The equity crowdfunding choice: A demand-side perspective

Löher, Jonas Article — Published Version The equity crowdfunding choice: A demand-side perspective Journal of Business Economics Provided in Cooperation with: Springer Nature Suggested Citation: Löher, Jonas (2024) : The equity crowdfunding choice: A demand-side perspective, Journal of Business Economics, ISSN 1861-8928, Springer, Berlin, Heidelberg, Vol. 95, Iss. 4, pp. 527-551, https://doi.org/10.1007/s11573-024-01211-w This Version is available at: https://hdl.handle.net/10419/323460 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/4.0/ Vol.:(0123456789) Journal of Business Economics (2025) 95:527–551 https://doi.org/10.1007/s11573-024-01211-w ORIGINAL PAPER The equity crowdfunding choice: Ademand‑side perspective JonasLöher1 Accepted: 22 September 2024 / Published online: 28 October 2024 © The Author(s) 2024 Abstract In recent years, equity crowdfunding has become increasingly popular for capital-seeking start-ups. A widely held assumption is that these ventures have no other risk capital options and see it as their “last resort” to obtain funding. However, not much is known about their narrow and broader motivational backgrounds. Based on case studies of ten crowdfunded ventures, this study unveils the motives to use equity crowdfunding and links them with organisational characteristics. The analysis shows that ventures’ risk capital choices in this setting are motivated by crowdfunding-specific investment conditions, value-add features, and their fit with ongoing organisational challenges. Thus, I provide a detailed picture of the specific role that equity crowdfunding is intended to play in these firms. Based on the analysis, a theoretical model of four motivational types is developed that could stimulate future research. I argue that instead of focusing exclusively on cost and control arguments, research about investor decisions in equity crowdfunding should also consider different forms of resourcefulness. Keywords Crowdfunding· Entrepreneurial finance· Investor choice· Risk capital· Crowdfunding motivation JEL Classification G23· L26· M13 1 Introduction The early-stage financing landscape changed substantially during the last years. The financial crisis, technological changes, and numerous policy interventions led to the emergence of multiple new resource providers for capital-seeking ventures (Block etal. 2018). This recent increase in diversity offers entrepreneurs more ways to customise and time their fundraising strategies according to their needs (Bellavitis etal. 2017). Given the resource-scarce world of young ventures and * Jonas Löher [email protected] 1 Institut für Mittelstandsforschung (IfM) Bonn, Maximilianstraße 20, 53111Bonn, Germany 528 J.Löher the need for rapid growth in many sectors, these actors often need to finance their businesses with partners that offer more than just financing. Rather the decision for the appropriate investor is often critical to unfold the entire growth potential of the firm. Despite its practical importance, not much is known about how entrepreneurs choose their investors (Schwienbacher 2013). During the last decades, most research in entrepreneurial finance had a supply-side focus, analysing how financiers select these firms (Rasmussen and Sørheim 2012). The perspective on early-stage ventures’ capital acquisition was mainly deficit-oriented, pronouncing the hurdles these firms have in attracting external risk capital. Nevertheless, the best ventures can often select between alternatives (Smith 2001). Consequently, our knowledge about demand-side motivations and the intended role of established and new risk capital providers is rather limited. However, to successfully match founders and funders, both sides need to understand each other’s interests in more detail (Polzin etal. 2018). An emerging risk capital source that recently enriched the venture finance landscape is equity crowdfunding, in which funders receive equity or equity-like shares in return for their commitment. In recent years, it has become a prospering way to finance many young and innovative for-profit businesses (Bradford 2012; Vulkan etal. 2016). However, despite its growing popularity in research and practice, it is not yet clear what drives entrepreneurs to use equity crowdfunding over other financial sources (e.g., Ahlers etal. 2015; Pollack etal. 2021). On the one hand, literature stresses its multiple non-monetary benefits that are often seen as the motivating factors to initiate crowdfunding campaigns in general (e.g., Belleflamme etal. 2014; Gerber etal. 2012; Junge etal. 2022). On the other hand, it is argued that equity crowdfunding systematically attracts businesses that see it as their last resort instead of their first choice (Blaseg etal. 2021; Ibrahim 2015; Tomboc 2013; WalthoffBorm etal. 2018). However, so far, research has failed to develop a differentiated understanding of the different motivational backgrounds. Studies that systematically analyse ventures’ decisions to use equity crowdfunding, considering their particular context, are