External finance is an essential success factor for entrepreneurial activity. Depending on the quality of the sources, the success of a startup remains a story that has to be written chapter by chapter.
Crowdfunding stocks deserves special attention, accounting for 5% of the total European corporate finance market, as it has grown in strength over the past decade and is the third most common corporate finance strategy after banks and VCs.
However, not all external sources of funding are the same. For example, a brand new one study published by a leading journal for entrepreneurship, Theory and practice of entrepreneurshipshows that entrepreneurs who have access to equity crowdfunding are more likely to fail. Why?
Researchers Daniel Blased, Douglas Cumming and Michael Kotter found that this depends on the quality of the entrepreneurial project, as crowdfunding stocks tend to attract low-quality projects.
Building on a previous study that entrepreneurs accessing crowdfunding stocks use it as a last resort, they found that entrepreneurial projects associated with the most risky banks are more likely to fail and that these projects are more likely to raise funds online via equity crowdfunding.
In addition, we find that companies do not choose ECF at random. Our findings clearly indicate a lower likelihood for companies that are larger, more liquid, less unprofitable, and well rated for using ECF.
Last but not least, the characteristics of the management team play a role in the choice of equity crowdfunding. Younger and less experienced teams with female participation in particular prefer this.
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