The evolution and adoption of equity crowdfunding: entrepreneur and investor entry into a new market
The evolution and adoption of equity crowdfunding: entrepreneur and investor entry into a new market
Saul Estrin 0 1 2
Daniel Gozman 0 1 2
Susanna Khavul 0 1 2
0 D. Gozman Henley Business School, University of Reading , Whiteknights Reading , UK
1 D. Gozman University of Sydney , Sydney , Australia
2 S. Khavul Lucas College and Graduate School of Business, San Jose State University , San José, CA , USA
Equity crowdfunding (ECF) offers entrepreneurs an online social media marketplace where they can access numerous potential investors who, in exchange for an ownership stake, may supply them with finance. In this paper, we describe the evolution of this market in the UK. Using an inductive qualitative longitudinal research design, we analyse the emerging views of entrepreneurs and investors towards ECF. Our interviewees include large and small-scale investors, as well as market participants who have chosen not to invest or raise funds via ECF. We find that the large financial flows to entrepreneurs in the UK via the ECF platforms, nearly half a billion GBP since 2011, have probably been largely incremental to traditional sources of early stage entrepreneurial finance. Moreover, our research indicates that for the most part, investors appear to understand and appropriately evaluate the risks that they are bearing; ECF investments are perceived as a high risk, high return component within individuals' portfolios. Investors also use their communication with peers and entrepreneurs via the ECF platform as a learning tool. On the entrepreneurs' side, ECF allows them to test their products, to develop their brand, to build a loyal customer base and to turn customers into investors. We conclude that policymakers, with the support of a locally appropriate regulatory framework, could support equity crowdfunding as one of the market choices available for entrepreneurs looking to start or grow their ventures.
Entrepreneurship; Equity crowdfunding; Early stage entrepreneurial finance; Regulation; Investor choices
Authors are listed in alphabetical order.
The literature has long identified the role of
entrepreneurship in enhancing innovation, economic growth and
(Schumpeter 1934; Carree and Thurik
2003; Baumol and Strom 2007; Braunerhjelm et al.
. However, the exploitation of this potential has
been limited by deficiencies in the market for early stage
(Denis 2004; Estrin and Khavul
. The finance literature details how asymmetries
of information between entrepreneurs and investors
often prevent new ventures from raising capital
and Meckling 1976; Stiglitz and Weiss 1981; Gompers
. This is because the transaction costs of collecting
accurate information are high, the results are
unpredictable and true risks unfold over time, usually after the
investment is made (Manigart and Wright 2013).
Therefore, entrepreneurs find it hard to identify and attract
investors through the standard market channels
(Gompers and Lerner 2011)
. Instead, entrepreneurs have
traditionally financed their new ventures in steps or
(Hellman et al. 2013)
, often starting
with personal savings, investments from friends and
family and seeking support from angel investors before
turning to venture capital (VC), banks or equity markets
(Cosh et al. 2009)
. Recently, entrepreneurs have also
begun to use equity crowdfunding (ECF), an innovation
in the early stage entrepreneurial finance space, which
uses the power of social media to provide a new channel
linking investors with entrepreneurs
(Estrin and Khavul
In this paper, we bring together quantitative and
qualitative data to address ECF growth and evolution
through the experiences of entrepreneurs and investors
engaged in equity crowdfunding. The combination
gives us a unique perspective into the microfoundations
of the crowdfunding industry from its inception.
Though many other countries, including much of the
European Union, have permitted ECF platforms to
operate since 2010
, we anchor our study in
the largest ECF marketplace, which is currently in the
UK. Large financial flows have been generated for
entrepreneurs in the UK via the ECF platforms, nearly
£450 m since 2011;
estimate that, by 2016,
ECF supplied more than 15% of UK early stage finance.
Important contributory factors to this success include
the depth of the UK entrepreneurial finance ecosystem,
the emergence of light-touch regulatory regime and a
sympathetic tax system
(Estrin et al. 2016; Estrin and
Khavul 2016a, b; Drover et al. 2017)
We first briefly quantify the evolution of the British
ECF market, with data available in the Online Resource
1, and then employ qualitative methods to outline
differentiated views of ECF. Our analysis is based on 64
structured interviews between 2014 and 2017 and
supported by 400 quotes in the Online Resource 2 of
the paper. Two research questions guide our work.
Our first research question (RQ1) asks, whether the
significant financial flows via ECF platforms are
incremental to existing funding sources for entrepreneurs.
That is, is ECF attracting new money to the early stage
entrepreneurial finance sector or are investments in ECF
merely a diversion of existing investor funds from more
traditional channels, such as angel investing or venture
capital. We then ask (RQ2), do investors understand and
appropriately evaluate the risks that they are bearing by
investing in this new form of equity asset? In asking this
question, we try to address a critique that ECF brings
large numbers of ill-informed and inexperienced
investors into the market
(Agrawal et al. 2013; Belleflame
et al. 2014)
. As we have noted, early stage investing is
highly risky, yet it is unclear whether the crowd
understands or can mitigate these risks
(Ahlers et al. 2015;
Courtney et al. 2017)
. Indeed, such reasoning lies
behind the caution of many policymakers towards ECF
(Estrin et al. 2016; Hornuf and Schwienbacher 2016)
Our quantitative research charts the rapid growth,
maturation and market deepening of the UK ECF sector
since its founding in 2010. In complement, the
qualitative data suggest that the sector is attracting not only
new investors interested in participating in
entrepreneurial ventures but also new funding that is additive rather
than a diversion from other flows in the entrepreneurial
ecosystem. Moreover, although some investors engage
in a little wishful thinking about returns to ECF, most
realistically evaluate the asset class as risky and a
longterm investment. Further, we see that entrepreneurs have
mixed motives for pursing ECF as a source of financing:
for some it is a strictly financial exchange, while for
others it is part of their marketing strategy. We conclude
our paper with a series of policy recommendations that
emphasise the opportunity ECF offered regulators to
take a policy-driven rather a rule-driven approach to
c o - c r e a t i n g w i t h u s e r s a n e n v i r o n m e n t f o r
experimenting with financial innovations.
