Research Papers in Economics 

No. 7/15 

 

Pricing Shares in Equity Crowdfunding 

 

 

 

Lars Hornuf 

Matthias Neuenkirch 

 

Pricingsharesinequitycrowdfunding

LarsHornufa,bandMatthiasNeuenkircha

aUniversityofTrier

bMaxPlanckInstituteforInnovationandCompetition

Firstdraft:30June2015

Thisversion:28July2016

Correspondingauthor:

MatthiasNeuenkirchDepartmentofEconomicsUniversityofTrierD‐54286TrierGermanyTel.:+49–651–2012629Email:neuenkirch@uni‐trier.de

* The authors are highly indebted to themanagers and owners of Innovestmentwhoprovided the investor data as well as Matthias Schmitt who calculated the data ongeographicdistances.TheyalsothankGregorDorfleitner,LarsKlöhn,AlexanderRajko,ElisabethSchulte, andparticipantsof the3.CrowdinvestingSymposium (UniversityofMunich) and Munich Summer Institute 2016 (Bavarian Academy of Sciences andHumanities),whoprovidedvaluablecommentsandsuggestionsonpreviousversionsofthepaper.Anearlierversionofthepaperwascirculatedunderthetitle“PricingtheValueofCashFlowRightsinCrowdinvesting:AnAnalysisofInnovestmentBackers.”

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Pricingsharesinequitycrowdfunding

Abstract

Weanalyzethepricingofcashflowrightsinstart‐upcompaniesusingauniquedataset

of44equitycrowdfundingcampaigns.Oursampleconsistsof499backerswhoinvested

during the period fromNovember 6, 2011, toMarch 25, 2014, on the German equity

crowdfunding portal Innovestment. In contrast with all other European equity

crowdfunding portals, Innovestment runs a multi‐unit second‐price auction in which

backersthemselvescanspecifythepriceofaninvestmentticket.Weexploitthisunique

auctionmechanismtoanalyzebackers’willingnesstopayforcashflowrights.Wefind

thatcampaigncharacteristics,investorsophistication,progressinfunding,herding,and

stock market volatility influence backers’ willingness to pay in an economically

meaningfulmannerwhilegeographicdistance,learningeffects,andsnipingattheendof

anauctionhavenoeffect.

Keywords:Auctions,Equitycrowdfunding,Valuationofshares

JELClassifications:D44,G11,M13

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1. Introduction

Aroundtheglobe, lawmakersaretakingactionstobringequitycrowdfundingundera

specific legal umbrella. Equity crowdfunding (also referred to as investment‐based

crowdfunding, securities crowdfunding, or crowdinvesting1) constitutes a financial

innovation in securities issuance that gives small entrepreneurs access to the general

public.Regulatoryeffortsoftenpursuetheobjectivetofacilitateentrepreneurialactivities

while also putting a minimum level of investor protection in place. To balance this

tradeoff,regulatorsmustconsidertheactualbehaviorofinvestorsinthesemarkets.In

thispaper,weinvestigatehowbackerspricethevalueofcashflowrightsinastart‐up

companywhenengaginginanequitycrowdfundingcampaign,usingauniquedatasetof

Innovestmentbackers.

Prior studies on Internet‐based entrepreneurial finance have mainly focused on

donation‐based crowdfunding (Bøg et al. 2012; Burtch et al. 2013;Koning andModel

2013;Meer2014;SaxtonandWang2014),reward‐basedcrowdfunding(Agrawaletal.

2013; Belleflamme et al. 2014; Colombo et al. 2015; Kuppuswamy and Bayus 2014;

MaromandSade2013;Mollick2013,2014;YounkinandKashkooli2013;Zvilichovskyet

al. 2013), andcrowdlending (Burtchet al. 2014;Linet al. 2012;LinandViswanathan

2013).Inoneofthefirststudiesonequitycrowdfunding,Agrawaletal.(2013)analyze

therevenue‐sharingmodelofSellaband.UndertheSellabandmodel,backersreceivea

portionof the futurereturns thatanartistgeneratesbyproducingmusic.Ahlersetal.

(2015)investigateinvestorsontheAustralianequityportalASSOB.Theyfindthatstart‐

upslistedontheportalusesignalswithregardtofinancialroadmaps,riskfactors,andthe

internalgovernanceofthefirmthatencouragecrowdinvestorstoparticipate.Blocketal.

(2016),HornufandSchwienbacher(2015),andVismara(2015)investigatethefunding

dynamics inequitycrowdfunding.They find that investorsbase theirdecisionson the

1Inthispaper,werefertothenewassetclassasequitycrowdfunding,asthisisthetermmostfrequently

used in the literature. See also the JOBS Act, which includes the term ‘crowdfunding’ referring totransactionsinvolvingtheofferorsaleofasecurity,andAhlersetal.(2015,p.955),whodefinetheterm‘equitycrowdfunding’asa‘formoffinancinginwhichentrepreneursmakeanopencalltosellaspecifiedamountofequityorbond‐likesharesinacompanyontheInternet’.TheFCAConsultationPaperCP13/13‘TheFCA’sregulatoryapproachtocrowdfunding(andsimilaractivities)’andtheEuropeanSecuritiesandMarkets Authority ‘Opinion Investment‐based crowdfunding’ use the term ‘investment‐basedcrowdfunding’.Knightetal.(2012)andtheUSSecuritiesandExchangeCommission(17CFRParts200,227,232etal.Crowdfunding,ProposedRule)refertothisnewactivityas‘securitiescrowdfunding’.Theterm‘crowdinvesting’isprobablythemostuseful,asitencompassesallfinancialinstrumentsfoundinpractice,regardlessofwhethertheyareclassifiedassecuritiesorinvestmentsorlackalegaldefinitionaltogether(KlöhnandHornuf2012).

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informationofferedbytheentrepreneurintheformofupdatesandbypeerinvestments

and comments of other crowd investors. Moreover, there is evidence for a collective

attentioneffectandherdingbehavior.

Inwhat follows,weanalyze thepricingof cash flowrights in a start‐upcompanyby

equitycrowdfundingbackers.IncontrastwithallotherEuropeanequitycrowdfunding

portals,Innovestmentdeviatesfrombrokeringfixed‐priceinvestmentticketsonafirst‐

come, first‐served basis. Instead, the portal implemented a multi‐unit second‐price

auctioninwhichbackerscanthemselvesspecifythepricetheyarewillingtopayforeach

ticket,with a lower threshold being specified by Innovestment and the start‐up to be

listed.Asaconsequence,backerscanoutbideachotherwhenacquiringcashflowrights

inastart‐upcompany.

Ourkeycontributiontotheliteratureistoexploitthisuniqueauctionmechanismand

present an analysis of backers’ willingness to pay. We test whether (1) campaign

characteristics,(2)investorsophistication,(3)theprogressinthefundingcampaign,(4)

herdingbehavior,(5)stockmarketvolatility,(6)thedistancebetweenthebackerandthe

start‐up,and(7)snipingattheendofanauctionplayarolewhenbackersdecidehow

muchmoneytheyarewillingtopayforaticket.Oursampleconsistsof44campaignsthat

Innovestmentacceptedtobelistedonitswebsite.Ourresultsarebasedon1,450bids

madeby499backersduringtheperiodfromNovember6,2011,toMarch25,2014.

