EQUITY CF ET QUALITE DES ENTREPRENEURS

Article
Entrepreneurship Theory and Practice
Equity Crowdfunding: 00(0) 1–26

© The Author(s) 2020
High-Quality or Low-
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DOI: 10.1177/1042258719899427
Quality Entrepreneurs? journals.sagepub.com/home/etp
Daniel Blaseg1 ‍ ‍, Douglas Cumming2,3 ‍ ‍, and Michael Koetter4
Abstract
Equity crowdfunding (ECF) has potential benefits that might be attractive to high-quality en-
trepreneurs, including fast access to a large pool of investors and obtaining feedback from the
market. However, there are potential costs associated with ECF due to early public disclosure
of entrepreneurial activities, communication costs with large pools of investors, and equity
dilution that could discourage future equity investors; these costs suggest that ECF attracts
low-quality entrepreneurs. In this paper, we hypothesize that entrepreneurs tied to more risky
banks are more likely to be low-quality entrepreneurs and thus are more likely to use ECF.
A large sample of ECF campaigns in Germany shows strong evidence that connections to dis-
tressed banks push entrepreneurs to use ECF. We find some evidence, albeit less robust, that
entrepreneurs who can access other forms of equity are less likely to use ECF. Finally, the data
indicate that entrepreneurs who access ECF are more likely to fail.
Keywords
adverse selection, pecking order theory, equity crowdfunding, entrepreneurial finance, credit
constraints
Access to finance is the most important growth constraint for young and innovative ventures (De
Prijcker et al., 2019; Manigart & Sapienza, 2017). The rise of new forms of alternative finance
elicits the question of whether or not these new forms have differential importance to entrepre-
neurs (Bruton et al., 2015). The growth of equity crowdfunding (ECF) warrants particular atten-
tion. According to industry observers, European providers of early-stage capital invested
approximately EUR 11 billion in 2017. With a volume of roughly EUR 630 million across
Europe in 2017, ECF already accounts for more than 5% of the market volume and is expected
to expand at a fast pace (European Business Angel Network, 2018). Among German startups,
crowdfunding is the third most popular source of external capital and only dominated by bank
finance and venture capital (German Startups Association, 2017). Recent work has called for a
1
Universitat Ramon Llull, ESADE, Sant Cugat, Spain
2
College of Business, Florida Atlantic University, Boca Raton, FL, USA
3
Birmingham Business School, University of Birmingham, UK
4
IWH, Otto-von-Guericke University, Deutsche Bundesbank, Halle (Saale), Germany
Corresponding Author:
Daniel Blaseg, Universitat Ramon Llull, ESADE, Av. Torre Blanca 59, 08172 Sant Cugat, Spain.
Email: daniel.blaseg@esade.edu
2 Entrepreneurship Theory and Practice 00(0)
better understanding as to how these different sources of entrepreneurial finance interact

(Cumming et al., 2018; Cumming, Deloof, et al., 2019).
Models of entrepreneurial finance traditionally derive adverse selection outcomes whereby
high-quality entrepreneurs, who have more information about their projects than potential inves-
tors (i.e., there is information asymmetry; Venkataraman, 1997), are less likely to seek equity
investments due to the loss of ownership share and the greater opportunity costs of giving up
ownership (Meza & Webb, 1987; Stiglitz & Weiss, 1981). In the context of venture capital
(Cumming, 2006), this trade-off is commonly observed in ways consistent with theory. It is
unclear, however, whether the traditional pecking order theory and signaling theory naturally
extends to new forms of entrepreneurial finance brought about by fintech and regulatory change,
such as ECF. The traditional pecking order and signaling predictions are potentially offset by
new financing technologies that reduce contracting costs and search costs and also offer compli-
mentary benefits of establishing market presence and “traction” (demonstrating interest in a ven-
ture’s product). ECF, in particular, offers a fast and relatively1 standardized way to reach a large
number of investors and obtain feedback from the market. It is unclear as to whether the tradi-
tional adverse selection costs dominate these potential benefits associated with the new technol-
ogy, which gives rise to this empirical study. Is ECF, indeed, a viable alternative to previous
traditional financing forms of new ventures? Or, does ECF attract entrepreneurs who could not
receive funding elsewhere for a very good reason: poor quality? Can a possibly uninformed
crowd identify the low-quality from the high-quality entrepreneurs in the project pool of the
economy more successfully than outside equity investors and banks? The implications of whether
or not ECF attracts the best or worst entrepreneurs are important for academics, practitioners,
and policymakers, as we discuss after reviewing the evidence.
In this paper, we contribute to the literature on ECF attracting low-quality or high-quality
entrepreneurs by theorizing that the quality of entrepreneurs’ bank connections, as well as the
availability of equity investors, will affect their use of ECF. An entrepreneurial project is more
likely to be low quality by virtue of its affiliation with a more risky bank. We conjecture that
entrepreneurs affiliated with distressed banks—the clearest indication of a risky bank—will be
pushed towards ECF. Entrepreneurs associated with less risky banks or with options to access
other forms of equity will be less likely to use ECF. Further, we examine whether or not entre-
preneurs are more likely to eventually fail if they have used ECF.
We gathered a unique and nearly comprehensive sample of all ECF campaigns in Germany
that together account for 90% of the ECF market volume between 2011 and 2015 (Crowdinvest.
de, 2018). We examine the German context for three main reasons. First, and most importantly,
we have information on whether or not the entrepreneur was affiliated with a distressed bank.
Second, German ECF platforms were among the first platforms around the world to start opera-
tions in 2011; thus, a large sample exists for statistical analyses. Third, in the German context,
there are sufficiently detailed data that enable us to construct a counterfactual sample of ventures
without ECF that are similar in terms of observable hard and soft factors and that complement
the information on the use of crowdfunding with data about each venture’s bank relationship and
whether an outside equity investor was involved. We are unaware of the existence of such
detailed data from other countries. Contrary to prior work (e.g., Belleflamme et al., 2014), we
can, therefore, estimate the probability of tapping the “wisdom of the crowd,” conditional on all
of the venture and managerial traits.
Our analysis gives rise to three main results. First, ventures that are tied to distressed banks
are around 9% more likely to use ECF. Those that have already secured equity funding from
outside investors are significantly less likely to tap the crowd by a similar order of magnitude.
Second, further indicators of bank quality corroborate that the quality of the bank associated with
the entrepreneur influences the use of ECF. If connected banks are well-capitalized and liquid,
Blaseg et al. 3
associated entrepreneurs are less likely to tap the crowd for equity. Those banks that have ineffi-
ciently managed costs and therefore require high loan-loss provisions are, in turn, more likely to
drive entrepreneurs toward ECF. Third, the data reveals that entrepreneurs who are associated
with a distressed bank and who do use ECF, in turn, are 10%–12% more likely to fail. Equity
funding from outside investors has no significant effect on failure. Notably, the effects of stressed
bank relationships and ECF on failure probabilities are not statistically different. This result sug-
gests that an unwise crowd is just as prone as a bad bank to finance the low-quality entrepreneurs
in the pool of projects.
Our paper adds to prior literature by evaluating the success of ECF by providing theory and
evidence on the importance of the quality of banks as well as the availability of equity investors
with whom entrepreneurs are associated with seeking ECF. Our empirical context builds on
important recent work in different institutional contexts (Hildebrand et al., 2017; Hornuf et al.,
2018; Walthoff-Borm, Schwienbacher, et al., 2018, Walthoff-Borm, Vanacker, et al., 2018) by
enabling explicit empirical tests of the use of alternative forms of finance. We examine a dynamic
entrepreneurial funding context and show how early usage of different sources of finance affects
the use of ECF.
This paper is organized as follows. The next section discusses the theory derived from prior
literature and testable hypotheses. Thereafter, we discuss the institutional context in which the
data were derived. The empirical tests are provided after introducing the data. The last sections
discuss the implications for theory, practice, and policy.
Hypotheses
Pecking Order in Entrepreneurial Finance
Table 1 provides an overview of the differences and similarities between ECF, venture capitalists
(VC), and bank financing from a venture’s perspective and shows how sources of capital differ
from one another in Germany. Note that institutional settings differ across countries, which com-
plicates international comparisons of some aspects. ECF in Germany involves the issue of
equity-like mezzanine financial instruments, such as silent partnerships and subordinated loans,
which combine many features of traditional sources of debt and equity. These financial instru-
ments mimic equity investments that are comparable to venture capital, enabling the crowd to
Table 1. Comparison of Features of Equity Crowdfunding and Traditional Sources of Financing From a
Ventures Perspective in Germany.
Equity crowdfunding Venture capital Bank finance
Profit sharing Yes Yes No
Exit gain sharing Yes Yes No
Maturity 5–7 years 5–7 years 1–3 years
Nonfinancial benefits Yes Yes No
Voting rights No Yes No
Subordination Yes Yes No
Transferability Approval required Yes No
Monitoring and control rights Limited Yes Limited
Notes. Some aspects of this comparison differ in an international context (e.g., voting rights of equity crowdfunding
investors). Sources: Blaseg and Koetter (2016), Rossi and Vismara (2018), Wilson and Testoni (2014).
participate in the future cash flows and the proceeds from a potential exit or liquidation. One of
the most discussed features of ECF is the possible benefit for ventures from interacting with a
heterogeneous crowd of investors, who could provide support similar to VCs (Agrawal et al.,
2014; Cholakova & Clarysse, 2015). This potential benefit comes at the risk of expropriation by
publishing information to a semi-anonymous crowd in an early stage (Ueda, 2004). These simi-
larities show that ECF could substitute venture capital from a capital structure perspective. Yet,
other features require the comparison to debt finance as an alternative source of financing. Similar
to bank financing, the crowd investment has a limited maturity of 5–7 years, including no voting
and limited monitoring and enforcement rights (Hornuf & Schwienbacher, 2018). The choice
between bank finance and venture capital depends on several factors, such as the specific sensi-
tivities of effort and performance and the variations in the ownership structure (de Bettignies &
Brander, 2007).
The traditional pecking order theory of the capital structure of internal finance, followed by
debt and outside equity, is well accepted by a large body of work (Meza & Webb, 1987; Myers
& Majluf, 1984; Stiglitz & Weiss, 1981). Bank funding takes the form of debt, whereas VCs
typically provide convertible preferred equity, convertible debt, or straight equity (Cumming,
2006). Whereas some authors state that the decision to use one type of capital versus another
may be driven by necessity rather than by choice (Coleman et al., 2016), others argue in line
with the pecking order theory, adjusted for potential constraints imposed by debt capacity
(Cumming, 2006; Vanacker & Manigart, 2010). Debt is usually preferred by entrepreneurs
because it is cheaper, does not dilute ownership, and entails less extensive monitoring compared
with venture capital finance (de Bettignies & Brander, 2007). A distinct feature of venture cap-
ital is the provision of high-value managerial input to the venture, thus making venture capital
more attractive, enhancing the chances of success from the perspective of the entrepreneur
(Baum & Silverman, 2004). Therefore, whether bank finance or venture capital finance is pre-
ferred depends on a variety of factors, including the specific risk profile and current profitability
of the venture, as well as the skills and the experience of the entrepreneur (Ueda, 2004; Winton
& Yerramilli, 2008).
VC investors are much more active investors who take larger ownership shares and greater
control rights into their investee ventures (Cumming, 2008; Cumming et al., 2008) relative to
ECF investors (Ahlers et al., 2015; Cumming, Meoli, et al., 2019). VCs typically take between
20% and 40% ownership and have effective control, whereas ECF investors typically collec-
tively take less than 20% ownership and have scant control rights. As such, VC investors are
much more active in adding value to their investees than ECF investors. Entrepreneurs who can
benefit from the advice and networks of VCs prefer VC finance, and VC-backed ventures are
normally expected to be acquired or publicly listed on a stock exchange within 7 years. ECF-
backed ventures, by contrast, do not face such systematically high growth expectations or assis-
tance from professional investors. Therefore, ECF is typically lower in the pecking order
relative to VC as an alternative source of equity investment for entrepreneurial ventures.
Further, once a venture obtains ECF, it is less likely to raise follow-up funding due to the costs
and negative signals associated with dispersed ownership of early-stage ventures and the asso-
ciated efforts and costs of managing a large pool of investors (Signori & Vismara, 2018). In
sum, in the absence of funding constraints for entrepreneurial ventures in traditional forms of
finance, such as venture capital or bank or angel finance, entrepreneurs would not select into
ECF. This is also confirmed by Walthoff-Borm, Schwienbacher, et al. (2018), who find that
especially start-ups without internal funds and debt capacity use ECF. We go beyond their
important finding that start-ups of higher quality rely first on debt instead of ECF by examining
the impact of the (un)availability of competing sources of start-up funding on the likelihood of
using ECF.
Blaseg et al. 5
Entrepreneurs Affiliated with Distressed Banks

