Dr. Jan Niklas Wick

In early-stage venture financing, investors’ portfolio returns crucially depend on investing in the few “big hits,” compensating for a significant number of investments that fail to return the invested capital. The recently established equity crowdfunding enables also retail investors to participate in the market for early-stage venture financing. Using survival analysis on a data set that tracks portfolios of individual equity crowdfunding investors over the course of more than five years, we study how personal and common liquidity events—i.e., realized and foregone losses and gains—impact an individual’s future investment behavior. Reinforcement learning theory predicts that investors overweight personal experience when making investment decisions. We find that in our context of a closed, specialized market, both personal and common liquidity events have a negative effect on subsequent investment decisions. Differentiating these findings by investor sophistication, we find that less sophisticated investors exhibit patterns of reinforcement learning.

In online, crowd-based investment markets, nonexpert individuals collectively make investment decisions that were previously left to experts. Being carried out publicly on an online platform, the funding process gives these individuals opportunity to observe the actions of others before deciding themselves. Using a unique dyadic panel data set that tracks online, crowd-based investments into startups, we study how individuals are influenced in their investment decisions by prior actions of others. We find evidence that individuals engage in herd behaviour and are more likely to invest into campaigns exhibiting a higher funding momentum. Counterintuitively, investors are at the same time less likely to invest into campaigns that exhibit high counts of already committed investors, indicating that individuals do not herd after herd.

Only recently, novel financing sources have emerged in the forms of crowdfunding or initial coin offerings. Attending to these new forms can be conceived as organizational deviance from the norm of established business angel or venture capital financing, which in turn has an effect on follow-on growth financing rounds. Drawing on theories of categorization and deviance, we propose that venture capitalists categorize crowdfunded ventures as deviant to screen them out in their selection process. We aim to empirically disentangle this categorization effect from venture capitalists’ diligent evaluation of substantial quality differences by using a comprehensive matching approach, an econometric model that separates venture capitalists’ screening from their due diligence and by testing three boundary conditions that should theoretically moderate a categorization effect. Implications are derived.

After having used own funds and potentially borrowed from friends and families, young ventures often reach out to external investors to obtain capital in exchange for equity. In absence of standard means of evaluation, the market for venture financing is characterized by high uncertainty and information asymmetries between players requiring young ventures to invest significant effort in effectively signaling their quality to potential investors. Due to the large numbers of ventures seeking financing investors typically use rapid categorization and filtering mechanism to focus their efforts on the most promising ventures. In the context of the recently established equity crowdfunding providing funds in exchange for equity we highlight the importance for young ventures to diligently assess with whom to partner or not. Building on a comprehensive sample of the funding activities of young ventures that is matched and, hence, balanced in terms of seven key quality controls, we find support for our theory that despite being of the same quality, deviating from the norm in absence of clear a rationale and obtaining equity crowdfunding in a first funding round acts as a negative signal in subsequent funding rounds. In line with prior literature we additionally find that such a negative signal can be mitigated through a greater funding amount in the first round and prior experience of second round investors with equity crowdfunding.