Ourkeyfindingsarethatcampaigncharacteristics,investorsophistication,progressin

thefundingcampaign,herding,andstockmarketvolatilityinfluencebackers’willingness

to pay in an economically meaningful manner. We find no evidence that geographic

distance, learning effects, or snipingbehavior at the endof the auction influences the

pricingofcashflowrightsinastart‐upcompany.Theresultssuggestthatself‐imposed

portaldesignsandtheorganizationofequitycrowdfundingcampaignscanexertastrong

impact on backers’willingness to pay for cash flow rights and company sharesmore

generally.

Theremainderofthispaperproceedsasfollows.Section2providessomebackground

onequitycrowdfundingingeneralandadetailedexplanationoftheauctionmechanism

oftheequitycrowdfundingportalInnovestment.Section3introducesthedatasetand

derives the paper’s hypotheses. Section 4 presents the empirical results. Section 5

concludesandprovidespolicyimplications.

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2. Theoreticalandinstitutionalbackground

2.1Definingequitycrowdfunding

Crowdfundingcombinestheideaofmicro‐financewithcrowdsourcing(Mollick2013).In

the United States, crowdfunding campaigns are run under either the donation or the

reward model. Under the former, backers donate money to support a philanthropic

project without expecting any compensation. Under the latter, backers are promised

tangibleorintangibleperks,suchasasupportercoffeemugorbeingmentionedonthe

campaign website. For some of the most popular projects, rewards resemble a pre‐

purchaseof theproduct or service tobedevelopedby the founder. In the caseof the

Pebblesmartwatch,forexample,68,929backersspentmorethan10millionUSDintotal

toobtainawatchthatconnectswiththesmartphone.Thefirst200backerspre‐purchased

ablackwatchfor99USD.Another40,799backersthenpre‐paid115USDforthevery

samewatch.Theremainingbackerspre‐paidaslightlyhigheramounttoobtainafancier

versionofthewatch.

The crowdfunding businessmodel is different from crowdlending, inwhich backers

invest in consumer or business loans to receive a pre‐determined periodic interest

payment from debtors. Equity crowdfunding is a combination of crowdfunding and

crowdlending. Backers spendmoney in equity crowdfunding campaigns to support a

founder, who is working to develop a sustainable product or service, and expect a

monetaryreturnaftertheinvestmentcontractexpiresorthestart‐upcompanyisbought

byaventurecapitalist.Inthemajorityoftheequitycrowdfundingcampaigns,however,

backersdonotpre‐purchasetheproductorservicetobedeveloped.IntheUnitedStates,

equitycrowdfundingwasrestrictedforalongtimetoaccreditedinvestorsanddidnot

takeplace inanysignificantmanner.Although in2012 theUnitedStateswas the first

jurisdiction to pass a law specifically regulating equity crowdfunding activities, the

Securities and Exchange Commission implemented specific rules on Title III of the

Jumpstart Our Business Start‐ups (JOBS) Act only in May 2016. At that time, equity

crowdfundingbysolicitingthegeneralpublicbecamelegal.

Under German securities law, equity crowdfunding by non‐accredited investors has

always been possible. Since 2011, more than 30 equity crowdfunding portals began

operating. The crowd participates in the future cash flows of a firm by investing in

mezzaninefinancialinstruments.Mostfoundersdonotoffercommonsharesinaprivate

limitedliabilitycompany(LLC),asanotaryneedstobeinvolvedtoallowforthetransfer

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ofsuchshares(Braunetal.2013).Moreover,theminimumcapitalrequirementaswellas

theoperatingcostsofapublicLLC(whichdoesnotrequiretheinvolvementofanotaryto

transfershares)oftenoverburdensthefoundersofastart‐upcompany.Commonshares

ofapublicLLCarethereforerarelyusedinequitycrowdfundingcampaigns.Asaresult,

Germanstart‐upsmostoftenuseprofit‐participatingloans,cooperativecertificates,and

silentpartnershipswhenrunninganequitycrowdfundingcampaign,whichthenreplicate

thefuturecashflowsofthefirm.

2.2Innovestment

One of the oldest German equity crowdfunding portals is Innovestment. The start‐up

Particularcompleted its firstsuccessfulcampaignthroughtheportalonDecember25,

2011,thesameyearmarket leaderandfirst‐moverSeedmatchappearedontheequity

crowdfundingmarket.Inmanyrespects,InnovestmentissimilartoSeedmatchandmany

otherequitycrowdfundingportalsinEurope(HornufandSchwienbacher2014).Before

acampaigngoesonline,Innovestmentandthefoundersmustagreeonavaluationofthe

start‐up,andevenbeforethat,thefoundersofthestart‐upmustdecidehowmuchcapital

theywanttoraise.Afterconsideringthefinancialneedsofthefirmandthevalueofthe

firmthatwasnegotiated,Innovestmentadaptsastandardizedfinancialcontract(asilent

partnership agreement) replicating an equity share in the start‐up. Becoming a silent

partner allows investors toparticipate in the future cash flowsof the firmduring the

lifespanofthecontractandagainwhenthesilentpartnershipagreementexpires.

Manystart‐upsrunningcampaignsonInnovestmentintendedtoraiseEUR100,000and

offeredEUR1,000 investment tickets tobackers. If the initialvaluationof thestart‐up

was, for example, negotiated to be EUR 1,000,000 and the firm raised EUR 100,000,

backersbuyingasingleinvestmentticketobtainedarighton0.091%ofthecashflow,

provided that the price of the investment ticket did not rise during the auction. It is

importanttonotethatbackerswhoultimatelybecomesilentpartnersofastart‐updonot

receive any of the rights attached to a common equity share, such as voting rights;

however,theyalsodonotparticipateinthelossesofthestart‐up.Furthermore,thesilent

partnership agreements Innovestment uses are senior to ordinary shares and

shareholderloansbutrankafterallordinaryliabilities.Theseusuallyexpireafterthree

to sevenyearsandcannotbe tradedona secondarymarketafter the initialallotment

takesplace.

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While in many respects Innovestment is similar to all other European equity

crowdfunding portals, it also differs in one important respect and therefore is worth

analyzing in further detail. European equity crowdfunding portals uniformly allocate

equitysharesoroneoftheaforementionedfinancialinstrumentsthroughafixed‐price

first‐come,first‐servedallocationmechanism.Thatis,theportalstipulatesafixedprice

perinvestmentticketthatusuallyappliesforallitsinvestorsandcampaigns.Thenumber

ofticketsbeingofferedduringacampaignisthendeterminedbytheoverallfundinglimit

asdefinedbythefoundersandthefixedpriceperticket.Thelowerthepriceperticket,

themoreticketscanbesoldgiventheparticularfundinglimit.Asaresult,theportalstops

sellingsilentpartnershipagreementstothecrowdwhenthefundinglimitand,thus,the

pre‐determinednumberofticketsarereached.