Credit is a crucial source of external funding for young ventures around the world (Cosh et al.,
2009; Robb & Robinson, 2014). The quality assessment of opaque new ventures is difficult, and
information asymmetries are paramount during early-stage financing (Jensen & Meckling, 1976;
Meza & Webb, 1987; Stiglitz & Weiss, 1981). Banks try to resolve the information asymmetry
between savers and investors by developing screening competencies and acting as delegated
monitors (Diamond, 1984), thereby mitigating the information frictions that plague small and
new ventures (Petersen & Rajan, 1994, 2002). Credit contractions are particularly painful for
small new ventures (Jiménez et al., 2012; Robb & Robinson, 2014). The financial crisis of 2008
gave rise to a large number of distressed banks, which, in turn, exacerbated credit contractions
(Puri et al., 2011).
Entrepreneurs who have ties to distressed banks face pronounced problems when seeking
external capital for the following five reasons. These pronounced problems are not merely attrib-
utable to the fact that an entrepreneur is, of course, much less likely to obtain capital from the
distressed bank with which it already has a relationship. Instead, there are five other primary
factors that mitigate an entrepreneur’s chances of being able to seek capital elsewhere.
First, external sources of capital, such as banks, are a source of governance for entrepreneurs
(Berger & Udell, 1998). Distressed banks, however, are less likely to monitor and add value to
an entrepreneur relative to nondistressed banks (Berger et al., 2001). In general, other investors,
such as venture capital providers, are much better external monitors for entrepreneurs than even
healthy banks (Manigart & Wright, 2013). Distressed banks typically suffer from internal gover-
nance problems, less skilled lending officers, and distracted attention by virtue of being in dis-
tress and risking bankruptcy themselves. This distorted attention and ability translate into weaker
governance for entrepreneurs who are affiliated with distressed banks, which, in turn, results in
lower quality entrepreneurs with less value-added external governance provided by their sources
of capital.
Second, entrepreneurs are, of course, credit constrained by virtue of being tied to a distressed
bank (Berger et al., 2013). Credit-constrained entrepreneurs make relatively inefficient decisions
that are more short-term in nature compared with what would be otherwise optimal, as they have
to focus on achieving and presenting short-term results to obtain capital from elsewhere (Yung,
2019). This inefficient allocation of attention towards short-termism means that entrepreneurs
tied to distressed banks will, on average, be of lower quality than entrepreneurs not tied to dis-
tressed banks.
Third, external sources of capital normally benefit their investees by enabling a superior
business network through which entrepreneurs can join (Manigart & Wright, 2013). This
network includes other companies that could offer strategic advantages to the entrepreneur
(e.g., suppliers and/or stakeholders) and other financiers that could partner in syndicated
lending or other financing arrangements. However, distressed banks are much less likely to
have these quality networks and offer these advantages to their investee ventures (Berger
et al., 2013). In fact, a tie to a distressed bank would be a negative signal to other potential
strategic partners and other financiers to which an entrepreneur might have sought a network-
ing relation.
Fourth, lending relationships with small entrepreneurial ventures are typically regionally
proximate to mitigate information asymmetries that are typical for small ventures (Berger &
Udell, 1998). If a bank is distressed, there will be less lending to other ventures in the same
region where the bank is based. As such, there will be fewer agglomeration benefits associated
with ties to distressed banks. The worsened economic conditions resulting from distressed banks,
in turn, make entrepreneurs worse off by being tied to distressed banks.
Fifth, stakeholders of entrepreneurial ventures tied to distressed banks may have concerns
about the financial stability of the entrepreneurial venture. If the bank has uncertain survival
prospects or an uncertain ability to lend to the entrepreneurial venture, it is less likely that the
entrepreneurial venture will be able to provide new products, innovative products, and/or support
the existing products that the entrepreneurial venture offers to its stakeholders by virtue of its
distressed source of bank capital. This stakeholder concern will subsequently weaken the growth
prospects of entrepreneurial ventures tied to distressed banks. Empirical evidence is consistent
with a greater rate of venture failure by virtue of ties to distressed banks, even when these ven-
tures otherwise show higher rates of productivity (Anderson et al., 2019).
For these five reasons, a tie to a distressed bank is a negative signal about an entrepreneur’s
quality. Which other type of investor is more likely to take note of such a signal? Or, put differ-
ently: for an entrepreneur with a tie to a distressed bank, where, pushed to seek capital elsewhere,
is it feasible for that entrepreneur to obtain capital?
Entrepreneurs and their investors face information asymmetry: entrepreneurs know more
about their own quality than do the investors. Thus, entrepreneurs use signals to mitigate infor-
mation asymmetry. Signaling theory has established that signals must be costly to be effective
(Akerlof, 1970; Bacharach, 1989; Connelly et al., 2011; Spence, 1973; Vanacker et al., 2019).
Otherwise, low-quality entrepreneurs would adopt the same signals as high-quality entrepre-
neurs. Also, investors must be capable of reading signals to distinguish between entrepreneurs of
different qualities.
ECF investors are not as skilled as other types of investors, such as VCs, at distinguishing
between high-quality and low-quality entrepreneurs by adequately processing signals. ECF
investors comprise many uninformed, unsophisticated, and dispersed ECF investors. The pres-
ence of sophisticated equity investors such as VCs reduces the need for entrepreneurs to rely on
ECF. Venture capital investors carry out extensive due diligence prior to investment and add
value to entrepreneurs after investment (Manigart & Sapienza, 2017; Manigart & Wright, 2013;
Sapienza et al., 1996). Moreover, VCs offer strategic, financial, human resource, and marketing
and provide their investee firms with an array of valuable contacts, including upstream suppliers
and downstream customers. Further, VCs provide connections to top accounting and legal ser-
vice providers and investment banks at the time of selling the entrepreneurial firm. These same
value-added services and coaching advice are much less likely to come from smaller dispersed
retail investors through crowdfunding. As such, ECF is a less attractive form of equity finance.
Crowdfunding enables entrepreneurs to exploit uninformed investors with behavioral, gam-
bling, and herding biases (Vismara, 2018). By continuously screening the market to find promis-
ing investment opportunities, VCs have developed superior screening and monitoring capabilities
to address information asymmetry problems (Colombo & Grilli, 2010; Croce et al., 2013). Banks
rely on transaction lending technologies, such as relationship lending, for the selection of opaque
ventures (Berger & Udell, 2006). ECF follows a different mechanism for selecting ventures. The
platform performs only limited due diligence using its team analysts and a check of formal crite-
ria, such as available documentation and organizational factors to select ventures that can launch
a campaign on the platform. The final decision on which ventures receive funding is left to the
investors though. The provision point mechanism implies that each ECF campaign manager
specifies a minimum threshold based on the capital requirements of the venture as a fundraising
goal, which has to be met by the aggregate individual investments. This mechanism should cap-
ture the wisdom of the crowd and ensure that only projects with sufficient financial resources are
started, thereby limiting the default risk faced by the crowd (Cumming, Leoboeuf, et al., 2019).
Empirical evidence suggests, at least in other types of crowdfunding, that the crowd does a good
job of evaluating projects and screening the good from the bad (Mollick & Nanda, 2016). Other
research highlights the crucial role of information cascades among individual investors for the
Blaseg et al. 7
success of ECF campaigns (Vismara, 2018). Information cascades imply a free-riding problem
across the crowd; that is, investors take low-equity stakes and anticipate the “team production
dilemma” (Alchian & Demosetz, 1972), but they do not engage in active monitoring.
Just as ECF investors are not effective at processing signals, ECF platforms, likewise, do not
act as delegated monitors. Contrary to underwriting banks, they are not liable for the information
they provide and take limited responsibility after a successful crowdfunding campaign. Revenue
is mostly generated from success fees for offerings that exceed their minimum requested amount.
This can induce platforms to act on a short-term focus by maximizing the number of projects and
outsourcing the costly due diligence process to the crowd (Adriani et al., 2014), despite reputa-
tional risks (Blaseg et al., 2019). An effective selection by the crowd requires individuals who
make an informed investment decision after proper due diligence, which is unreasonable to
expect for two reasons. First, it is difficult for investors to assess the true ability of the manage-
ment team or the underlying quality of the venture in the absence of face-to-face interaction.
Second, the crowd in ECF consists mostly of uncoordinated amateurs. The crowd is subject to
herding behavior and has little incentive to spend much time on extensive due diligence due to
small amounts of invested and small returns. As such, it is questionable whether the combination
of limited due diligence by the platform and reliance on the collective decision of the crowd is
an effective mechanism for selecting good-quality projects (Agrawal et al., 2014).
Overall, we expect that entrepreneurs tied to distressed banks or entrepreneurs who are unable
to attract equity investors are more likely to be pushed toward ECF. Our two null hypotheses are,
therefore, as follows:
Hypothesis 1: Being associated with a distressed bank limits the possibility to access (more) bank
debt and other sources of capital, thereby pushing entrepreneurs at the bottom of the pecking order
for external capital towards ECF.
Hypothesis 2: Being able to access other forms of external equity capital reduces the need for entre-
preneurs to raise ECF as a last resort in the pecking order.
Specification, Sampling, and Data