2 Empirical context: the evolution of equity crowdfunding in the UK
2.1 Regulatory and tax environment in the UK Equity crowdfunding is an international phenomenon (Kshetri 2015; Massolution 2015, Terry et al. 2015) and,
albeit to varying degrees, a regulated activity.1
Regulators in each jurisdiction are concerned primarily with the
protection of investors who, it is argued, do not have the
expertise to evaluate the riskiness of these investments.
Regulators have responded in many ways, including by
limiting the types of investors and methods of
solicitation available to ECF platforms, the amount investors
can invest or the investments sought.
Overall, the UK Regulator has adopted a sympathetic
approach to fintechs in general and its approach to ECF
is one example. The FCA required investors to
selfcertify that they understood the risks and made no
restrictions on the type of investors to which the
platform could market
. Consumer protection
has been interpreted in terms of informing investors of
potential losses with the responsibility for providing this
information placed on the platform. This contrasts with
most other jurisdictions in which there were greater
restrictions on investors often including external
validation of certification
(Cumming and Zhang 2016;
Dushnitsky et al. 2016)
. Thus, in its approach to ECF,
the UK Regulator, in contrast to the focus on
prescriptive rules of some of continental Europe and the USA,
has adopted a flexible Bprinciples-based^ approach in
which regulatory policy evolved in collaboration with
innovators and users
(Estrin et al. 2016)
policymakers have also supported ECF via two tax
incentives. The Enterprise Investment Scheme (EIS)
helps entrepreneurs to raise finance by offering tax relief
to investors and the Seed Enterprise Investment Scheme
(SEIS) offers tax relief to individual investors who
purchase new shares in new companies. These policies
have probably also helped the rapid expansion of ECF
in the UK (Vulkan et al. 2016).
2.2 The evolution of the UK equity crowdfunding sector
T h e n u m b e r o f p l a t f o r m s i n t h e U K e q u i t y
crowdfunding market has increased from four in 2010
to thirteen in June 2017, though the sector is very
concentrated; we estimate the top three platforms
account for around 95% of the market in 2016.2 We
provide detailed information about the nature and scope
1 The US Jobs Act came into force in 2016 and EU countries have
implemented regulations nationally since 2011 within limits set by EU
legislation. In the UK, the Regulator initially adapted existing
regulations to allow equity crowdfunding and then introduced formal rules in
2 Source: www.beauhurst.com.
of the sector in the Online Resource 1. By June 2017,
the platforms had supplied equity funds of almost £500
million for 1538 entrepreneurial pitches, drawing on
more than 400,000 registered potential investors. Given
that only around one third of pitches are funded, and the
ECF platforms screen out perhaps 90% of initial
enquiries, one can estimate that around 45,000
entrepreneurs and their ventures in the UK have sought capital
via ECF in the past six years.
In contrast to other forms of crowdfunding
, the average number of investors in each
successful ECF pitch is relatively small. Table A.1 (Online
Resource 1) shows that there are between 200 and 250
investors per successful pitch on average, and the
average amount invested per investor is around £2000.3
Entrepreneurs using ECF seek only modest funding
from around £110,000 to almost £2 million.
The rapid growth of the sector is shown by the
number of investors engaged in one or more platforms.
As with other forms of social network, growth of the
network is impressive. For example, the size of the
investor network on Crowdcube increased
exponentially from around 10,000 at the start of 2012 to 30,000 at
the start of 2013; 50,000 at the start of 2014; more than
100,000 at the start of 2015; more than 200,000 at the
start of 2016 and more than 400,000 by June 2017.4
In Table 1, we report the equity raised by the three
leading platforms, Crowdcube, Seedrs and Syndicate
Room, since 2011. As noted, increasing funds are being
raised in total and also for each entrepreneur: the
average investment per pitch has increased from £99,000 in
2012; £243,000 in 2013; £357,000 in 2014; £508,000 in
2 0 15 t o £ 5 5 1, 0 0 0 i n 20 1 6 . A p p e n di x i n t h e
Online Resource 1 further provides evidence of the
deepening of the investor network over time. We show
that the early entrepreneurial pitches were concentrated
in London, but that the rapid increase in deal flow has
brought a widening of the geographical base, with
entrepreneurs from all over the country seeking investors
through this channel by 2016 (Fig. A.1). We also
illustrate the remarkable expansion in the depth of the social
network, greatly enhancing the possibilities for network
(Evans and Schmalensee 2016)
. While in
3 This contrasts with other forms of crowdfunding (donation and
reward) which also draw on a large social network, but where each
participant typically only provides small sums
4 Though precise data are not available, interviews suggest that the
other major platforms have seen similar growth rates
Khavul 2016b; Vulkan et al. 2016)
the early years of ECF, investors joined platforms
primarily to invest in a particular pitch, perhaps friends and
family or investors concerned with a particular sector or
location, the network has now become far more
integrated. Hence, it is linking investors and entrepreneurs
who joined for one purpose, but have since been enticed
to engage with other projects (Fig. A.2). However, the
data on growth and marketing maturation do not by
themselves establish that the supply of funds to the
market is incremental. We return to this issue in our
Our dataset also allows us to provide some of the first
evidence concerning risks and returns on ECF
platforms. As yet, few successful exits can be identified
and Table A.3 shows that failure rates average about 8%
per annum and above 30% over a five-year horizon,5
which is high but below the norm for early stage
(Ucbasaran et al. 2010)
. Thus, while the risks
associated with ECF are high compared with other asset
classes, they are not extravagant when compared with
other forms of investment into entrepreneurial ventures.