Innovestment has deviated from stipulating a fixed price per investment ticket and

instead has adapted a multi‐unit second‐price auction. In theory, under a sealed‐bid

second‐priceauctionadominantstrategyforbackersistorevealtheirtruewillingnessto

pay for the cash flow rights in a start‐up company (Kagel and Levin 2001). The

Innovestment auction is particular as it involves three stages.Beforedescribing these

threestagesinmoredetail,wenotethatitisonlyattheendofapre‐determinedfunding

period(usually30days2)thatunitsareallottedtotheinvestorsandalegaltransferof

moneyaswell as silentpartnershipagreements takesplace.Before that, backersonly

committobuyingcashflowrightsaccordingtotheirbids,andfundsarefrozenonatrust

account.Moreover, the portal reveals only three types of information to backers: the

current price per ticket, the overall funding amount reached, and, thus, whether the

funding goalwas reached or not. Nevertheless, individual bids by other investors are

sealed(seeFigureA1intheAppendixfortheentrymask).

Duringthefirstphaseoftheauction,backerscanmakepledgesbyspecifyingthenumber

of tickets they want to buy and the price they are willing to pay for each ticket.

Innovestment and the start‐up determine a lower threshold for the price of a single

investment ticket,which is oftendetermined to beEUR1,000. Everyonewhopledges

moneyisallottedthedesirednumberofticketsduringthefirstphaseoftheauction,and

thelowestbidappliestoeveryone.Inprinciple,thereisnoreasonforinvestorstooutbid

thelowerthresholdatthisphase,asthereisyetnoscarcityinticketsandindicatingtheir

2 ChemlaandTinn (2016)show theoretically thata limitedcampaign length isessential toovercome

moralhazard.

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truewillingnesstopaywouldonlydriveupthepriceperticket.However,backersmay

anticipatethattheauctionwillruninthesecondphaseandindicatetheirtruewillingness

topayforcashflowrightsfromtheoutsettoavoidthepotentialtransactionscostofbeing

outbid and bidding again later.3 Importantly, the Innovestment auction also operates

under an all‐or‐nothing funding model (Cumming et al. 2015). Under this model,

Innovestment and the start‐up determine a minimum funding goal that needs to be

reachedwithin a pre‐determined funding period. If theminimum funding goal is not

reachedwithinthistimeframe,thecapitalpledgedbythebackersisreturnedtothem.

Thesecondphaseoftheauctionbeginswhenapre‐determinednumberofinvestment

ticketsaresoldtothecrowd.Thenumberoftickets,andthusthebeginningofthesecond

stageoftheauction,isnotknowntotheInnovestmentbackersuntilthesecondstageis

finallyreached.Thenumberofinvestmentticketssoldbytheendofthefirstauctionphase

alsodeterminesthenumberthat isavailable throughoutthesecondphaseand is then

kept constant. From now on, investors can only outbid each other by posting higher

prices.Backersanticipatingthatthesecondstageoftheauctionwillbereachedshould

now rationally reveal their true willingness to pay, given that this phase of the

InnovestmentauctionisequivalenttoaVickrey(1961)auction.Importantly,thesecond

phaseoftheauctionisnotrestrictedtoinvestorsfromthefirstphase.Everyinvestorwho

isregisteredontheportalcanstilljointhebiddingprocess.Thesecondphasecontinues

until the funding limit is reached.After that, theauctionenters the thirdstage,during

whichallregistereduserscanstilloutbidinvestors.Atthispoint,however,itisnolonger

possible to increase the overall sum of funds received by the start‐up. Higher bids

consequentlyresultintheoverallnumberofinvestmentticketsbeingreduced.Because

theoverallsumoffundsstaysconstant,whilethenumberofticketsisreduced,thecash

flowrightsthestart‐upmustsellforagivenamountofcapitalaredecreased.4

Whatshouldbecleartothecrowdisthatthedifferentphasesoftheauctionmechanism

havenohard‐endingrule;thatis,silentpartnershipagreementscannotselloutastheir

availability only depends on backers’willingness to pay. Everyone can invest at each

phaseoftheauctionuntilthepre‐determinedfundingperiodends.Thus,unlikeunderthe

3Indeed,theCEOofInnovestmentmadethisargumentwhenshewasaskedwhyinvestorsoverbidthe

lowerpricethresholdduringthefirstphaseoftheauction.4ThesecondphaseoftheauctionwasabolishedfromNovember1,2012,onward.Consequently,thefirst

phasecontinueduntilthefundinglimitwasreached.Thereafter,thethirdphasestartedimmediately.Intheempiricalanalysis,wetakethischangeinportaldesignintoaccount.

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fixed‐pricefirst‐come,first‐servedallocationmechanism,inwhichitmightberiskyfor

thecrowdtopostponeaninvestmentdecision,investorshaveanincentivetorevealtheir

truewillingness topayandmay theoretically investatany timeof the fundingperiod

underthemulti‐unitsecond‐priceauctionmechanism.

3. Empiricalmethodologyanddata

Our data set consists of 42 start‐ups that used the equity crowdfunding portal

InnovestmentfortheirfundingcampaignsduringtheperiodfromNovember6,2011,to

March25,2014.Intotal,weobserve1,627bidsfor44fundingcampaigns,5withatotal

volumeofEUR4,525,062pledged.Totalbidsbyindividualsoverthe2.5‐yearperiodvary

fromEUR500toEUR149,839.Duetodataavailabilityissuesforsomeoftheexplanatory

variables (average income according to postal code; see subsequently), our sample

contains1,450bidsmadeby499backers.

3.1Dependentvariable:premiumoverticketprice

Asthedependentvariable,wemeasurebackers’willingnesstopayforcashflowrightsby

calculatingtherelative‘premium’overtheinitialticketpriceinpercentage:

1 100

.

Table 1 shows descriptive statistics for the observed premia. Figure 1 shows the

distributionofthepremia,splitforseveralsub‐groups.Thefirstsub‐groupconsistsofall

bidsbeforethefundinggoalwasreached,thesecondsub‐groupconsistsofallbidsafter

thefundinggoalwasreachedbutbeforethefundinglimitwasreached,andthethirdsub‐

groupconsistsofallbidsafterthefundinglimitwasreached.

Overall,457investmentbids(31.5%ofallbidsinthesample)aremadewithoutany

premium.Mostofthesebidsweremadebeforethefundinggoalwasreached(370;

48.9%ofallbidsinphase1).6However,thefactthatmorethan50%ofallbidsinthat

sub‐samplearemadewithapositivepremiumconfirmsthatsomebackersavoidthe

5Twostart‐upsinoursampleranmultiplefundingcampaigns.6Thestartofthesecondorthirdstageoftheauctiondoesnotnecessarilycoincidewiththefundinggoal

orfundinglimitbeingreached.

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transactioncostsofbiddingagainlater,eventhoughpostingapremiumcandriveupthe

secondpriceinthefirstroundoftheauction.

Table1:Descriptivestatistics:premiumoverticketprice

Mean SD Median Min. Max. Obs. 0All 18.32 25.87 8.00 0 203 1450 457Goalnotreached 10.67 20.81 1.00 0 203 757 370Goalreached 13.70 19.68 9.13 0 150 281 86Limitreached 35.53 29.67 29.80 0 203 412 1

Note:Column‘0’indicatesthefrequencyofbidswithoutanypremium.