We construct a sample of ECF and non-ECF ventures that fulfill the criteria of using crowdfund-
ing in Germany from an organizational perspective (e.g., limited liability). In the first step, we
constantly monitored the four largest ECF platforms in Germany (Companisto, Fundsters,
Innovestment, and Seedmatch) between November 2011 and December 2015. These platforms
dominate the market and are comparable in terms of the mechanisms for selecting ventures and
the financing instruments used (Crowdinvest.de, 2018). Table OA1 in the online appendix pro-
vides descriptive statistics on the ECF platform and offers characteristics. We gathered all pro-
vided data about the 163 ventures that used crowdfunding during this observation period.
In a second step, we identified 32,005 ventures that did not use ECF, were founded with lim-
ited liability between 2008 and 2014, and were not publicly traded using the Orbis and Markus
databases. From this sample, we create a counterfactual sample of similar ventures that did not
use ECF by applying nearest neighbor propensity score matching without replacement (PSM,
see Dehejia & Wahba, 2002) using the NACE industry classification, the year of foundation, and
the form of limited liability as a proxy for venture size (Puri & Zarutskie, 2012; Walthoff-Borm,
Schwienbacher, et al., 2018). Table OA2 in the online appendix details the procedure that pro-
vides us with a counterfactual for each ECF venture.2 The resulting sample thus includes 163
ventures that used ECF and 163 ventures that did not use ECF but could have. We augment the
matched sample with financial reporting data, management and venture traits, and equity inves-
tor and bank relationship information (see Table 2 for a full description of all variables).3
Our main question tests whether or not the probability that venture i applies for crowdfunding
yi = 1 also depends on its association with a distressed, and thus more risky, bank. We identify
distressed banks as those that received equity support from the German Special Fund for Financial
Market Stabilization (“SoFFin”). In October 2008, the German Federal government founded the
SoFFin in response to the turmoil in the aftermath of the collapse of the Lehman Brothers. The
fund was designed to strengthen the capital base of German banks that were hit by taking over
problematic positions and providing other guarantees. The fund supported a total of 10 German
banks since its inception, with a total volume of outstanding equity and guarantees of 192 billion
Euros in 2009. By the end of 2015, the SoFFin remained exposed to three German banks, with
shares and hybrid capital equivalent to a total volume of about 16 billion Euros. We matched
bank names from the Creditreform database, with public information provided by the SoFFin,
which supported banks and estimated the following probit model:
‍ Pr (yi = 1) = (αSoFFin + βxi + ui > 0)‍ (1)
The dependent variable in Equation (1) is an indicator that equals “1” for ECF ventures and “0”
for non-ECF ventures. Bank health aside, ventures choose a form of financing based on further
observable and unobservable characteristics (Manigart & Wright, 2013). Therefore, we specify
control variables xi to gauge venture and management traits that influence the choice between
debt (Robb & Robinson, 2014) and equity (Cassar, 2004).
Table 3 shows descriptive statistics for all covariates and tests whether the means differ
between the ECF and non-ECF ventures. Consistent with available empirical evidence (e.g.,
Walthoff-Borm, Schwienbacher, et al., 2018), ECF ventures are smaller, less liquid, perform
worse regarding financial results, and have higher leverage. Other venture traits related to the
management team, governance, and riskiness of the venture differ significantly. Most notably,
ventures that seek ECF have significantly worse ratings and fail more often.
Main Result: Determinants of ECF