rare. Based on qualitative data from ten German cases, the study responds to the question: Why do entrepreneurs use equity crowdfunding instead of other equity investors? The analysis links ventures’ backgrounds with their decision to use crowdfunding. Thus, I compare ventures regarding (1) their reported motivations, (2) their access to alternative means of risk capital and (3) their broader organisational context. Responding to the research question is critical for various reasons: For investors, it provides insights into whether equity crowdfunding solely supports campaigns of ventures that see it as their last chance to receive funding, which might be a negative signal about the quality of these firms (lemons market risk). Entrepreneurs, who currently seek funding, receive insights about the decision-making contexts of other risk-capital-seeking ventures and a better picture under which circumstances equity crowdfunding fits their financing strategy. Furthermore, for entrepreneurial finance and especially crowdfunding research, it is critical to get a much more differentiated understanding of ventures’ motives to understand how demand and supply of capital find each other in this setting. The research focus in the past was mainly on 529 The equity crowdfunding choice: Ademand-side perspective campaign success factors—however, essential elements about the context in which the analysed campaigns take place are not well understood. I show that ventures are not solely pushed to this form of financing because they lack alternatives. Rather their motivation is considerably influenced by multiple aspects related to investment conditions and specific value-add features. The case analysis discusses the specific motivational backgrounds for each case and develops a theoretical framework of four different motivational types. In this way, the findings contribute to multiple theoretical discussions: Besides providing specific determinants of risk capital choices in the particular context of equity crowdfunding, the framework builds the foundation for further research of motivational backgrounds in other early-stage financing contexts. Furthermore, the paper calls for a more finelined discussion of young firms’ investor choices. Thus, while some ventures make use of what is available or seem to follow cost and control motivations when they approach external investors, others seem to follow a more goal-oriented resource acquisition and therefore pursue an optimising strategy. The paper is structured as follows: Section two provides a literature review. Section three explains the methodology and describes the analysis. Section four presents the findings. The last section discusses the results and brings up future research questions. 2 Background 2.1 Investor decisions ofearly‑stage ventures During the last decades, entrepreneurial finance research developed a detailed understanding of the evaluation processes and selection criteria of different risk capital providers (e.g., Fried and Hisrich 1994; Mason and Stark 2004; Tyebjee and Bruno 1984). Nowadays, business angels, and especially venture capital funds, are known for their highly selective screening processes, in which most ventures are sorted out (Baum and Silverman 2004; Mason and Harrison 2002). Our knowledge about the demand side in this respect is comparably limited and fragmented as it fails to systematically disentangle the different factors that determine a venture´s choice of an investor. What we know about the decision-making context is that innovative new ventures generally face severe problems in attracting external investors due to the huge uncertainties about the later success of the business model (Cassar 2004; Cosh etal. 2009). As the company grows, these uncertainties and thus, information asymmetries between ventures and different kinds of capital providers decrease, giving ventures more alternatives to finance their business (Berger and Udell 1998). To partner with a specific investor at that stage a basic requirement is that ventures decide or can at least imagine using external equity financing (Eckhardt etal. 2006; Mason and Harrison 2001). Furthermore, while it may be difficult for many companies to convince even a single investor, the most promising companies may receive offers from several sides (Smith 2001). While some researchers stress cost and control arguments for capital structure and investor choice, others also consider the value-add investors bring to the firm. 530 J.Löher The pecking order theory served as a central framework for the former ones. The theory assumes that financing costs rise with increasing information asymmetries. Thus, firms follow a pecking order in their financing decision and prefer internal over external financial means. They prefer debt to equity if external financing is required (Myers and Majluf 1984). Although the theory was developed in the context of larger firms, the pecking order was partly supported in the context of small and high-growth businesses (Achleitner etal. 2011; Berggren etal. 2000; Cassar 2004; Vanacker and Manigart 2010). The