3 Theoretical considerations
We next outline the theoretical considerations that affect
how entrepreneurs and investors engage with each other
5 The failure rate is based on year of receiving funding rather than year
of being founded. These should not be confused with survival rates.
Moreover, it is notoriously difficult to capture true rates of failure as
many firms could be struggling or dormant before they are observed as
having failed. Examining each and every firm for its operating status
was beyond the scope of our research.
in an equity crowdfunding environment. ECF platforms
provide entrepreneurs and investors access to a
twosided online social media marketplace
, where they can trade equity finance
for ownership stakes
(Cumming and Zhang 2016; Rossi
and Vismara 2017)
. The platform is the market-maker,
regulated by the relevant financial services authority,
and each offering of shares by entrepreneurs is denoted
a pitch. Social networks allow new markets to emerge,
because they drastically reduce the transactions costs of
(Estrin and Khavul 2016a)
. There is
a rapidly burgeoning literature about ECG, focused on
social networks (Vismara 2016); pricing and regulation
(Hornuf and Schwienbacher 2016; Hornuf and
and distance effects
(Guenther et al.
2017; Mohammadi and Shafi 2017)
This literature has proposed three mechanisms
whereby equity crowdfunding might be able to improve
the matching between investors and entrepreneurs
(Estrin and Khavul 2016a; Polzin et al. 2017)
there is a priori information provided by the
entrepreneur as part of the pitch process, which is freely
available to all potential investors. This includes a valuation
of business and financial information about the
company, including data about themselves, their business
experience and their business idea. Entrepreneurs often
provide a video of themselves outlining their pitch to
potential investors. These messages are provided within
a standard format, and the investor has the knowledge
that the proposal has been screened by experts within
the platform to weed out weaker investment proposals.6
The open access characteristics of the platform provide
entrepreneurs with an interesting balancing act between
revealing enough and too much to the public at large
(McKenny et al. 2017)
. Second, information flows are
generated through the dynamics of the pitch process.
The platform pools together the knowledge of a network
of investors with skills and experience about particular
sectors, technologies and financing arrangements
(Estrin and Khavul 2016a)
. From its opening, potential
investors are invited to comment on any and every
aspect of the pitch—the valuation, the product, the
business plan, the market, the entrepreneur and the
management team, financial forecasts and the entire
business model (Ahlers et al. 2015). The investor
6 In one UK platform, only around 10% of entrepreneurs’ proposals
survive the screening process. The proportion is reported verbally to be
similar in other platforms.
network is an informed group, which includes people
who are entrepreneurs themselves, as well as potential
consumers, specialists in finance and marketing and
. The ECF platforms
are structured to facilitate the posting of comments from
investors and responses from entrepreneurs, in an
accessible and easy to manipulate format
(Dushnitsky et al.
Finally, network participants can watch the
investment decisions of other investors, potentially creating
. Investors reveal
to others on the network their willingness to pay for
equity in the business by publicly pledging sums
towards the target
(Estrin and Khavul 2016a)
network is informed about the amount invested and the
timing of the investment (early in the process, late, in a
large single sum or in a number of smaller amounts).
This may encourage others to invest, in the knowledge
that some investors have already taken the plunge
(Cumming et al. 2014)
4 Methodology for the qualitative study
4.1 Data sampling and collection
Focusing on a relatively recent phenomenon, our study
is qualitative and inductive in design. We follow the
tradition of discovering new knowledge by generating
thematically underpinned concepts and ideas
Pitre 1990; Gioia et al. 2012)
. To investigate our
research questions, we need to explore the views and
attitudes of actors involved in ECF. We use a multiple
case method. This
approach is appropriate where investigators are
exploring a phenomenon, such as ECF, which has novelty and
where related scholarly literature is sparse
et al. 2011)
.7 It also allows for inductive building of
theory and provides rich empirical descriptions of the
phenomena under consideration
We used Bpurposive sampling^ to select participants.
Adoption of a typical case purposive sampling strategy
required a search for information-rich cases illustrative
. Consequently, we interviewed a
range of entrepreneurs, as well as new and experienced
investors, who either engaged or chose not to invest
7 Other studies of platforms and innovation
(Gawer and Phillips 2013;
Klingebiel and Joseph 2016)
have employed similar coding methods.
through ECF platforms
(Pettigrew 1990; Golden
. Primary data were collected through
semistructured interviews. This technique allows flexibility
to explore new topics while ensuring important issues
(Kvale and Brinkmann 2009)
researcher must frame what is important in understanding
the behaviours, events and patterns related to the
. Pilot interviews were
initially conducted to ensure the questions were clear and
followed a logical flow, leading to some minor changes.
Secondary data sources included research publications
from ECF websites, regulatory authorities, business
angel associations and press reports.8 These resources
aided the refinement of questions and provided context
for interpreting responses. In total, 64 semi-structured
interviews were conducted between 2014 and 2017; the
longitudinal method was used, because the study
explored interconnections between the context, content
and processes of change over time
Symon and Cassell 2012)
4.2 Data analysis and validation
We followed the BGioia Methodology^ designed to
enhance Bqualitative rigour^ by deriving first-order,
second-order and aggregate concepts (Gioia et al.