To assess the role of ECF as a way to mitigate the funding constraints of young ventures, we
estimate that the likelihood of new ventures seeking to crowdfund is conditional on whether they
are tied to stressed banks and whether they have access to outside equity.
We first consider potential funding constraints that arise, in line with the first hypothesis, from
ventures’ relationships to distressed banks, as measured by capital support by the SoFFin. We
collect bank relationships for all 326 ventures from the Creditreform and Orbis databases, which
we compare with the payment information provided to crowdfunding platforms as well as self-
reported information on ventures’ webpages, to control for multiple bank relationships. In total,
we identify 83 different banks, of which two were supported by the SoFFin.4
In addition to these potential bank funding impediment indicators, we specify an empirical
test of the second hypothesis, that ECF is less likely used by young ventures if an equity investor
is already invested. We collect data on outside equity investors who were already present before
the venture started an ECF campaign by gaging changes in the subscribed capital in the years
after the foundation and before the use of ECF. Table 3 already revealed that this is significantly
more often the case for ventures not engaging in ECF. Whereas 21.5% of non-ECF ventures have
an investor on board, only 10.4% of those running an ECF campaign do.
Table 4 provides empirical evidence from regression analyses beyond the descriptive indica-
tions in Table 3 to test formally whether we cannot reject Hypotheses 1 and 2. Specifically, we
Table 2. Definition of Variables.
Variable Description Source(s)
Blaseg et al.
Pecking order proxies

ECF Dummy variable equal to 1 if the venture was listed on a German ECF platform ECF Platforms
between 2011 and 2015
SoFFin Dummy variable equal to 1 if the bank of the venture received funds from the BMF
SoFFin
Investor Dummy variable equal to 1 if the venture received equity from an outside Orbis, BvD Markus
investor
Venture traits
Team age Average age of the management team Orbis, Social Networks
Entrepreneurial Dummy variable equal to 1 if one of the management team members has Orbis, Social Networks
experience entrepreneurial experience
Gender Gender composition of the management team (male/mixed/female) Orbis, Social Networks
Number of employees Number of employees without management team Bundesanzeiger, Orbis, BvD Markus
Headcount Number of heads in the management team Orbis, Social Networks
Credit rating Credit rating of the venture (good/fair/poor) Buergel
Large city Dummy variable equal to 1 if the headquarter of the venture is based in a city Creditreform, Orbis
with more than 500,000 inhabitants
Scholarship Dummy variable equal to 1 if the venture received the “EXIST Business Start-up BMWi
Grant”
Award Dummy variable equal to 1 if the venture received an award fuer-gruender.de
Failure Dummy variable equal to 1 if the venture filed for bankruptcy with the respective Bundesanzeiger, insolvenzbekanntmachungen.de
court
Legal form Legal form of limited liability as a proxy for venture size (UG/GmbH) Orbis, BvD Markus
Year of foundation Year of foundation of venture Orbis, BvD Markus
Industry code NACE industry code of venture Orbis, BvD Markus
Venture financials
Size Log of total assets in EUR Bundesanzeiger, Orbis, BvD Markus
9
(Continued)
10
Table 2. Continued
Variable Description Source(s)
Subscribed equity Amount of subscribed equity in k EUR Bundesanzeiger, Orbis, BvD Markus
Leverage Ratio of liabilities to total assets in percent Bundesanzeiger, Orbis, BvD Markus
Financial result Ratio of annual surplus/deficit to total assets in percent Bundesanzeiger, Orbis, BvD Markus
Liquidity (Venture) Ratio of liquid assets to total assets in percent Bundesanzeiger, Orbis, BvD Markus
Bank traits
Capital Ratio of total equity to total assets in percent Bankscope
Loan loss provisions Ratio of loan loss provisions to total gross loans in percent Bankscope
CTI Ratio of total costs to total income in percent Bankscope
ROAE Ratio of return on average equity in percent Bankscope
Liquidity (Bank) Ratio of liquid assets to deposits and short-term funding in percent Bankscope
ECF = equity crowdfunding.

Entrepreneurship Theory and Practice 00(0)
Blaseg et al. 11
Table 3. Descriptive Statistics by the Use of ECF.

Matched
Non-ECF ventures ECF ventures All ventures Difference
Mean SD Mean SD Mean SD in means
SoFFin 0.135 0.343 0.356 0.480 0.245 0.431 0.221***
Investor 0.215 0.412 0.104 0.307 0.160 0.367 −0.111***
Venture traits
Team age 37.603 7.885 35.597 7.866 36.600 7.927 −2.006**
Entrepreneurial experience 0.307 0.463 0.160 0.367 0.233 0.423 −0.147***
Gender 1.141 0.470 1.423 0.769 1.282 0.652 0.282***
Number of employees 8.761 9.599 7.074 8.471 7.917 9.078 −1.687*
Headcount 1.742 0.798 1.896 0.927 1.819 0.867 0.153
Credit rating 2.319 0.585 1.951 0.646 2.135 0.642 −0.368***
Large city 0.620 0.487 0.675 0.470 0.647 0.479 0.055
Scholarship 0.104 0.307 0.135 0.343 0.120 0.325 0.031
Award 0.086 0.281 0.031 0.206 0.058 0.247 −0.055**
Failure 0.092 0.290 0.190 0.394 0.141 0.349 0.098**
Venture financials
Size 13.109 1.588 12.191 1.252 12.650 1.500 −0.918***
Subscribed equity (in k 29.827 22.987 28.090 24.387 28.959 23.677 −1.737
EUR)
Leverage 0.590 0.418 0.762 0.286 0.676 0.368 0.172***
Financial result 0.009 0.178 −0.453 0.700 −0.222 0.560 −0.462***
Liquidity 0.293 0.314 0.174 0.195 0.234 0.268 −0.119***
Bank traits
Capital 0.058 0.027 0.053 0.021 0.056 0.024 −0.006**
Loan loss provisions 0.003 0.012 0.004 0.005 0.003 0.009 0.001
CTI 0.996 0.921 1.950 6.032 1.473 4.335 0.954**
ROAE 0.024 0.024 0.017 0.037 0.021 0.031 −0.007**
Liquidity (Bank) 0.395 0.289 0.309 0.220 0.352 0.260 −0.086**
Observations 163 163 326
Notes.Venture financials and bank traits are from the year prior to the first crowdfunding offering for ECF ventures
and the corresponding year for non-ECF ventures. Significance levels are as follows: *10%, **5%, and ***1%. The
description of variables is provided in Table 2. ECF = equity crowdfunding.
show in Column (1) the marginal effect estimates of the probit model in Equation (1). First, we
specify only the potential funding constraints due to an association of the venture with a dis-
tressed bank. The parameters of the according SoFFin indicator variable are statistically signifi-
cant at 1% and positive. This result strongly supports the first hypothesis, that young ventures
associated with a distressed bank are more likely to seek ECF funding. The estimated effect is
also economically significant. The likelihood of ECF use increases by roughly 13% when a ven-
ture’s bank is supported by the SoFFin. Given that we control for important managerial and
financial traits of ventures documented in prior literature, this finding is, therefore, consistent
with Hypothesis 1. Above and beyond venture characteristics that push entrepreneurs further
Table 4. Marginal Effects for the Use of Crowdfunding.

