Equity Crowdfunding: High- or Low-Quality Entrepreneurs?

We identify the determinants and the success of equity crowdfunded (ECF) ventures using a two-stage selection model and a hand-collected sample of 363 ventures and 41 failures in Germany. First, we explain the choice of ventures to tap the crowd for funds conditional on the presence of venture capital and a (distressed) bank relationship. Tighter funding constraints render the use of crowdfunding more likely. Conditional on the self-selection of ventures into ECF, ventures that are worse rated, are run by less experienced management teams, and are limited in liability are more likely to fail. Across all ventures failure is around 10% more likely for both firms using ECF or being connected to a distressed bank. As such, crowdfunding appears to attract lemon projects about as much as do distressed banks.