2012) to analyse the qualitative data. A common
challenge is that qualitative studies create voluminous and
varied data sets which are Bdisordered^ and difficult to
. The application of Gioia’s
systematic approach to data analysis brings structure
and Bqualitative rigour^ to the development and
presentation of research findings. During this process, primary
data from interviews were closely reviewed to
determine points of importance, common themes were then
identified and categories assigned
We organised our interviews into a series of key
themes, assigned descriptive codes to text passages that
indicated these issues: one each for entrepreneurs and
for investors. A consolidation yielded initial schemes
allowing rigorous comparison of topics across data
sources. We then iterated further between data points
to capture the most empirically grounded and
8 We therefore conducted additional interviews with a broad cross
section of people associated with the sector; working for the platforms,
regulators, and policymakers
(Estrin et al. 2016)
9 Interviews were transcribed, analysed and shared electronically; such
approaches have been usefully employed in studies of similar
phenomenon including microfinancing
(Bruton et al. 2011; Khavul et al. 2013)
theoretically interesting issues highlighted in the views
of entrepreneurs and investors respectively. This process
yielded the two data structures presented in Figs. 1 and
2. The first (Fig. 1), for investors, contained three
second-order themes further divided into 28 first-order
categories, while the second (Fig.2), for entrepreneurs,
also contained three first-order themes, but subdivided
into 20 first-order categories. Each interview was
assigned a unique identifier followed by the year the
interview was conducted (e.g. I12.2017).10 Our
iterations between data points continued as we added new
interview transcripts until Btheoretical saturation^ had
been reached (Morse 1997).
External validity was constructed through
investigation of multiple cases across different ECF platforms,
thereby allowing Bliteral replication^ across cases
2009; Stake 2013)
. The multi-case research design also
allowed for internal validity by allowing close
inspection of the context and causes of changes in ECF
practices (Leonard-Barton 1990). Internal validity was
further achieved by considering different empirical data
sources. Scope, depth and consistency were ensured
by discussing key concepts, constructs and terminology
with each of the informants and triangulating the
findings across data points
(Flick 1998; Seale 1999)
summarise, the research design employed is inductive
(Eisenhardt 1989) and so aims to build concepts that
Bcapture the qualities that describe the phenomenon of
theoretical interest (Gioia et al. 2012, p. 2).
5 Entrepreneur and investor motivations for use or avoidance of ECF
This section outlines the results of 20 interviews (2015:
5 interviews, 2016: 15 interviews) conducted with
entrepreneurs, who either have engaged or have
consciously chosen not to engage with ECF. Empirical
analysis of the aggregate dimension of entrepreneurs’
motivations for ECF adoption and avoidance is
supported by three second-order concepts: reasons for
bypassing institutional funding models (four first-order
categories); reasons for using ECF for fundraising
(eight first-order categories); and reasons for avoiding
10 These are reported in the ‘Representative Data’ column in the
Online Resource 2.
ECF for fundraising (eight first-order categories). Each
second-order concept is supported by a series of
firstorder categories, the total number of which is listed in
parenthesis above. We draw from the concepts and
aggregate dimensions, outlined in Fig. 1, to structure
this section and Appendix B (Online Resource 2), which
contains selected evidence regarding these interviews. It
should be noted that the second-order concepts are
supported by 60 representative quotes.
5.1.1 Why did entrepreneurs bypass traditional institutions and moved to ECF?
Why do entrepreneurs seek capital via ECF rather than
through more traditional means? Entrepreneurs offered
several reasons. In the aftermath of the financial crisis,
there was a distinct lack of funds for early stage
financing. In fact, potential investment funds were being held
back: (BSimply put [ECF] makes it easier for the smaller
enterprises to raise funds, the banks problems are that
due to the costs being too high for them to enable them
to contemplate smaller transactions.^). Furthermore,
though some seed money was available through angel
investors in the UK, further capital for growth and funds
for day-to-day liquidity were hard to obtain (BWe went
round everybody in the UK. We went to all of the
VCs… that confirmed out experience… nothing—no
interest whatsoever^), especially compared to the USA.
Likewise, ECF presented entrepreneurs with a
logistically viable ability to self-fund or to use an existing
customer base to raise capital. (BWe could see that there
was a huge demand from our customers—there are three
quarters of a million of them,—to own some of the
business and to profit from our success^). This has the
benefit of turning user-investors into more committed
and vocal advocates of the firm. Raising funds in this
way was described as being fundamentally Ban easier
sell^ as existing customers were felt to understand the
product and the company’s vision.
In addition to their customer, ECF provided access to
a large pool of platform investors and entrepreneurs
indicated a preference for larger platforms (BIt’s an easy
way to raise finance, it’s quick, it’s low hassle
administratively and there are a lot of side benefits to it. You can
get publicity just by crowdfunding and you can get lots
of recognition^). Some entrepreneurs turned to ECF for
purely commercial reasons, to raise funds quickly and
cheaply, while others because they wanted to be
inclusive. ECF platforms were also seen to offer effective and
speedy access to significant amounts of finance (BIt was
a commercial decision.^). As we have seen, as the ECF
platforms have matured, the investments that
entrepreneurs can raise have increased. Interestingly, our
interviewees cited that crowdfunding gave them access to
capital without relinquishing the same levels of control
as with venture capital.