(1) (2) (3) (4)
SoFFin 0.134*** 0.137*** 0.086**
(0.042) (0.043) (0.039)
Investor −0.105* −0.104* −0.098**
(0.057) (0.053) (0.045)
Venture traits
Team age −0.005** −0.004* −0.005** −0.003
(0.002) (0.002) (0.002) (0.002)
Entrepreneurial experience −0.098** −0.099** −0.102*** −0.070**
(0.039) (0.041) (0.039) (0.035)
Gender
Mixed 0.093 0.065 0.073 0.092
(0.070) (0.070) (0.068) (0.066)
Female 0.113* 0.146** 0.122* 0.096
(0.059) (0.063) (0.065) (0.061)
Number of employees −0.002 −0.002 −0.002 −0.003
(0.002) (0.002) (0.002) (0.002)
Headcount 0.011 0.003 0.008 0.011
(0.021) (0.021) (0.021) (0.018)
Credit rating (base level = poor)
Fair −0.079 −0.118 −0.079 −0.049
(0.066) (0.072) (0.069) (0.060)
Good −0.198*** −0.239*** −0.190*** −0.142**
(0.072) (0.078) (0.073) (0.065)
Large city −0.074** −0.064* −0.069* −0.071**
(0.037) (0.036) (0.036) (0.032)
Scholarship 0.070 0.051 0.053 0.021
(0.051) (0.051) (0.051) (0.042)
Award −0.159** −0.089 −0.119 −0.062
(0.072) (0.078) (0.072) (0.067)
Venture financials
Size −0.090*** −0.100*** −0.092*** −0.077***
(0.018) (0.018) (0.017) (0.014)
Subscribed equity −0.001 −0.001 −0.001 −0.001
(0.001) (0.001) (0.001) (0.001)
Leverage 0.125** 0.124** 0.127** 0.119***
(0.050) (0.053) (0.050) (0.044)
Financial result −0.563*** −0.602*** −0.560*** −0.455***
(0.109) (0.110) (0.110) (0.089)
Liquidity (Venture) −0.323*** −0.320*** −0.314*** −0.278***
(0.078) (0.079) (0.077) (0.079)
Bank traits
Capital −2.184**
(0.867)
(Continued)
Blaseg et al. 13
Table 4. Continued
(1) (2) (3) (4)
Loan loss provisions 4.202***
(1.235)
CTI 0.059*
(0.031)
ROAE −0.858
(0.579)
Liquidity (Bank) −0.391***
(0.069)
Observations 326 326 326 326
Pseudo R2 0.514 0.505 0.524 0.588
AURROC 0.929 0.930 0.931 0.948
Notes. This table presents the average marginal effects from probit regressions, where the dependent variable
is the use of crowdfunding. The sample consists of the 163 ventures that used crowdfunding and 163 matched
ventures that did not use crowdfunding. Robust standard errors appear in brackets. AURROC curve indicates the
discriminatory abilities of the model. Significance levels are as follows: *10%, **5%, and ***1%. The description of
variables is provided in Table 2. AURROC = area under the receiver operating characteristic.
down in the pecking order of capital structure, the association with a distressed bank further
amplifies the tendency to seek equity funding from a presumably uninformed crowd.
This inference is further supported by the first test of Hypothesis 2 in Column (2). Here, we
specify the second main variable of interest, namely, whether an outside equity investor was
already on board before launching an ECF campaign. The statistical result is consistent with the
hypothesis that the presence of equity investors renders it less likely that young entrepreneurs
seek ECF. The estimated magnitude of a 10% reduction of this probability is also sizeable. But
the effect is only statistically significant at the 10% level when ignoring any further information
on the health of a ventures’ bank relationship.
Columns (3) and (4), however, provide crucial qualifications regarding this finding. Note first
that both hypotheses are also jointly supported when specifying the two indicators of whether an
entrepreneur was tied to a distressed bank and when it had an equity investor on board at the
same time. The magnitude, direction, and significance of these effects remain largely unaffected.
Yet, an important additional concern is that the likelihood of choosing ECF is driven by other
bank risk indicators that correlate with the SoFFin indicator and subsequent lending and risk-
taking. To avoid this concern, we accept the first hypothesis, based on such a spurious correla-
tion, and include bank-level control variables that gauge the financial health of banks using the
CAMEL (capital, asset quality, management quality, and liquidity) supervisory ratings system.
We calculate CAMEL variables for the year prior to the first crowdfunding offering for ECF-
funded ventures and the same year for all matched non-ECF ventures.5
Column (4) features two crucial insights. First, both main testing variables remain supportive
of the two hypotheses, even after the inclusion of these bank-risk controls. Whereas the associa-
tion effect with a distressed bank is somewhat smaller with 8.6%, the presence of equity inves-
tors is now statistically significant at the 5% level. Second, three of the five specified CAMEL
proxies are statistically significant at the 1% and 5% level, respectively. Consistent with the first
hypothesis, relationships with banks exhibiting more risky financial profiles render it more likely
that entrepreneurs will seek ECF. Less well-capitalized banks are less able to buffer asset price
depreciation. Banks with lower-quality assets exhibit higher loan loss provisions relative to total
gross loans, which indicates more exposure to credit risk shocks. And finally, lower shares of
liquid assets expose banks to random macro and financial shocks. Consistent with Hypothesis 1,
we find that higher capital and liquidity ratios at the bank level reduce the likelihood of using
crowdfunding, whereas a higher loan loss provisions ratio increases the likelihood. The result
corroborates that a relationship with a stable and well-managed bank also reduces the need for
young ventures to seek alternative funding from a crowd. The positive SoFFin and the negative
outside investor effects remain statistically and economically significant, which implies that
these indicators of potential constraints faced by young ventures are unlikely to merely confine
unobserved traits as credit supply shocks, again consistent with Hypotheses 1 and 2.
Finally note that goodness-of-fit indicators like the receiver operating characteristic curve
(AURROC) corroborate the discriminatory power of the model and show that the probability of
using crowdfunding is explained quite well by the model (Hosmer & Lemeshow, 2012). In sum,
the results in Table 4 clearly support Hypotheses 1 and 2, indicating that young ventures are more
likely to use ECF when more conventional providers of early-stage funding are stressed or
absent.
Venture Traits
To assess if our results depend on the degree of information asymmetries and the quality of the
venture, we first consider nine well-established venture traits that gauge softer management fac-
tors as well as ratings to proxy for the riskiness of the venture.
First, we consider demographics such as age and gender as well as the experience of the man-
agement team (MT) (Franke et al., 2008; Hsu, 2007). For each venture, we collect the identity,
gender, and birthyear of all MT members from the Bundesanzeiger. We match the identity of
each MT member to manually collected information from professional social networks, such as
LinkedIn and XING, obtaining the curriculum vitae of each executive. The variable
Entrepreneurial Experience equals “1,” if at least one MT member has founded and led a venture
before the current undertaking, and “0” otherwise. The effects of Team Age and Entrepreneurial
Experience are significantly negative, indicating that younger and less experienced MTs are
more likely to use ECF. Both MT traits offer important funding criteria for traditional outside
investors, and having ties to a weak bank seems to aggravate these funding hurdles for young
entrepreneurs. Gender gauges the composition of the MT. The value “1” indicates male-only, “2”
mixed, and “3” female-only MTs. Relative to male-only MTs, the marginal effects for mixed
MTs are not statistically significant, but female-only MTs are 10%–14% more likely to tap the
crowd. This finding confirms results that female-owned ventures are less likely to obtain external
funding (Coleman, 2000).
Whereas previous research reveals that the number of MT members and the number of
employees are quality signals to outside investors (Davila et al., 2003), the according marginal
effects for the Number of Employees and the MT Headcount are statistically insignificant.
The variable Credit Rating ranges from A (good) to C (poor) and is obtained from the rating
agency Buergel. Robb and Robinson (2014) confirm that better external ratings enhance the
chances of obtaining a loan, whereas ventures with poor ratings are credit-constrained. Hence,
we expect that poor credit scores increase the likelihood of using ECF, as they should amplify
already-existing credit supply frictions, which we hypothesize to be characteristic of a relation-
ship with a distressed bank.6 The estimated marginal effect of a positive credit rating is signifi-
cantly negative in all models. A good credit rating decreases the probability of using ECF by
14%–24% compared with ventures that have a bad rating.
We also specify a Large City indicator equal to “1,” if the venture is located in a city with
more than 500,000 (urban) inhabitants, because most financiers invest only within a close
Blaseg et al. 15
geographic scope in order to reduce distance‐sensitive costs, such as monitoring (De Prijcker
et al., 2019). We expect that ECF provides a greater alternative outside the largest cities. The
significantly negative marginal effect confirms that ECF is roughly 7% less likely for ventures
located in large cities. Put differently, the lack of agglomeration effects due to lackluster loan
supply by distressed banks is partly mitigated for ventures residing in urban environments, which
offer more funding alternatives.
Finally, we control for the reputation of the venture, which is an important quality signal to
reduce information asymmetry when acquiring outside funding (Higgins & Gulati, 2006). Given
the short history of new ventures, we focus on awards won in business plan competitions and
scholarships, which we both hand-collect and match by venture names to our data. Both creden-
tials symbolize MT capability, establish social standing, and increase the chance of receiving
external finance (Howell, 2017), yet either indicator—Scholarship and Award—is insignificant,
indicating that winning an award has no statistically significant effect on using ECF.
In sum, our results attribute an important role to more tacit venture traits as well as to credit
scores. Less experienced, younger, and female MTs are significantly more likely to tap the crowd.
More risky ventures and those residing outside urban areas are more likely to use ECF. The
results corroborate our previous findings that ventures of lower quality appear to need funding
from a crowd.
Financial Traits
Due to notoriously light public reporting requirements in Germany, we rely on a rudimentary
balance sheet and a few indicators of financial performance to control for the impact of five well-
established financial variables on the likelihood of the use of ECF. We measure Size as the natural
logarithm of total assets to mitigate the influence of outliers.7 We observe the amount of
Subscribed Equity and gauge Leverage as the share of total liabilities to total assets. The Financial
Result equals the ratio of annual surplus, or deficit, reported on the balance sheet, relative to the
total assets of the venture. Finally, Liquidity is the ratio of cash and accounts receivable to total
assets. We compare the data from one year prior to the start of the ECF campaign with the exact
same year when the matched venture did not use ECF.8
The data indicate that financial traits have significant effects on the odds of using ECF for all
financial covariates but subscribed equity, as shown in Table 4. Smaller and less profitable ven-
tures, with lower liquidity buffers and more leverage, seek funding from the crowd more often.
These results confirm prior evidence (e.g., Walthoff-Borm, Schwienbacher, et al., 2018) and
suggest that it is the more risky and potentially more funding-constrained ventures that are
attracted by the crowd. Overall, note that the inclusion/exclusion of different control variables
does not affect the main results pertinent to our hypotheses.
Competing Failure Hazard