Fig.1:Distributionofpremiaoverticketprice

Note:y‐axisshowstherelativefrequencyofpremiainthethreephasesoftheauction.

Theaveragepremiumovertheticketpriceis18.3%andisincreasingoverthethreesub‐

samples:Itwas10.7%beforethefundinggoalwasreached,13.7%afterthefundinggoal

wasreached,and35.3%after the funding limitwasreached,andthesedifferencesare

statisticallysignificant.7 Inaddition, thestandarddeviationdiffersconsiderablyacross

sub‐groups.Itis1.5timesaslargeinthethirdsub‐groupasinthefirstandsecondsub‐

groups,andthisdifferenceisalsostatisticallysignificant.8Thisisalsoreflectedintheright

panelofFigure1whichismoreuniformlydistributedoverthedifferentlevelsofpremia

thantheleftandmiddlepanels.

7Theresultsoft‐testsfordifferencesinmeansacrosssub‐groupsareasfollows:goalnotreachedvs.goal

reached:t=–2.17,p‐value=0.03;goalnotreachedvs.limitreached:t=–15.11,p‐value=0.00;goalreachedvs.limitreached:–11.65,p‐value=0.00.8Theresultsofvariance‐comparison testsacross sub‐groupsareas follows:goalnot reachedvs. goal

reached:f=1.12,p‐value=0.27;goalnotreachedvs.limitreached:f=0.49,p‐value=0.00;goalreachedvs.limitreached:f=0.44,p‐value=0.00.

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Ofthe499backersinoursample,255(51.1%)madeasinglepledgeduringthewhole

sampleperiod,another107(21.4%)pledgedtwice,andonly24(4.8%)made11pledges

ormore.In527(36.3%)ofthe1,450totalbids,backersmadearepeatedpledgeinone

campaign. The maximum number of bids by one backer in one campaign is 11. The

averagestartingbidoffirst‐timebiddersbeforethefundinggoalwasreachedis10.8%(n

=310),whichisalmostthesameastheoverallaveragebidduringthatphase(10.7%,n=

757,seealsoTable1),implyingthattherearenodifferencesbetweenfirst‐timeandmore

experiencedbidders.

ToaccountfortheabolitionofthesecondphaseoftheauctiononNovember1,2012,

andtoinvestigatewhetherinvestorsadapttheirwillingnesstopayovertime,weplotthe

premiaagainstthenumberofpledgesaninvestorhadalreadymadeatthetimeofthe

focalpledgeforthetwosub‐samplesfromNovember6,2011,toNovember1,2012,and

fromNovember2,2012,toMarch25,2014.Figure2showsthatduringthesecondsub‐

sample, investors’ mean unconditional willingness to pay for an investment ticket

remainedlargelyconstantwhenbidding.Inthefirstsub‐sample,however,weobservea

hump‐shaped patternwhen the premia are plotted against the number of pledges. In

general,wefindthatinthefirstperiod,investors’willingnesstopayismuchlarger,with

ameanpremiumpaidof22.7%(n=710),thanthatinthesecondperiod,withamean

premiumpaid of only 14.1% (n= 740), and this difference is statistically significant.9

Whiletheobserveddifferencecouldbeattributedtotheabolitionofthesecondstageof

the auction after November 1, 2012, it might also be due to changes in the market

environment, inwhichovertimemoreportalsprovidedfundingopportunitiesandthe

additionalcompetitiondrovedowninvestors’willingnesstopay.

In theempiricalanalysis that follows,weruna regressionon the full sampleof1,450

observationsandfurtherfocusontheperiodfromNovember2,2012,toMarch25,2014,

toaccountforapotentialstructuralbreakduetothechangeintheplatformdesign.In

addition,wetruncateboththefullsampleandthesecondsub‐samplebyleavingout164

and 50 observations, respectively, where we observe a premium larger than 50% to

exploretherobustnessofourresults.10

9Theresultsofat‐testfordifferencesinmeansacrosssub‐groupsisasfollows:premiumNovember6,

2011,toNovember1,2012vs.November1,2012,toMarch25,2014:t=6.39,p‐value=0.00.10Thisthresholdcorrespondstoroughlytwostandarddeviationsintheobservedpremia.Anotherreason

forleavingoutrelativelylargepremiaistoavoidtypingerrorsbytheinvestors.Forexample,in25casesweobserveapremiumof100%,anditmightbethecasethatinvestorswantedtobuytwoticketswithoutanypremiuminsteadofoneticketwithapremiumof100%.

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Fig.2:Averagepremiumandnumberofpledges(byinvestor)

Note:Theleft(right)panelshowstheaveragepremiumfordifferentnumbersofpledgesatthetimeofthepledge(byinvestor),alongwith95%confidencebandsduringthefirst(second)sub‐sample.Thedashedlinesrepresentthemeansfromtherespectiveothersub‐sample.

3.2Explanatoryvariables11andhypotheses

3.2.1Campaigncharacteristics

Ourfirstsetofexplanatoryvariablesreflectscampaigncharacteristicsthatareobservable

to all backers on the portal website. For each start‐up, Innovestment reports an

assessmentofthefirm’svalue,whichvariesfromEUR420,000toEUR10,000,000inour

sampleof44 fundingcampaigns. Inaddition,each firmmustannouncea fundinggoal,

which varies from EUR 36,000 to EUR 150,000. We conjecture that the backers can

interpret both the firm value and the funding goal as effective signals in the spirit of

Spence (1973) forpotentially lucrative investments.This isbecause thevaluationand

fundinggoalarebotheasilyobservable,andifchosensuchthattheyaretoohigh,theyare

costlyforthefounderbecausethecampaignmightreceivenotenoughornofundingat

all.Forthefundinggoal,ahigherfundinggoalsignalstothecrowdthattheentrepreneur

isconfidentthatheorshewillatleastcollectthepre‐determinedamountofmoney.Ifthe

thresholdisnotmet,themoneypledgedisgivenbacktothefundersandthecampaign

fails. However, in case of the pre‐valuation there is also a channel that works in the

oppositedirection.Ahigherpre‐valuationimplies,forasingleinvestmentticket,alower

11TableA1intheAppendixreportsdescriptivestatisticsfortheexplanatoryvariables.

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shareoffuturecashflowsand,consequently,makessuchaninvestmentlessattractive.

Accordingly,ourfirsthypothesisisasfollows:

H1:Theeffectofthefirm’spre‐valuationonthepremiumisambiguous.Thepremiumis

increasinginthefundinggoal.