The interviews also revealed important secondary
reasons for entrepreneurs to engage with ECF; platforms
allowed businesses to spread awareness of their
products and services. One company had BBC articles
written about them, when they raised a hundred percent
of their target in just 24 h. Publicity seeking is identified
as another motivation. Savvy entrepreneurs will aim to
create Bmomentum and buzz^ through marketing
campaigns and so create excitement. Often, positive press
regarding crowdfunding campaigns relates to how
quickly a funding round has achieved the target level
of capital. Entrepreneurs pursue several strategies to
accomplish fast and successful raises, including
recruiting investors early and presenting achievable
minimum investment targets.
Finally, using ECF platforms to raise capital had an
added secondary benefit for entrepreneurs. One felt that
the digitisation and virtualisation of the investment
process removes the need to physically attend numerous
pitch events, but instead allowed virtual meetings and to
upload pitch videos. A further secondary reason cited for
adopting ECF is that a large network of investors may
help entrepreneurs to find people with the necessary skill
sets and knowledge base needed to grow the business.
5.1.2 Why do entrepreneurs avoid fundraising through ECF?
Some entrepreneurs argue that, contrary to popular
perception, the potential levels of capital available to
entrepreneurs are low and the administrative overheads
required. Some entrepreneurs suggested that a great deal
of due diligence work was required by the platform and
that this had increased over time, not least due to rising
regulatory obligations. However, others felt that the
administrative overheads were not large compared with
other forms of investment though they agreed these had
increased. Some entrepreneurs felt the platforms did not
provide enough support in preparing due diligence,
understanding the regulatory obligations and promoting
the campaign. For example, one entrepreneur admitted
that they had no understanding of the responsibilities
placed on them regarding financial investment rules.
Luckily, their campaign did not reach its target so no
funds were received from investors.
Some of our interviewees raised concerns about
transparency and the public nature of crowdfunding.
Consistent with the theory, some entrepreneurs felt ECF came at
an unacceptable risk should the campaign not reach its
target. Traditional funding routes are undertaken behind
closed doors and so, if an entrepreneur fails to raise funds,
the outcome is not widely known. However, if an ECF
pitch fails to reach its target, the failure is public. Other
interviewees were not willing to place sensitive financial
information in the public domain. Furthermore, some
entrepreneurs were wary of the signal from using ECF:
by going down the crowdfunding route they were
publically signalling to future investors that they were a less
robust and attractive business.
Interviewees also raised concerns about potential
problems from having to deal with unsophisticated
investors. They did not want to feel that they were
responsible for managing other peoples’ savings nor have to
address a plethora of ill-informed questions. In contrast
to the perspective held by some entrepreneurs that large
networks of investors would help them access
knowledge and skill sets, some interviewees felt that
unsophisticated investors could add very little value as they
knew little about the business environment. Other
entrepreneurs felt the platforms were not regulated
enough, that there were a lot of hidden risks, false
projections and over-exuberance. One entrepreneur
gave an example of an unsophisticated investor, who
invested £500 and then rang their office to ask what he
would get for his money. He was not worried about
losing his money. He thought the company was great,
but did not understand if it was a gift or an investment!
In summary, for entrepreneurs, ECF appears to have
provided a new and for the most part attractive form of
funding. The platforms offer many advantages: of low
cost, ease and availability. They also provide some
spillovers in the form of product and market testing
and development. Nonetheless, there remains some
suspicion of this innovation among entrepreneurs, notably
concerning the additional risks generated by reliance on
This section outlines the results of 44 interviews (2014:
3 interviews, 2015: 13 interviews, 2017: 28 interviews)
conducted with investors, who have engaged or have
consciously chosen not to engage with ECF. We divide
our interviewees into two groups; investors whose
engagement with ECF is relatively casual, termed Blow
value^, and those who are investing more frequently
and/or larger sums, termed Bhigh value^. As Fig. 2
shows, there are twenty eight first-order categories
supporting three second-order concepts (a) reasons for
investing through ECF (supported by twelve first-order
categories and 200 representative quotes); (b)
investment decision-making practices (supported by eight
first-order categories and 78 representative quotes);
and (c) reasons for investing through ECF (supported
by eight first-order categories and 62 representative
quotes). Selected evidence regarding these interviews
and the related themes and concepts identified are
available in Appendix C (Online Resource 2). The aggregate
dimension, Investors’ motivations for ECF Adoption
and Avoidance, is supported by 340 representative
quotes from investors.
5.2.1 Why do investors choose ECF?
All the investors interviewed cited financial motivations
as either the primary or a very important motivation for
their engagement (Bat the bottom line, it is financial^).
Across the two investor groups, by far the most cited
reason for investment was the potential for high returns.
Most investors see their ECF investments in the context
of a balanced asset portfolio, as an asset class which
raised both the riskiness and the expected return. Most
hoped to find a Bgolden unicorn^ but recognised that
such outstanding financial performance was likely to be
extremely rare. The specific expectations of returns were
rather varied, but usually high and often framed in
venture capital terms, for example expectations of B3X
to 5X^ or B10X^ (BI would say that 10 times is an
acceptable return^), though combined with a realisation
that many investments might fail. Most investors
understood that they needed to make a number of investments
in the knowledge that only one or a few might generate
returns and the rest would probably fail.
Time horizons for anticipated returns were relatively
long, ranging from Bthree to five years^ to Bfive to ten
years^. Our interviewees all understood that losing their
entire investment was possible. For example, BI
understand the risk, I understand the upsides and downsides^;
BMy confidence in the investments are always very,
very low^). There was also a strong appetite for risk,
especially for high value investors (BYou expect 7 out of
10 to fail, 1 to be going along nicely, and 2 to be quite
good^). Indeed, some had previous experience investing
in equities and start-up firms and several high value
investors had been entrepreneurs themselves.