If ventures associated with distressed banks or without external equity are indeed more likely to
be pushed into ECF because they are low quality ex ante, we expect that more of these ventures
eventually fail ex post, compared with non-ECF entrepreneurs who managed to receive funding
elsewhere. To discern the low-quality from the high-quality entrepreneurs along this train of
thought, we propose an empirical ad-hoc test that exploits our plentiful manually collected data
to reveal successful and unsuccessful ECF ventures. Specifically, we track all ventures, crowd-
funded or not, and estimate whether they filed for bankruptcy with their respective courts, con-
ditional on funding sources.9
Figure 1. Sample of new ventures that applied for crowdfunding and failed. Notes. This figure shows the
sample of ventures that applied to one of the four largest equity crowdfunding platforms in Germany
for funds between 2011 and 2015. To account for the small number of ventures that used ECF in 2015,
we extended the observation period for failures by one year. Some ventures applied multiple times for
funding. The data on nonapplicants were obtained from the Orbis database. The data about crowdfunding
applicants were collected from observing applicant data directly in the online platforms maintained by
Companisto, Fundsters, Innovestment, and Seedmatch.
Figure 1 illustrates that out of a total of 326 matched ventures, 46 failed between 2011 and
2016.10 Note that the unconditional failure rate is significantly higher among crowdfunded ven-
tures compared with noncrowdfunded ones: 19% as opposed to 9%. To operationalize this ad-
hoc test on the role played by ECF, distressed bank association, and their interaction to explain
the failure of new ventures, we estimate Equation (2) using a probit model as our main work-
horse specification.
‍ Pr (Fi = 1) = (αSoFFini + βECFi + γSoFFin × ECFi + δxi + ui > 0)‍ (2)
The dependent variable is an indicator Fi equal to “1,” if the venture declared insolvency, and “0”
otherwise. Failure indicates whether the projects were ultimately successful or turned out to be
low quality, with unpaid bills and, for the most part, a total failure for investors. The variables
SoFFin and ECF are indicators equal to “1,” if the venture is associated with a distressed bank
and used ECF, respectively. The interaction between both financing forms is then captured by γ,
whereas the vector x features the same control variables as before.
Table 5 shows the results from a reduced form competing for hazard specification using a
probit model for the entire sample. We explain failures for the full sample of all 326 ventures,
conditional on the presence of the alternative financing forms. Furthermore, we specify all of the
tacit venture traits, as well as financial indicators as discussed above, as control variables.
The effect of using ECF on the likelihood of eventual failure is estimated in Column (1),
whereas Column (2) shows the marginal effect if the venture is connected to a SoFFin-supported
bank. Consistent with Hypothesis 1, failure is significantly more likely for both indicators (ECF
and SoFFin) of a venture that is of lower quality and therefore pushed further down in the peck-
ing order of capital. The estimated marginal effects indicate an increase of around 12% and 10%,
respectively. These magnitudes are substantial given an unconditional failure probability of 14%
Blaseg et al. 17
Table 5. Marginal Effects for the Failure of All Ventures.

