10th) percentile of the distribution of the comments.

We checked the Schoenfeld residuals and do not find violations of the proportional hazards assumption. Specifically, none of the non-time-varying variables violated the proportional hazards assumption. Time-varying variables violate this assumption; however, this does not cause concern because these variables are non-proportional; see Allison (1984).

Given the correlation between Positive review and Negative review, there might be concerns of multi-collinearity; we also insert these variables separately in regressions and obtain similar results (they are available from the authors upon request).

We also added to the model specification Negative review, Positive review, and Days of delay in delivery. As expected, these variables are not significant at conventional confidence levels. The results are available from the authors upon request.

As a further robustness check, we rerun all estimates on the Kickstarter campaigns only (i.e., after excluding the Indiegogo campaigns from the sample). The results (available from the authors upon request) are qualitatively similar.

The exceptional case of Pebble Watch offers an illustrative case. Pebble Watch raised approximately $10 million in its first CF campaign after being rejected by VC investors. Subsequently, having demonstrated the large customer demand for its watch, Pebble Watch raised a $15 million series A round of VC from a syndicate led by Charles River Ventures, a prominent early-stage VC investor, and then raised another $20 million in a follow-on CF campaign. For more details, see http://​www.​forbes.​com/​sites/​anthonykosner/​2012/​04/​19/​who-needs-venture-capital-pebble-smart-watch-raises-over-5-million-on-kickstarter/​ and http://​techcrunch.​com/​2015/​03/​29/​pebble-times-20m-kickstarter-campaign-by-the-numbers/​.