For the majority of the interviewees, both high and
low value, ECF constituted a relatively minor part of
their overall portfolio; few of the interviewees invested
more than £15,000 in any single pitch. Thus, almost all
the investors referred to their ECF investments as
Bsmall^. In fact, one of the reasons often cited for
engaging and investing with ECF platforms was the
ability to invest small sums in risky projects. A further
reason for investing through ECF platforms was the tax
relief provided by the UK government, which was of
universal importance to the high value investors.
Our interviews also revealed some important
nonfinancial motivations for investors choosing to
participate.11 Many ECF investors enjoyed the vicarious
benefits from engaging in ECF, for example stating, Bit’s
nice to be part of a project^ or wishing to Bhelp young
entrepreneurs^. This was a quite common motivation in
the interviews undertaken in 2014–2016, but perhaps
rather less so in the more mature market of 2017, where
financial returns were emphasised, and particularly so
by the more high value investors. Some investors of
both types revealed that Bliking the product^ was an
important consideration; for example, because of
personal interest in biotech, zero carbon food or beer. Thus,
investors talked about being passionate about particular
industries and wanting to support related innovations.
Some of the interviewees cited medical and
energysaving innovations as examples. Others talked about
feeling Bpart of the entrepreneurs’ journey.^
Other non-financial motivations for investing
included using ECF as a way to learn about the investment
process and as a way to access start-up communities,
thereby helping the investor in the development of their
own professional networks. Many interviewees also felt
that regulation offered some level of guarantee that
funds would be returned and also ensured a degree of
oversight towards the platform.12
Some investors specifically noted the lower
transactions costs in the process (BThere’s a transparency about
it that you don’t see necessarily in the traditional
investment market^) and commented on how investing
through ECF platforms created less Bfriction^. Our
interviews therefore provide some support for the
argument that the lower transactions costs of trading within
ECF platforms allows matching between investors and
entrepreneurs which was not possible previously. As a
result, ECF may well be able to bring new financial
resources to early stage entrepreneurial ventures.
Relevant quotes include: BI would not have invested the
funds at all if not through ECF^; Bthis has opened up
opportunity to deploy money that I probably wouldn’t
have looked to invest otherwise^; BIf I wouldn’t have
11 Some interviewees from 2014 to 16 also cited low interest rates as a
motivational factor, but this issue was not cited in the 2017 interviews.
12 However, a few 2017 interviews suggested some growing mistrust
of the platforms, especially among high value investors. Some
concerns were expressed about returns, valuations and governance.
Conversely, several high value investors were not concerned about
regulation, arguing that platforms would be regulated by the market.
invested my money in this firm, I think I would’ve put it
in bonds or fund^.
5.2.2 How do investors make decisions when investing through ECF?
Our data analysis also provides insights into the
investment decision-making practices within ECF platforms.
There was considerable variation in the amount of time
that investors spent evaluating alternative pitches and
making investment decisions. The platforms allowed
individuals to invest without engaging in time consuming
due diligence and lengthy research processes. Many high
and low value participants suggested, they would only
spend at the very most a couple of hours researching
materials (valuations, pitch videos, etc.), but this
depended on the sums being invested. Rather little time
was typically spent for very modest investments, but the
experience of the investor was also important. Typically,
more experienced investors focused on the standard
bundle of factors driving early stage venture investment: the
entrepreneurial group, the concept and business model
and the technology. The less experienced investors
focused more on particular unidimensional factors, often
related to the product or the entrepreneur.
Our interviews also reveal that ECF generates a
learning process for the investor, who may start by
responding to an advert or the desire to buy into the
producers of their favourite beer, but who quickly get a
taste for the investment process itself. Thus, by 2017,
most interviewees had invested in between three and ten
firms, and their reasoning related more to their portfolio
than to the characteristics of any particular investment.
Direct access and knowledge of the new ventures and
entrepreneurs prior to the funding round were cited as
important factors as was having previous working
knowledge of the industry. Some of the investors had
previously been customers of the firms and had used
their products and services. This parallels the point
above that some entrepreneurs have used ECF to
leverage their customer base; first-hand experience of
product and brand recognition were cited as important
factors behind investment.
Investors also stressed their need to be convinced that
the entrepreneurs understood the product and business
environment. Correspondingly, they highlighted the need
to review the experience and Btrack record^ of the
founders and whether they had run similar businesses
successfully before. Acknowledging that Bno one knows
everything,^ some investors also looked to see if
inexperienced entrepreneurs had the awareness to know they did
not understand some aspects of running a business and so
were partnering with the right people or seeking help in
Communications among investors was also an
important factor in the investment decision-making
process, as was the ability to interact and communicate with
the entrepreneurs. Thus, the majority of our
interviewees highlighted the importance of learning from
the expertise of other investors by engaging with the
online discussion groups, facilitated by the platform (BA
lot of the reason for investing I’d say was because of the
lead investor^). One investor described this as a big part
of his due diligence process, observing other investors’
analysis to see what they were thinking, and how they
responded to different perspectives and investment
rationalisations (BIt’s a form of self-improvementB; Blots
of things people would ask, which I wouldn’t—people
with different areas of expertise.^). Some investors also
described how they were keen to contact other investors
Bin similar situations^ post-investment, seeing this as a
good opportunity to develop their professional
networks. The enthusiasm of the entrepreneurs and their
willingness to engage in response to questions on the
online forums was also seen a good indicator of their
likelihood to remain engaged with the investor
community post-funding (BSound and solid responses increases
the trust^). The ability to learn and communicate with
both investors and entrepreneurs was therefore seen by
many as motivational factor for investment.