3.2.2Backersophistication

We conjecture that more sophisticated backers understand the underlying auction

mechanismbetterthantheirlesssophisticatedpeers.Asmentionedpreviously,weexpect

no extensive investment premia in the first phase of the auction, though backers

anticipatingthesecondstageoftheauctionmightrationallyposttheirreservationprice,

whichmayliewellabovetheminimumticketprice.Inaddition,weexpectsophisticated

backersto indicatetheirtruewillingnesstopayforcashflowrights inthesecondand

third stages. The differences across different types of backers might even be more

relevantundertransactioncosts,asmoresophisticatedbackerstypicallyfacerelatively

low costs when investing because they are more specialized in evaluating start‐up

companies.Aswecannotmakeanyconjecturesabouthowthewillingnesstopaydiffers

amongsophisticatedandunsophisticatedinvestors,wedonotspecifyafirmpriorabout

conditionaldifferencesinthepremiumacrossthesesub‐groups.

Weincludeasecondsetofexplanatoryvariablesthatproxybackersophistication.First,

more sophisticated investors typically undertake relatively large investments.

Consequently,weusethenumberofticketsasingleinvestorbidsforinasinglepledge,

whichvariesbetween1and40,asanexplanatoryvariable.Similarly,ahigherminimum

priceperticketasdefinedbyInnovestmentcanserveasanentrancebarrier forsmall

investors.Thus,itismorelikelythatmoresophisticatedinvestorsundertakebidsifthe

minimumticketprice,whichvariesbetweenEUR500andEUR25,000,isrelativelyhigh.

Moreover, backers might better understand how the auction mechanism works after

pledginginmultiplecampaignsandbecomemoresophisticatedbyinvestingmoreoften

on the portal. To capture possible learning effects, we consider how often a backer

pledged on the portal before the current investment (see also Figure 2). Next,

Innovestmentrequireseverybackertocompleteashortquestionnaireabouthisorher

investmentexperienceinthefollowingsevencategorieswhenregisteringwiththeportal:

bonds,commodities,fundsandcertificates,realestate,stocks,termdeposits,andother

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equity.Backerswhoclaimtohaveexperienceinatleastoneofthesecategoriesconducted

52.3%ofthebids.Intheempiricalanalysis,weincludeasetofdummyvariablesforall

sevencategories,whichtakethevalueof1ifabackerhasexperienceinthatparticular

categoryand0otherwise.Finally,Innovestmentrecordsthepostalcodeofeachbacker.

Thus,weareable to include theaverage income in thebacker’shomeregion in2011,

which varies between EUR 16,239 and EUR 28,900 in our sample, as a proxy for the

backer’sincomeandsophistication.12Therefore,oursecondhypothesisisasfollows:

H2:Thepremiumwilldifferdependingonthenumberofticketsbought, thepriceper

ticket, the number of pledges the backer previously made, the backer’s general

investmentexperience,andtheaverageincomeinthebacker’shomeregion.

3.2.3Progressinthefundingcampaign

Athirdhypothesistakesintoaccounttheprogressinthefundingcampaign.Backersare

wellawareoftheoverallpercentageoftargetedfundingaccomplishedatthetimeoftheir

decision.BecausetheauctionmechanismofInnovestmentallowsforbidsevenafterthe

fundinggoalorlimithasbeenreached,13theaccomplishedfundingshareatthetimeofa

bidvariesbetween0%and100%.Consequently,weincludeanotherexplanatoryvariable

thatmeasuresthefundingshareinpercentage.Inaddition,backersknowwhetherornot

thefundinggoalorthefundinglimithasbeenreached.Thus,wealsoconsidertwonon‐

disjunctivedummyvariables,whichmeasure(1)whetherthefundinggoalwasreached

butthefundinglimithasnotyetbeenreachedand(2)whetherthefundinglimithasbeen

reached.Asreachingthefundinggoalremovestheuncertainty inwhetherthefunding

actuallytakesplace,backerswithstrongliquiditypreferencesnolongerneedtofearthat

they are simply putting theirmoney on hold because the campaign in the end fails.14

Furthermore,reachingthefundinggoalandfundinglimitmightbeasignalofdemandfor

theparticularinvestmentopportunityandthepotentialqualityofthestart‐up.Thus,we

expectedastrongpositiveinfluenceofthesetwodummyvariablesonthepremiumand,

inparticular,forthefundinglimit.Accordingly,ourthirdhypothesisisasfollows:15

12Wecannotretrievethisinformationforsomeoftheforeigninvestorsand,therefore,loseapartofthe

1,627observationsowingtotheinclusionofthisvariable.1347.8%(28.4%)ofallbidswererecordedwhenthefundinggoal(limit)wasreached.14However,backersstillcanbeoutbidatthisstage.15Wedonotdifferentiatebetween thedifferentstagesof theauction in theempiricalmodel,because

includingadummyvariableforthethirdstageoftheauctionalongsideinteractiontermsofthisdummy

15

H3: The premium is increasing in the share of targeted funding, which has been

accomplishedandishigherifthefundinggoalorfundinglimithasbeenreached.

3.2.4Herding

Herdingisawell‐documentedphenomenoninfinancialmarkets(ScharfsteinandStein

1990),andithasalsobeenobservedincrowdlending(Herzensteinetal.2011;Leeand

Lee2012)andequitycrowdfunding(HornufandSchwienbacher2015;Vismara2015).

To test whether herding affects the pricing of cash flow rights on Innovestment, we

includethesumofinvestmentbidsinastart‐upthatweremadeearlieronthesameday,

as additional explanatory variable. The variation in this variable is surprising, as it is

betweenEUR0andEUR217,000.Thus,ournexthypothesisaimstotestwhetherherding

behaviorinequitycrowdfundingaffectsthepremiumofferedbybackers:

H4: Thepremium is increasing in the sumof bidsmade earlier on the sameday in a

particularstart‐up.

3.2.5Stockmarketvolatility

Oursampleperiodconsistsofepisodesoffinancialmarketstress,inparticularduringthe

euroandsovereigndebtcrisis.Consequently,stockmarketvolatilityasmeasuredbythe

German VDAX varies considerably over this period (between 11.47and 37.28%).

Moreover, portfolio diversification of equity investors largely increased during the

financial crisis as investors had a higher demand for similar but uncorrelated assets

(Vermeulen2013).Thus,ifbackersconsiderstocksandcrowdinvestmentssubstitutes,

higherstockmarketvolatilitymightleadtohigherdemandforthisassetclassandalarger

premiabeingpaidforcrowdinvestments.16Thus,ournexthypothesisaimstodetectsuch

asubstitutioneffect:

H5:Thepremiumisincreasinginstockmarketvolatility.

withthefundingshare,thefundinggoal,andthefundinglimitneithergeneratessignificantestimatesnorchangestheresultsoftheotherexplanatoryvariables.16Dornetal.(2015)documentthatinvestorsconsiderinvestmentandgamblingproductssubstitutes.

16

3.2.6Distancebacker/start‐up

Weusethedistancebetweenthebackerandthestart‐upasanadditionalexplanatory

variable. This variable takes values between 0 and 644 km in our sample. A greater

distance to a specific investment might imply higher search costs to obtain accurate

information about a start‐up and, as a consequence, a lowerwillingness to pay and a

reducedpremium.Inaddition,weobservealocalbiasinfinancialmarkets(Baltzeretal.