(1) (2) (3) (4)
ECF 0.118** 0.093* 0.053
(0.052) (0.052) (0.056)
SoFFin 0.097** 0.075* −0.100
(0.040) (0.039) (0.090)
ECF # SoFFin 0.227**
(0.100)
Investor 0.046 0.038 0.043 0.044
(0.052) (0.051) (0.051) (0.050)
Venture traits
Team age 0.001 0.001 0.001 0.002
(0.002) (0.002) (0.002) (0.002)
Entrepreneurial experience −0.086* −0.100** −0.090* −0.085*
(0.049) (0.049) (0.049) (0.049)
Gender (base level = male)
Mixed −0.032 −0.017 −0.025 −0.015
(0.065) (0.068) (0.065) (0.064)
Female −0.065 −0.043 −0.056 −0.035
(0.043) (0.047) (0.044) (0.048)
Number of employees 0.003 0.002 0.002 0.002
(0.002) (0.002) (0.002) (0.002)
Headcount −0.011 −0.008 −0.012 −0.013
(0.020) (0.020) (0.020) (0.019)
Credit rating (base level = poor)
Fair 0.025 0.026 0.036 0.046
(0.047) (0.048) (0.045) (0.043)
Good −0.007 −0.012 0.007 0.019
(0.053) (0.054) (0.052) (0.050)
Large city 0.026 0.007 0.015 0.015
(0.039) (0.039) (0.039) (0.038)
Scholarship 0.048 0.065 0.055 0.064
(0.053) (0.053) (0.053) (0.052)
Award 0.032 0.010 0.022 0.019
(0.076) (0.076) (0.079) (0.078)
Venture financials
Size 0.043*** 0.035*** 0.044*** 0.045***
(0.015) (0.013) (0.015) (0.015)
Subscribed equity −0.001 −0.001 −0.001 −0.001
(0.001) (0.001) (0.001) (0.001)
Leverage −0.018 0.020 −0.010 −0.022
(0.055) (0.052) (0.055) (0.053)
Financial result −0.065* −0.097*** −0.072** −0.075**
(0.036) (0.035) (0.036) (0.036)
Liquidity (Venture) −0.028 −0.057 −0.035 −0.032
(0.081) (0.078) (0.080) (0.079)
(Continued)
Table 5. Continued
(1) (2) (3) (4)
Observations 326 326 326 326
Pseudo R-squared 0.098 0.097 0.109 0.124
AURROC 0.735 0.728 0.742 0.755
Notes. This table presents the average marginal effects from probit regressions, where the dependent variable
is the failure of the venture. The sample consists of the 163 ventures that used crowdfunding and 163 matched
ventures that did not use crowdfunding. Robust standard errors appear in brackets. AURROC curve indicates
the discriminatory abilities of the model. Significance levels are as follows: *10%, **5%, and ***1%. The description
of variables is provided in Table 2. AURROC = area under the receiver operating characteristic, ECF = equity
crowdfunding.
(=46/326). These results show ECF is associated with lower-quality entrepreneurs. The presence
of an outside equity investor, in turn, has no significant effect on the occurrence of insolvencies.
This result might indicate that, compared to stressed banks and an uninformed crowd, early-stage
financiers with skin in the game are more successful in avoiding the low-quality entrepreneurs in
the applicant pool.
As a simple first-pass inspection regarding whether it is the relationship to a distressed bank
in itself or, rather, the resulting push of young entrepreneurs into ECF that renders subsequent
failure more likely, we specify both proxies for low-quality ventures in Column (3). The respec-
tive marginal effects remain intact regarding magnitude, sign, and significance compared to
Columns (1) and (2). That the discriminatory power of the model improves slightly suggests that
either aspect of being a venture of inferior quality has an individual influence on failure
likelihood.
Column (4) tests more explicitly whether ventures that maintain both ties to bad banks and
funding from the crowd are particularly endangered by failure. To gauge any such undesirable
interaction when both sources of funding occur at the same time, we specify an according param-
eter, which is significantly positive and large in Column (4). At the same time, both individual
indicators are no longer statistically different from zero. This result thus underpins that the hike
in failure probabilities is driven by the subgroup of new ventures that face credit constraints from
bad banks and receive, at the same time, funding from uninformed crowd investors. Potentially,
stressed and inattentive bankers continue lending without monitoring well, which an uninformed
crowd is misreading as a signal of quality. This interpretation is further supported since we do
account for a range of well-established drivers of failure among young entrepreneurs in the form
of venture traits and financials. This approach mitigates concerns that we merely gauge omitted
factors with our proxies for the quality of financiers that drive ventures down the pecking order
of finance. Specifically, we find that more experienced and financially successful ventures are
significantly less likely to fail, while, within this group of generally small young entrepreneurs,
only the relatively large ones file for insolvency with the courts when they go out of business.
The ad-hoc nature of this empirical test is clearly subject to a number of limitations. At the
same time, we provide in the online appendix some important indications that these findings are
not driven by the choice of estimation method. Table OA4 demonstrates that the results for the
main test variables, SoFFin and ECF, remain qualitatively unaffected when using, instead of a
probit model as in Equation (2), a Cox proportional hazard rate model, a logit model, or a linear
probability model, respectively. Related, we rule out the very reasonable concern that the failure
probability result is subject to selection bias by some ventures into ECF. The results from the
Blaseg et al. 19
second stage of an accordingly specified Heckman selection model in Table OA5 also confirm
the qualitative results reported here.
Overall, the ad-hoc tests on this rich manually collected sample reveal rather robustly that
ventures tied to distressed banks that use ECF are also significantly more likely to eventually fail,
compared to non-ECF-funded ventures that are not connected to bad banks. As such, this evi-
dence points towards the conclusion that the low-quality entrepreneurs especially seek funding
from the crowd.
Discussion, Policy Implications, and Future Research

In this paper, we hypothesize that entrepreneurs who are tied to more risky banks are more likely
to be low quality. A large sample of ECF campaigns in Germany shows strong evidence that
connections to distressed banks push entrepreneurs to use ECF. We find some evidence, albeit
less robust, that entrepreneurs who can access other forms of equity are less likely to use ECF.
Finally, the data indicate entrepreneurs who access ECF are more likely to fail.
There are potentially two types of ventures that are in our matched samples: those that did not
apply for crowdfunding and those that did apply for crowdfunding but were not listed by the
platform. Most likely, the matched sample comprises the former and not the latter, given the
breadth of the potential matched sample comprised of over 32,000 start-ups; the ECF ventures in
our sample comprise 163 start-ups. Therefore, our evidence implies that, on average, the quality
of entrepreneurial ventures that seek ECF in Germany is lower than the quality of ventures that
do not seek ECF after matching. The evidence does, therefore, not imply that crowd investors are
bad at screening projects; rather, the evidence implies that the average quality of ventures is
lower in ECF, and investors are willing to take the risk and make crowdfunding investments with
a preference for skewness in terms of hoping for outlier positive returns from some
investments.
Our evidence does not directly enable an assessment of whether or not ECF investors are
worse at screening and due diligence. That type of wisdom of the crowd argument could only be
tested with data unavailable to us. Essentially, what would be needed would be to take into con-
sideration that the crowd selects projects among the deal-flow preselected and suggested by the
ECF platform. So, the backers do not select among all start-ups or all fundraising start-ups, but
select those among the start-ups applying to ECF platforms, and those selected by the invest-
ment’s platforms. It would be interesting to compare start-ups: (1) applying to the ECF platforms
but who were not selected by the teams, (2) the selected start-ups not financed by the crowd, and
then (3) the ECF’s financed start-ups. With a such comparison, future scholars could comment
on the capacity of crowdfunders to evaluate and screen ECF projects. Our data do not allow for
this type of analysis, but we hope future scholars will be able to obtain such data.
Our evidence nevertheless does contribute to our understanding of adverse selection and how
pronounced it can be in ECF. The most direct policy implications for our research focus on infor-
mation sharing for investors. Investors should be made fully aware of the risks associated with
ECF through information disclosed on the platform webpages and through online material made
available alongside crowdfunding regulations disclosed from securities authorities. Moreover,
our findings imply that regulations that limit the amounts of investment per year from retail
investors, as well as regulations that limit the amount of ECF capital that can be raised by entre-
preneurs per year can mitigate the potential losses associated with crowdfunding relative to what
might be achievable, on average, from investing elsewhere. At the same time, ECF enables entre-
preneurs’ access to capital and investors access to the possibility of superior returns with poten-
tial outlier projects.
It is important to highlight the fact that the estimates here are based on the average venture in
the sample and not the outliers. There are two types of outliers: (1) very bad and, in some cases,
even fraudulent ventures and (2) extremely successful ventures. Markets like crowdfunding,
with very low listing standards, are often viewed like lotteries, as the payoffs are very skewed
and can be enormous for a small number of very successful ventures. For example, some ECF
ventures have turned out to be extremely successful, such as Rewalk Robotics Ltd, which
achieved an IPO in 2014 on NASDAQ.11 As such, understanding the motives of ECF investors
is somewhat akin to understanding the economics of lottery markets and junior stock exchanges
with very low listing standards (Carpentier et al., 2012). Conversely, there is some work on the
context of rewards-based crowdfunding that shows that rates of fraud are substantially lower
than that which is observed on public stock exchanges (Cumming et al., 2016). In addition to the
due diligence implications of this study for policymakers and practitioners, there are related
implications for the overall design of support programs in entrepreneurial finance. Our evidence
appears to be consistent with the view that crowdfunding fills an even more risky spectrum of the
early-stage financing market than do traditional equity investors. But, future work is needed to
better understand the intersection between the different forms of finance; the optimal mix of VC,
debt, and crowdfunding in different economic and institutional environments; and the efficient
role for legislation and government programs, so that each of these segments might best comple-
ment another.
Our findings are certainly consistent with the presence of extreme information asymmetry
between entrepreneurs and investors in ECF campaigns. Likewise, as researchers, we do not
observe all of the characteristics of the entrepreneurs. We are not fully able to assess whether the
results are driven by unobserved characteristics of the management team, project, technology, or
industry. Future research with more fine-tuned data and/or different institutional settings might
shed additional light on these issues. This type of work would inform not only academics about
pronounced sources of information asymmetry but also continue to inform practitioners in their
due diligence checks and policymakers with optimal design of regulatory structures.
Conclusion
External finance is crucial to entrepreneurial activities. However, continental Europe is plagued
by scarce early-stage capital. Moreover, poor bank profitability, paired with tighter regulations to
combat risk-taking after the financial and sovereign debt crises, imply that young ventures’
access to bank credit is hampered.
In this paper, we test whether the emergence of ECF as an innovative form of external funding
is both attractive and successful for such ventures. Thereby, we shed light on the broader ques-
tion of whether ECF is conducive to match small denomination savers efficiently with innovative
projects or if an uninformed investor crowd is more likely lured by proverbial low-quality entre-
preneurs from the project pool. Also, in response to recent calls to better understand how differ-
ent sources of funding interact (e.g., Cumming et al., 2018, Cumming, Deloof, et al., 2019), we
examined the intersection of bank finance and ECF.
To this end, we manually collect a sample of 326 German ventures, of which 163 ran an ECF
campaign, between 2008 and 2015. To gauge potential funding constraints faced by these ven-
tures, we collect their bank relationship(s) to approximate potential credit frictions. These ven-
tures do business with 83 banks, underscoring the importance of bank credit in the German
financial system, even as an early-stage financier. Also, we identify whether or not an equity
investor was invested in the venture, which should reduce funding constraints. This information
is combined with hand-collected and web-crawled data on financials, ratings, management
teams, and campaign-specific traits to specify a regression model that explains two main
Blaseg et al. 21
questions. First, can we identify the determinants of young ventures’ choices to tap the crowd for
funding? And, second, how likely are crowdfunded ventures to fail? Failure would ultimately
unveil these ventures as low-quality rather than high-quality projects not efficiently selected by
the mechanisms in ECF.
An important first result is that young ventures are significantly more likely to use ECF if
they are connected to banks that were bailed out by the German government after the financial
crisis. Likewise, the presence of an outside equity investor reduces these odds substantially.
Thus, it seems that tighter funding constraints induce ventures to take to the crowd for
funding.
Moreover, we find that ventures do not choose ECF randomly. Our evidence clearly points to
a lower likelihood for ventures that are larger, more liquid, less unprofitable, and rated well to use
ECF. Besides financial profiles and credit ratings, we also provide evidence that more tacit indi-
cators, in particular, management team traits, matter in the choice of ECF. Specifically, younger
and less experienced management teams with female participation tend to use ECF more often.
Together, these results suggest that ventures of lower-quality consider the less conventional
method of ECF to raise external finance.
We also assess whether projects that use ECF are more likely or not to be successful for the
investors. Specifically, we conduct an analysis based on manually collected insolvency data for
each of the 326 ventures between 2011 and 2016. The results imply that ventures tied to dis-
tressed banks and that use ECF are also significantly more likely to eventually fail, compared to
non-ECF-funded ventures that are not connected to bad banks. As such, this evidence points
again toward the conclusion that especially the low-quality entrepreneurs seek funding from the
crowd.
Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or
publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
ORCID IDs
Daniel Blaseg ‍ ‍https://orcid.org/0000-0002-9218-3806
Douglas Cumming ‍ ‍https://orcid.org/0000-0003-4366-6112
Notes
1. Equity crowdfunding is not completely standardized, as different platforms offer different ways in
which entrepreneurs can engage in equity crowdfunding. But the menu of options is rather limited,
particularly relative to the wide scope of things that could be put into a venture capital contract, for
example.
2. As an alternative, we use a matched sample of ventures that are members of the German Startup
Association as counterfactual. Results are qualitatively and quantitatively similar and available upon
request.
3. All data were collected and coded by two independent and trained human coders. In the case of a dis-
agreement, a final decision was made by a third coder.
4. Results are insensitive to various alternative categorizations of distressed banks that are available upon
request. The full list of banks is provided in Table OA3 in the online appendix.
5. Results are robust to alternative measurements (e.g., average since foundation, CAGR, the year of the
crowdfunding).
6. Rating classes are coded discretely in descending order of quality from 3 to 1. Probabilities of default
(PoD) in the three classes range from 0.2% to 2.1%, from 2.1% to 4.3%, and from 4.3% to infinity over
a forecast horizon of 36 months. Investment grades usually have a PoD of less than 0.1%, whereas
speculative grades are around 3.2%.
7. Winsorizing total assets instead did not alter our results qualitatively.
8. Using alternative episodes before or during ECF use does not alter our results qualitatively.
9. These data are available at the Federal Ministry of Justice (www.insolvenzbekanntmachungen.de).
10. As most failures occur in the first years, we monitor failures until 2016 to also account for ventures
funded in 2015.
11. https://www.nasdaq.com/markets/ipos/company/rewalk-robotics-ltd-939127-75947. Other success-
ful ECF campaigns are listed frequently on webpages such as http://www.eu-startups.com/2017/09/
europes-10-most-successful-crowdfunding-campaigns/.
Supplemental Material
Supplemental material for this article is available online.
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Author Biographies
Daniel Blaseg is Assistant Professor of Entrepreneurship in the Department of Strategy and
General Management at ESADE Business School. He received his PhD in Business from Goethe
University Frankfurt and holds master’s degrees in Law and in Finance. He gained practical
experience as a consultant for venture capital transactions and as co-founder and CFO of several
startups.
Douglas Cumming, is the DeSantis Distinguished Professor of Professor of Finance and