5.2.3 Why do investors avoid investing through ECF?
We also interviewed some investors who were negative
about ECF, either being unwilling to use it or unwilling to
do so again. By 2017, a few investors had become
disillusioned with the low success rate of ECF-funded
ventures, perhaps initially underestimating the time
horizon required while some others were worried, whether
the platforms offered insufficient protection should the
new venture become insolvent. High value investors in
particular expressed frustration about the lack of regular
updates and general quality of feedback to the investors.13
13 Some suggested that this was due to entrepreneurs having nothing to
report and therefore probably failing, while others suggested that they
rarely heard anything back unless another funding round was
A few more experienced investors were also critical of
ECF suggesting that if the firm was not good enough to
attract professional investment then it was too high risk.
Furthermore, while some of the investors felt encouraged
to follow the crowd, others felt that enthusiasm and
exuberance regarding a product were poor indicators of
In summary, our interviews suggest that the rapid
expansion of ECF in the UK has gone hand in hand
with the emergence of a large new enthusiastic investor
pool, often interested in supplying relatively small
tranches of capital (a few thousand pounds) to a variety
of projects. To quote an investor: Byeah, definitely a new
channel and … it gives you access to an area that wasn’t
available before^. Many ECF investors interviewed
were not previously investors in company equity at all,
let alone private equity, and were attracted by the social
network aspect of ECF, as well as the highly visible
marketing campaigns for particular pitches through, for
example, social media, advertisements on the London
Underground and through the sales outlets of the firms
seeking funding. This further supports the view that
ECF has probably added significant new funding to
the UK entrepreneurial capital market though further
large scale quantitative analysis is required to establish
this insight empirically.
6 Discussion and limitations
The ECF sector in the UK has grown very rapidly in the
past six years, under the benign gaze of a Blight-touch^
regulatory regime. The ECF market has become larger,
deeper and has matured considerably in this period. In
light of the novel approach that ECF offers both
entrepreneurs seeking equity funding and investors
supplying capital, we return to our two research questions to
deepen our understanding of the evolution of the sector.
First, (RQ1), are the significant financial flows via
ECF platforms incremental to more traditional forms of
funding for entrepreneurs or are they merely a diversion
of previous flows via a new channel? Our analysis
supports the view that the supply of equity capital for
entrepreneurs via ECF is largely new, rather than
diverted from other channels such as angel investment
or venture capital. The evidence for this includes the
extraordinarily rapid growth in the number of registered
and participating investors as well as of the funds
provided. The interviews indicate that many investors are
entirely new to this type of activity. Furthermore, for the
most part, entrepreneurs appreciate this form of funding
and view it as differentiated as well as additional to what
was available to them previously. It is significant that
entrepreneurs, even those who choose not to pursue it,
see ECF as an alternative for raising capital. Given that
ECF emerged as an alternative source of financing in
time of crisis, it is notable that many entrepreneurs see
ECF not so much in transactional terms as in relational
ones. Moreover, entrepreneurs appear able to think
critically about the possible limitations of raising financing
in this way. The public nature of the financing round and
the transparency that it enforces also changes the
decision-making process of whether and when to pursue
ECF with implications for how and where ECF can
entrench itself on the landscape of entrepreneurial
finance in the future.
Our second issue, RQ2, concerned whether investors
understand and appropriately evaluate the risks that they
are bearing by investing in this new form of equity asset.
There is support for this view in the investor interviews,
which indicate an understanding of the risks and returns
entailed in this asset class. We have seen that investors
engage closely in the evaluation process of new ventures
and are undertaking their investment primarily for
financial reasons. They have a medium to long time
horizon and seek one or a few Bgolden unicorn^
successes to offset the fact that they realise the bulk of their
investments will either fail or provide at best lacklustre
returns. We conclude from the interviews that most
investors appeared to have some understanding of the
risks involved in ECF investments. Moreover, many
investors valued, over and above the potential returns,
the opportunity to participate in the creation or
expansion of either one or several businesses. For investors,
ECF presents a window on the work of private firms in a
low transaction costs and high visibility environment, to
which they previously had no access. The implications
of mass participation by investors in ECF may have
implications for future entrepreneurial activity in the
country. Experiences, even vicarious ones, open the set
of possibilities that individuals may have previously not
We finally address an issue only indirectly
thematised in our interviews, namely whether ECF
provides skills and advice from the investor to the fledgling
enterprise, as is claimed for VC
(Gompers and Lerner
. The ECF platforms do offer mechanisms for the
speedy and costless transfer of knowledge through the
social networks—posts, followers and comments—and
we have evidence that these are widely used and noted,
especially by other investors in making their investment
choices. Moreover, ECF offer possibilities for
entrepreneurs not available through other funding mechanisms;
to test their products, to develop their brand, to build a
loyal customer base, to turn customers into investors.
Nonetheless, on both the investor and entrepreneur side,
our interviews suggest these factors are not always
adequate compensation for the absence of expert
guidance provided by traditional early stage financiers, and
this may limit the attractiveness of ECF into the future.
However, some interviewees note that the crowd
contains many members who do not have the relevant skills
and expertise to assist entrepreneurs or are not willing to
share their knowledge in such a public forum.
As with most studies, ours has limitations which
open the door for future research. To start, we
exclusively focus on the UK, because this presents an
unprecedented opportunity to document and analyse the
emergence of the most significant equity crowdfunding
market in the world. However, this remains a single country
study with all the associated pitfalls for generalisation.
