On equity crowdfunding: investor rationality and success factors

Based on observations from four European equity crowdfunding platforms, this study assesses crowdinvestors' ability to interpret signals associated with firm and owner attributes, financial statements, and social networking activity when selecting investment opportunities. It was found that crowdinvestors attempt to reduce risk by choosing larger firms managed by experienced and educated managements who maintain a relatively large equity stake post-offering, while maximizing returns by picking projects with better growth opportunities (for example, young firms with higher expected margins and reasonably high sales growth forecasts). These results suggest that participants in the crowdfunding market are rational, interpreting signals derived from firm attributes and financial statements in appropriate ways to minimize risk and maximize returns. The firm's and entrepreneur's social networks also has a strong influence on investment decisions, so much so that the inclusion of this variable weakens the impacts of firm size, expected sales growth and margin on campaign success. This suggests the possibility that social media provide investors with an opportunity to validate otherwise less credible information.