Entrepreneurship at the College of Business, Florida Atlantic University, and Visiting Professor,
Birmingham Business School. He has published over 180 articles in leading refereed academic
journals in entrepreneurship and finance. He is the Managing Editor-in-Chief of the Journal of
Corporate Finance (2018-2020), and the British Journal of Management (2020-2022). He is the
Founding Editor of Annals of Corporate Governance (2016-current). He has published 18 aca-
demic books, the most recent being Crowdfunding: Fundamental Cases, Facts, and Insights.
(Elsevier Academic Press, 2019).
Michael Koetter, is Professor of Financial Economics at the University of Magdeburg and head
of the Financial Markets department at the Halle Institute for Economic Research (IWH). He is
an editor at the Economics of Transition and Institutional Change, an associate editor at the
Journal of Financial Stability, and scientific advisory board member of the RSDC of Deutsche
Bundesbank. His research has received funding from national science foundations and appeared
in economics, finance, and statistics outlets like the Journal of Monetary Economics, Review of
Financial Studies, Review of Economics and Statistics and others. He regularly advises central
banks and regulators.

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Entrepreneurship Theory and Practice

Equity Crowdfunding: 00(0) 1–26

Daniel Blaseg1 ‍ ‍, Douglas Cumming2,3 ‍ ‍, and Michael Koetter4

better understanding as to how these different sources of entrepreneurial finance interact

Entrepreneurs Affiliated with Distressed Banks

Specification, Sampling, and Data

‍ Pr (yi = 1) = (αSoFFin + βxi + ui > 0)‍ (1)

Main Result: Determinants of ECF

Pecking order proxies

ECF = equity crowdfunding.

Table 3. Descriptive Statistics by the Use of ECF.

Table 4. Marginal Effects for the Use of Crowdfunding.

Competing Failure Hazard

‍ Pr (Fi = 1) = (αSoFFini + βECFi + γSoFFin × ECFi + δxi + ui > 0)‍ (2)

Table 5. Marginal Effects for the Failure of All Ventures.

Discussion, Policy Implications, and Future Research

Declaration of Conflicting Interests

Douglas Cumming, is the DeSantis Distinguished Professor of Professor of Finance and

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EQUITY CF ET QUALITE DES ENTREPRENEURS

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Article

Entrepreneurship Theory and Practice

Equity Crowdfunding: 00(0) 1–26

Daniel Blaseg1 ‍ ‍, Douglas Cumming2,3 ‍ ‍, and Michael Koetter4

better understanding as to how these different sources of entrepreneurial finance interact

Entrepreneurs Affiliated with Distressed Banks

Specification, Sampling, and Data

﻿‍ Pr (yi = 1) = (αSoFFin + βxi + ui > 0)‍ (1)

Main Result: Determinants of ECF

Pecking order proxies

ECF = equity crowdfunding.

Table 3. Descriptive Statistics by the Use of ECF.

Table 4. Marginal Effects for the Use of Crowdfunding.

Competing Failure Hazard

﻿‍ Pr (Fi = 1) = (αSoFFini + βECFi + γSoFFin × ECFi + δxi + ui > 0)‍ (2)

Table 5. Marginal Effects for the Failure of All Ventures.

Discussion, Policy Implications, and Future Research

Declaration of Conflicting Interests

Douglas Cumming, is the DeSantis Distinguished Professor of Professor of Finance and

You might also like

‍ Pr (yi = 1) = (αSoFFin + βxi + ui > 0)‍ (1)

‍ Pr (Fi = 1) = (αSoFFini + βECFi + γSoFFin × ECFi + δxi + ui > 0)‍ (2)