Low-quality entrepreneurs seek funding from the crowd, study says

External finance is a key success factor in entrepreneurial activity. However, depending also on the quality of the sources, the success of a startup remains a story which has to be written chapter by chapter.

With a 5% of the whole entrepreneurial finance market across Europe, equity crowdfunding deserves particular attention as it has been growing from strength to strength for the last decade becoming the third most used of entrepreneurial finance strategy behind banks and VCs.

However, not all sources of external finance are made equal. For example, a brand-new study published by a leading scholarly journal in Entrepreneurship, Entrepreneurship Theory and Practice, reveals that entrepreneurs who access equity crowdfunding are more likely to fail. Why?

Researchers Daniel Blased, Douglas Cumming, and Michael Kotter found out that it depends on the quality of the entrepreneurial project as equity crowdfunding tend to attract low-quality projects.

Building on a previous study according to which entrepreneurs accessing equity crowdfunding use it as a sort of last resort, they found out that entrepreneurial projects associated with riskiest banks are more likely to fail and that those projects are the ones which are more likely to raise funds online via equity crowdfunding.

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.

Last but not least, management team traits play a role in the choice of equity crowdfunding. In particular, younger and less experienced teams with female participation are the ones preferring it.

You may want to find the whole study 👇

Equity Crowdfunding: High-Quality or Low-Quality Entrepreneurs?