2015;CummingandDai2010).HornufandSchmitt(2016)provideevidencethatbackers

onInnovestmentalsoexhibitalocalbias.Ifbackershaveahigherdemandformorelocal

start‐upsthanfordistantstart‐ups,ahigherpremiumforgeographicallyclosefirmscould

result. Both the aforementioned channels indicate a negative relationship between

distanceandpremium,whichleadstooursixthhypothesis:

H6:Thepremiumisdecreasinginthedistancebetweenthebackerandthestart‐up.

3.2.7Sniping

Awell‐knownphenomenon inauctions is sniping—that is, theauctionprice increases

drasticallytowardtheendoftheauctionprocess(Arielyetal.2005;RothandOckenfels

2002).AsInnovestmentpoststhecurrentsecondpricethatappliestoeveryone(seealso

FigureA1intheAppendix),backersmightbidlatetoavoidrevealinginformationabout

theirwillingnesstopaytootherbackers,whichcouldultimatelydriveupthepriceper

ticket. Indeed, roughly25%of thebidsaremadeon the lastdayof theauction,which

providessomedescriptiveevidenceinfavorofsniping.Totestwhethersnipingisalso

relevantinamultivariateanalysis,weincludetheremainingtimemeasuredindaysasan

additionalexplanatoryvariable.Totestforpotentialnon‐linearitiesandtocapturethe

often‐documentedmassive increase toward the end of the auction, we also include a

quadratictermthatmeasuressquaredremainingtimeindays.Ifsnipingisprevalent,we

wouldobserveanegativesign;thatis,thepremiumislowerthemoretimeisremaining

intheauctionprocess.Thus,ourlasthypothesisisasfollows:

H7:Thepremiumisdecreasingintheremainingtime.

Table 2 provides an overview of all seven hypotheses and explanatory variables

employedintheempiricalanalysis.

17

Table2:Summaryofhypotheses

H1:Campaigncharacteristics H2:Backersophistication(+/–)Pre‐valuation(+/–) Numberoftickets(+/–)Fundinggoal(+) Priceperticket(+/–) Investmentexperience(+/–)H3:Progressinthefundingcampaign Averageincome/region(+/–)Fundingshare(+) Numberofpledges(+/–)Fundinggoalreached(+) Fundinglimitreached(+) H4:herding(+) H5:Stockmarketvolatility(+) H6:Distancebacker/start‐up(–) H7:Remainingtime(–)

3.3Econometricmodel

We explain the relative premium over the ticket price with all explanatory variables

describedintheprevioussub‐section.Econometrically,weuseordinaryleastsquaresand

standarderrorsclusteredatthebackerlevel.17InSection4,wepresentfourdifferentsets

of results. First, we show estimates that are based on the full sample of all 1,450

observations.Second,weestimatethesamemodelfortheperiodfromNovember2,2012,

toMarch25,2014,usingonly740observationstoaccountforapotentialstructuralbreak

duetothechangeintheplatformdesign.Inaddition,wefurthertruncatethesampleand

thesecondsub‐sample,respectively,andexplainthe1,286and690investmentsinwhich

the premium is lower than or equal to 50%of the ticket price. In all regressions,we

controlforday‐of‐the‐weekeffects,withMondayasthereferencecategory.

4. Empiricalresults

Table3reports theresults for the full sampleperiodandallbids(column(1)). Italso

presents theresults for the full sampleperiodandbidswithapremiumofup to50%

(column(2)),forthesecondsub‐samplefromNovember2,2012,toMarch25,2014,and

allbids(column(3)),andforthesecondsub‐sampleandbidswithapremiumofupto

50%(column(4)).

17 Our empiricalmodel does not contain campaign‐fixed effects. Otherwise, wewould not be able to

identify the effect of campaign characteristics (H1) and the price per ticket (H2) on the premium. Inaddition,ourmodeldoesnotcontainbacker‐fixedeffects.Otherwise,wewouldnotbeabletoidentifytheeffectofexperience(H2),theaverage incomeinthe investor’sregion(H3),andthegeographicdistance(H6)onthepremium.Finally,ourmodeldoesnotcontaintime‐fixedeffects.Otherwise,itwouldbedifficulttoidentifytheeffectofstockmarketvolatility(H5)onthepremium.

18

Table3:Explainingequitycrowdfundingpremia

FullSample Nov2,2012–Mar25,2014 AllBids Prem.≤50% AllBids Prem.≤50% (1) (2) (3) (4) Pre‐valuation 0.001 0.001 0.005 * 0.003 * (0.001) (0.001) (0.002) (0.001) Fundinggoal 0.270 ** 0.067 ** –0.049 –0.042 (0.053) (0.024) (0.076) (0.045) Numberoftickets 0.309 0.146 0.226 0.193 * (0.197) (0.089) (0.201) (0.097) Initialprice/ticket –0.928 –0.971 ** –1.613 –1.145 * (0.633) (0.319) (0.970) (0.465) Bonds –1.831 0.542 –2.593 –1.345 (2.941) (1.351) (3.469) (1.509) Commodities –3.320 –0.634 –0.312 0.478 (2.705) (1.397) (3.373) (1.639) Funds/certificates 3.974 –0.004 5.702 –1.216 (3.308) (1.805) (4.281) (2.085) Realestate –5.317 –2.842 * –9.809 * –5.375 ** (2.903) (1.279) (3.789) (1.536) Stocks 3.787 3.145 9.367 * 5.729 ** (2.779) (1.777) (4.088) (2.106) Termdeposits –2.039 –1.777 –3.736 –0.326 (3.165) (1.515) (4.670) (1.528) Otherequity 2.936 0.877 –0.321 0.364 (2.290) (1.094) (2.637) (1.242) Disposableincome 0.112 0.119 0.584 0.178 (0.292) (0.146) (0.423) (0.187) Numberofpreviouspledges 0.059 0.168 ** –0.190 0.132 (0.099) (0.037) (0.168) (0.071) Fundingshare 0.030 0.025 0.041 0.034 (0.033) (0.017) (0.043) (0.021) Fundinggoalreached 3.729 3.513 ** –3.443 0.022 (2.334) (1.168) (3.240) (1.452) Fundinglimitreached 17.748 ** 6.640 ** 9.021 * 3.938 ** (2.369) (1.109) (3.707) (1.410) Bidsearlierthatday 0.079 ** 0.111 ** 0.128 ** 0.125 ** (0.020) (0.009) (0.022) (0.009) VDAX 0.789 ** 0.521 ** –1.130 * 0.088 (0.152) (0.063) (0.502) (0.243) Distancebacker/start‐up 0.225 –0.205 –0.308 –0.278 (0.381) (0.182) (0.502) (0.222)

19

Table3:Explainingequitycrowdfundingpremia(continued)

Daysremaining –0.013 0.510 ** –0.207 0.422 ** (0.261) (0.098) (0.236) (0.126) Daysremaining2 0.004 –0.012 ** 0.014 * –0.011 ** (0.007) (0.003) (0.006) (0.003) Tuesday –0.987 1.126 2.348 1.918 (2.331) (1.305) (2.918) (1.582) Wednesday –1.354 0.367 –0.270 –1.088 (2.392) (1.338) (2.175) (1.331) Thursday 0.258 –0.677 4.734 –0.303 (2.917) (1.254) (3.476) (1.454) Friday 2.588 0.158 8.900 * 1.017 (2.728) (1.340) (4.073) (1.506) Saturday 0.034 –1.083 5.493 0.012 (2.906) (1.410) (3.022) (1.523) Sunday 1.375 1.402 8.018 * 2.881 (2.722) (1.278) (3.367) (1.720) Constant –29.614 ** –15.751 ** 2.997 –4.675 (6.989) (3.694) (11.729) (6.181) AdjustedR2 0.254 0.357 0.220 0.480 ExclusiontestDotW 0.74 1.23 2.18 * 1.61 Observations 1450 1286 740 690 Note:Dependentvariable:Premium(inpercentage).Standarderrors(clusteredatthebackerlevel)areinparentheses.**/*indicatessignificanceatthe1%/5%level.