Our reach across levels of analysis could also be seen as
a limitation. However, in combining quantitative sector
level analysis and qualitative actor level analysis, we are
able to draw links between the macro consequences of
microbehaviour. We believe that it would be incomplete
to rely on one or the other level of analysis in trying to
open the discussion on our research questions. Future
research should consider each level of analysis
separately and allow the literature to integrate findings across
multiple research efforts. Finally, crowdfunding, and
equity crowdfunding in particular, are emerging
phenomena which are as yet only superficially understood.
Our qualitative work with entrepreneurs and investors
opens the door to more questions that can only be
explored with the benefit of time.
7 Conclusions and policy implications
We noted at the outset of this paper that entrepreneurial
ventures are an important source of innovation, economic
growth and job creation and that many countries are
probably underachieving relative to this potential,
perhaps because of deficiencies in the supply of finance.
However, recently there has been a considerable flow of
funds to early stage entrepreneurial firms in the UK,
associated with rapid growth and maturation of the ECF
market, with increasing concentration and market
deepening in terms of the number of investors, the amount
invested and sums raised for new ventures. We have
argued that this is likely due to a combination of
favourable circumstances in the UK including
lighttouch regulation and attractive tax benefits for early stage
entrepreneurial investors. We now turn to the policy
implications of our study.
We d r a w t h r e e m a i n r e c o m m e n d a t i o n s f o r
policymakers that parallel the levels of our analysis.
First, our research shows that financial innovations can
emerge in periods where traditional institutions create
voids. The 2008 financial crisis proved just such an
opportunity in the UK, leading entrepreneurs to look
to the power of the internet and social media for access
to finance. In the absence of a prescriptive regulatory
structure, and in the face of an economic and political
constraint, UK financial regulators and platform
innovators worked together to create an institutional logic
that allowed entrepreneurs, investors and platform
intermediaries to experiment with equity crowdfunding as a
financial innovation.14 Drawing on this UK experience
with light-touch regulation, policymakers could be
reminded that, although innovation normally runs ahead
of regulation, regulatory stakeholders can shape practice
with policy and principles in advance of formal rules.
Practically, this requires tight connections to innovators
to avoid unintended consequences of policy. Not every
country nor every legal system or cultural environment
can support such an approach; however, our policy
recommendation of vigilance but temperance is a
strategic choice that could be judiciously transferred across
The growth of equity crowdfunding in the UK also
raises policy implications for the entrepreneur and
investor ecosystem. We noted that in the UK, as in many
other countries, there has been a persistent gap in access
to early stage finance for entrepreneurs. History will
judge whether equity crowdfunding is the financing
innovation that might help to address this persistent
problem; yet what is clear that the emergence of equity
crowdfunding in the context of increased digitalisation
of economic life has created new opportunities for
policymakers to engage with both entrepreneurs and
14 It should be noted that the equity crowdfunding unlike debt-based
crowd-lending is far more difficult to scale and, in the eyes of
regulators, presents a more confined risk to consumers.
investors in ways that were previ ously m or e
constrained. Our research shows that entrepreneurs vary
in their appetite for the open format of raising financing
over the internet. Some eschew the public nature of
success or failure that platform financing entails. Others
have used the social media internet environment to
strategically anchor existing customers, to raise their
public profiles and to attract follow-on investors. As
with other financial tools, policymakers whose job it is
to enable equity crowdfunding should not view it as the
hammer that all entrepreneurs need to nail their businesses.
Rather, through education and sensitive differentiation of
needs, policymakers, with the support of a locally
appropriate regulatory framework, could support equity
crowdfunding as one of the market choices available for
entrepreneurs looking to grow or start their ventures.
Finally, in the UK and elsewhere, policymakers and
market observers have raised persistent questions about
how investors make decisions in the context of equity
crowdfunding. Our research suggests that investors
broadly understand the opportunities and limitations
involved in equity crowdfunding. This does not imply
that every investor understands the risks or that investors
cannot be misled or that there is no post-investment
regret or opportunism. Investing in illiquid equity in
businesses that are starting up or growing is not the
norm for even experienced investors. Therefore,
policymakers would do well to invest in educating
investors and their advisers about the best way to
participate in this asset class. Education that results in
mindful investing, one that moderates the propensity
to make emotional or impulsive decisions, will create a
more stable environment for both entrepreneurs and
investors in this marketplace. However, our research
shows that policymakers looking to support the
entrepreneurial ecosystems in their geographies should
consider the tacit benefits of a vicarious education that
investors receive when they are able to observe others
engage in entrepreneurial activity.
Acknowledgements The authors gratefully acknowledge the
research assistance from Lolo Chen, Linde de Nie, Mary Fox,
Ioanna Gouseti, Andrea Guerini-Rocco, Ines Steimelweger and
Dustin Voss. We have benefited from extensive discussions with
Luca Grilli, Andrea Hermann, Lukas Held, Werner Liebregts,
Boris Mjkajic, Mark Sanders and anonymous referees. The
authors gratefully acknowledge the financial support of the EU
Horizon 2020 programme under grant agreement No 649378, as
well comments and advice from members of the FIRES research
programme and the Centre for Economic Performance at LSE. We
are responsible for any remaining errors.
Open Access This article is distributed under the terms of the
Creative Commons Attribution 4.0 International License (http://
creativecommons.org/licenses/by/4.0/), which permits
unrestricted use, distribution, and reproduction in any medium, provided
you give appropriate credit to the original author(s) and the source,
provide a link to the Creative Commons license, and indicate if
changes were made.
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