4.1Campaigncharacteristics

Intheregressionsforthefullsampleperiod,wefindthatthepremiumisincreasinginthe

sizeofthefundinggoal,whichconfirmsH1.Backersarewillingtoofferapremiumof27.0

basispoints(bps)(column(1))and6.7bps(column(2))foreachEUR1,000increasein

the funding goal, which evidences that the funding goal indeed serves as a signal to

potential investors. To put this figure into perspective, we compare two groups of

campaignsandusethemoreconservativeestimateincolumn(2).Inourdataset,wehave

15campaignswithafundinggoalofEUR50,000andanother14campaignswithafunding

goal of EUR 70,000. This difference of EUR 20,000 corresponds to a ceteris paribus

differenceof1.34percentagepoints (pp) in thepremium.These findingsarearguably

driven by the first sub‐sample, as the coefficients on the funding goal are no longer

significantwhenweconsideronlytheperiodafterNovember2,2012.Incontrast,firms’

pre‐valuationinfluencesthesizeofthepremiumonlyinthesecondsub‐sample.Foreach

EUR1,000increaseinpre‐valuation,thepremiumincreasesby0.5bps(column(3))and

20

0.3bps(column(4)),respectively,whichprovesthatahigherpre‐valuationalsoserves

as a signal for a potentially lucrative investment. The ceteris paribus difference for

campaignswithpre‐valuationsofEUR800,000andEUR1,000,000is0.6pp(basedonthe

estimatesincolumn(4)).18

4.2Backersophistication

The estimates for our proxies of backer sophistication yield conflicting results. The

premiumincreasesinthenumberofticketsboughtby19.3bps(column(4))andinthe

numberofpriorpledgesbyaninvestorby16.8bps(column(2)).Inaddition,investors

withexperienceinthestockmarketarewillingtopayhigherpremiaduringthesecond

sub‐sample(9.8ppincolumn(3)and5.7ppincolumn(4)).Incontrast,eachEUR1,000

increase in theminimumpriceper ticket leads toa0.97pp (column(2))and1.15pp

(column (4)) decrease in the premium. This implies that the total difference between

campaignswithEUR500tickets(6campaigns)andEUR1,000tickets(29campaigns)is

48.6bps(basedontheestimatesincolumn(2)).Furthermore,backerswithexperience

inrealestateinvestmentsofferasignificantlylowerpremiumthanbackerswithoutany

experienceinthatcategory.Onepotentialdriverofthisdifferencebetween–2.84ppand

–9.81ppcouldbetheexperienceinassessingafinancingplan.Finally,theaverageincome

in the backer’s region is insignificant in all estimations. In summary, similar to the

descriptiveanalysisintheprevioussection,wefindnoconclusivedifferencesbetween

sophisticatedandunsophisticatedinvestors.

4.3Progressinthefundingcampaign

ConfirmingH3,theprogressinthefundingcampaignpositivelyinfluencesthepremium

backers offer. The premium of bids made after the funding goal was reached is, on

average, 3.51 pp larger than bidsmade before the goal was reached, but only in the

completesampleperiodandforbidswithapremiumupto50%(column(2)).Reaching

the funding limit is significant in all four specifications as we observe an additional

increaseinthepremiawhenthefundinglimitwasreached.Thisincreasevariesbetween

18Notethatthedifferences intermsof(non‐)significanceofbothvariablesacrossthedifferentsetsof

resultsmightbeduetocollinearity,asthebivariatecorrelationbetweenpre‐valuationandthefundinggoalis=0.76.

21

3.98ppand17.75pp.Finally,theaccomplishedfundingshareitselfdoesnotsignificantly

influencethepremium.

4.4Herding

Forthesumofinvestmentbidsinastart‐up,whichweremadeearlieronthesameday,

weagainobservepositiveandsignificantcoefficients inall fourmodels.Thepremium

increasesbetween7.9bpsand12.8bpsforeachEUR1,000,whichisaclearindicationof

herdingbehaviorandconfirmsH4.Multiplyingthepointestimateof11.1bps(column

(2))bythestandarddeviationofthisvariable(EUR38.023)indicatesthatthevariation

inthepremiacausedbyherdingbehaviorisalsoeconomicallyrelevant(4.22pp).

4.5Stockmarketvolatility

Forthefullsampleperiod,backerstendtobidhigherpremiaduringepisodesoffinancial

marketstressandconsiderstocksandcrowdinvestmentssubstitutes.Aone‐unitincrease

intheVDAXleadstoa78.9bps(column(1))and52.1bps(column(2))largerpremium.

Toputthelatterpointestimateintoperspective,weconsidertheeffectofaonestandard

deviation change in theVDAX (6.752%).Thisback‐of‐the‐envelope calculation reveals

thattheVDAXaccountsforavariationof3.52ppinthepremium.Similartothefindings

for the fundinggoal, theresults forstockmarketvolatilityaredrivenby the first sub‐

sample,asweevenobserveanegativeandsignificantcoefficientforthisvariableinthe

secondsub‐sample(column(3)).

4.6Distancebetweenbackerandstart‐up

Thedistancebetweenabackerandastart‐upis insignificant inall foursetsofresults.

Consequently, we find no evidence of distance influencing the premium paid, which

rejectsH6.

4.7Sniping

For thecomplete sampleperiodandallobservations, thepointestimates for thedays

remainingand(daysremaining)2are individuallyand jointly insignificant(F(2,498)=

1.43).Whenconsideringonlypremiaupto50%,wefindahump‐shapedinfluenceofthe

remainingtimeonthepremiuminthecompletesampleperiodandinthesecondsub‐

samplestartingonNovember2,2012.From0to21(19)daysremaininginthefullsample

22

period(secondsub‐sample),thepremiumisincreasing;thereafter,itisdecreasing.19We

interpretthisasbackerspostingtheirreservationpriceatsomepointduringtheauction,

whichiswellinlinewiththedominantstrategyinVickreyauctions.Anotherexplanation

forthefindingisthatInnovestmentextendsthefundingperiodconsecutivelyforanother

15minutes if additionalbidsaremade toward theendof the campaign,whichmakes

sniping literally impossible. Consequently, we find no evidence for sniping behavior

towardtheendoftheauction,whichrejectsH7.

Finally,wecanexcludeday‐of‐the‐weekeffectsinthreeofthefourmodels(columns(1),

(2),and(4)).Forthesecondsub‐sampleandallbids(column(3)),bidsonFridaysand

Sundaysare8.90ppand8.02pphigher,respectively,thanthereferenceday(Monday).

5.Conclusion

In thispaper,weanalyze thepricingofcash flowrights instart‐upcompaniesusinga

uniquedatasetofequitycrowdfundingbackers.Oursampleconsistsof44campaignsand

includes1,450bidsmadeby499backersduringtheperiodfromNovember6,2011,to

March25,2014,on theGermanequitycrowdfundingportal Innovestment. Incontrast

with all other European equity crowdfunding portals, Innovestment runs amulti‐unit

second‐priceauctioninwhichbackerscanspecifythepricetheyarewillingtopayforan

investmentticket,withtheportalandstart‐upspecifyingalowerthreshold.Weexploit

thisuniqueauctionmechanismtoanalyzebackers’willingnesstopayforcashflowrights

inastart‐upcompany.

First,campaigncharacteristicsplayameaningfulroleinthedeterminationofbackers’

willingnesstopay.Boththefundinggoalandpre‐valuationserveassignalsforpotentially

lucrative investments, as an increase in these variables is associated with a higher

premium.Second, theestimates forbackersophisticationyieldconflicting results.The

premiumincreasesinthenumberofticketsboughtandinthenumberofpriorpledgesby

aninvestorbutdecreases intheminimumpriceperticket.Backerswithexperiencein

realestateinvestments(thestockmarket)offer,onaverage,alower(higher)premium

thantheircounterpartswithoutanyexperienceintherespectiveclassofassets.Third,

marketforcesarealsoofparticularrelevance,asreachingthefundinggoal leadstoan

increaseinthepremium(comparedwithinvestmentsinwhichthefundinggoalhasnot

19NotethattheU‐shapedpatternincolumn(3)isnotsignificantfor0to28daysremaining.

23

beenreached),asdoesreachingthefundinglimitwithanadditionalsignificantincrease.

Fourth,backersrespondtothesumofinvestmentbidsinastart‐up,whichweremade

earlieronthesameday,byincreasingthepremiumintheirbids.Fifth,backerstendtobid

higherpremiaduringepisodesoffinancialmarketstressandconsiderstocksandcrowd

investmentssubstitutes.Wefindthiseffect,however,onlyforthefirstsub‐samplefrom

November6,2011,toNovember1,2012.

Incontrast,wefindthatgeographicdistance,learningeffects,andsnipingdonotaffect

thepremiumpaid.Ifbackersweretoindicatetheirtruewillingnesstopayonlyattheend

oftheauction,asisregularlythecaseoneBay(RothandOckenfels2002),theremightbe

a risk that some bids are not successfully transmitted and investors with a higher

willingnesstopayarelockedout.Ourresultsdonotindicatethatthisisthecaseinequity

crowdfundingthattakesplaceunderamulti‐unitsecond‐priceauction.Conversely,under

afirst‐come,first‐servedmechanismwithahard‐endingrule, investmentticketsmight

quicklysellout(HornufandSchwienbacher2016)andinvestorswithahigherwillingness

topaycouldbeinefficientlydebarred.Whetherequitycrowdfundingportalsshouldadopt

anauctionmechanism,however, alsodependson the returns that inventorsearnand

whethertheirbidsexceedthevalueoftheauctionedasset.Apromisingavenueforfuture

researchwouldbetotesttheauctionmechanismafterdataoninsolvenciesandactual

payoutsofthefundedfirmsbecomeavailable.

Ourresultscontributetotheliteratureonportaldesignandcampaigncharacteristicsin

equitycrowdfunding.Theysuggestthatportaldesignandthespecificfeaturesofhowan

equitycrowdfundingcampaignisrunsignificantlyinfluencebackers’willingnesstopay

forfuturecashflowrightsinastart‐up.Thisisalsoinlinewithpriorstudiesthatfindthat

campaigncharacteristicssuchastheamountofequityofferedandfinancialprojections

matter for funding success (Ahlers et al. 2015). Furthermore, in linewithHornuf and

Schwienbacher (2015) and Vismara (2015), who find that information cascades

determine funding success in equity crowdfunding, our results provide evidence that

herdingalsoaffectsbackers’willingnesstopayforsharesinastart‐up.Asmoredataon

theultimatesuccessandfailureofstart‐upsbecomeavailable,itwouldbepromisingto

investigate whether herding in the context of equity crowdfunding is rational or

irrational.Ontheonehand,someinvestorsmightrationallyrelyonthebehaviorofothers

becauseinformationcostsarehigh.Ontheotherhand,thecrowdcouldalsomakefaulty

decisions by engaging in what has been termed ‘groupthink’ (Janis 1972). If it were

24

necessary to guard investors from herding, equity crowdfunding portals that run an

auctionmechanismcould implement someof the rules that are common to electronic

tradingsystemsonregularstockmarkets.

25

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Appendix

TableA1:Descriptivestatisticsofexplanatoryvariables

Mean SD Min. Max. Yes CorrPre‐valuation(inEUR1,000) 1,051.350 770.547 420 10,000 –0.047 Fundinggoal(inEUR1,000) 60.325 14.904 36 150 0.050 Numberoftickets 2.270 2.821 1 40 0.019 Initialprice/ticket(inEUR1,000) 1.136 1.577 0.5 25 –0.019 Bonds 0.303 0.460 439 0.005 Commodities 0.228 0.420 331 –0.030 Funds/certificates 0.416 0.493 603 0.047 Realestate 0.306 0.461 443 –0.013 Stocks 0.460 0.499 667 0.049 Termdeposits 0.434 0.496 629 0.025 Otherequity 0.309 0.462 448 0.036 Disposableincome2011(inEUR1,000) 21.219 2.569 16.239 28.900 0.025 Numberofpreviouspledges 4.998 6.979 1 55 0.030 Fundingshare(in%) 69.469 36.353 0 100 0.240 **Fundinggoalreached 0.478 0.500 693 0.309 **Fundinglimitreached 0.284 0.451 412 0.419 **Bidsearlierthatday(inEUR1,000) 15.660 38.023 0 217 0.227 **VDAX(in%) 19.568 6.752 11.47 37.28 0.271 **Distancebacker/start‐up(in100km) 2.942 1.758 0 6.440 0.033 Daysremaining 14.911 14.101 –0.047 76.058 –0.061 *Tuesday 0.112 0.316 163 –0.072 **Wednesday 0.157 0.364 228 –0.055 *Thursday 0.114 0.318 165 –0.045 Friday 0.140 0.347 203 –0.007 Saturday 0.105 0.306 152 –0.036 Sunday 0.292 0.455 423 0.191 **

Note:Column‘Yes’indicatesifadummyvariabletakesthevalueof1.Column‘Corr’showsbivariatecorrelationswiththepremium.**/*indicatessignificanceatthe1%/5%level.

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Fig.A1:Auctionentrymask

numberofticket

priceperticket

totalprice

fundinggoal fundinglimit

fundingreached

currentprice

valuationdaysremaining