findings suggest that ventures generally seek financial means with little dilution of ownership and authority (e.g., Valliere and Peterson 2007). Some researchers even argue for a diverted pecking order in the context of technology-based firms. They state that these firms prefer equity to debt when external financing is required (Garmaise 2001; Minola etal. 2013), because VCs are e.g., more capable of assessing the risks at these early stages. In contrast, some researchers stress the importance of specific value-adding features for ventures’ decision-making (e.g., Zheng 2011). Thus, early-stage investors differ considerably in their characteristics and, more precisely, the added value they bring to the firm. They frequently provide coaching and managerial support or access to their extensive network resources of customers, suppliers, investors or employees for their portfolio companies (Rosenbusch etal. 2013). Consequently, risk capital investors often play a multi-faceted role in developing their investees far beyond the sole provider of financial means (Kaplan and Strömberg 2004; Sapienza etal. 1996). Therefore, some researchers argue that information asymmetries exist on both sides of the market. Thus, Glücksman (2020) showed how entrepreneurs deal with these asymmetries as they engage in timing, matching, preparing and trust-building efforts when making their investor choice. Fairchild (2011) developed a game-theoretic model in which entrepreneurs need to decide between the higher value-creating abilities of the VC (Venture Capitalist) and the closer, more empathetic and trusting relationship with the BA (Business Angel). He concludes that, based on the high empathy, entrepreneurs may choose the BA, even though the VC might provide greater value-add capabilities. Schwienbacher (2013) more broadly distinguished between specialist and generalist investors. He argues that specialists outperform generalists as they are more likely to perform value-adding services in early financing rounds. Furthermore, VCs’ reputation for past success and their ethical behaviour have been shown to influence investor choice beyond cost, control and value-add (Drover etal. 2014; Zheng 2011). 2.2 Motives forventures touse equity crowdfunding Against this background, the capital supply side, and thus, ventures’ access to financial alternatives, underwent significant changes. Multiple new players entered the scenery, including incubators and crowdfunding (Block etal. 2018; Bruton etal. 2015). Consequently, entrepreneurs, who traditionally had few funding sources available, have nowadays more power to select, negotiate and manage relationships with investors (Drover et al. 2017). One of these new sources is crowdfunding, which is defined as an open call over the internet for financial means for specific 531 The equity crowdfunding choice: Ademand-side perspective purposes (e.g., Belleflamme etal. 2014). Early research in this new setting focused almost exclusively on its success drivers (see e.g., Ahlers etal. 2015; Kleinert etal. 2020; Vismara 2018). However, so far research failed to explain its growing popularity for capital-seeking ventures (Cumming etal. 2019; Short etal. 2017). First exploratory studies imply that campaign creators use, e.g., reward-based crowdfunding to raise funds, establish relationships, receive validation, replicate the successful experiences of others and expand awareness through social media (Gerber etal. 2012). Nevertheless, motivations to participate for campaign initiators and funders presumably diverge between the different crowdfunding types (see e.g., Cholakova and Clarysse 2015). Especially equity crowdfunding differs in many respects. Depending on the contractual conditions of the intermediating platform, capital-seeking entrepreneurs share ownership, future profit or some other form of the firm’s upside potential with numerous investors. This kind of arrangement is different from, e.g., rewardor donation-based crowdfunding, presumably influencing motivations on both sides of the market. Research should therefore clearly articulate which type it is analysing and interpreting. In an equity crowdfunding context, Walthoff-Borm et al. (2018) showed that firms that are listed on crowdfunding portals lack internal funds and additional debt capacity. Hence, their findings support the pecking order theory in this specific context. Furthermore, they conclude that entrepreneurs use equity crowdfunding as a last resort. However, their results do not reveal how entrepreneurs choose between equity crowdfunding and traditional sources of external equity for these firms. Brown etal. (2018) showed that entrepreneurs use this form of financing to access financial means quickly and with little dilution of equity and autonomy. Estrin etal. (2018) gave a more differentiated picture. They argue that entrepreneurs have mixed motives to use equity crowdfunding. While it is for some strict financial exchange, others use it to test their products, develop their brand and customer base and turn customers into investors. In a similar manner, Stevenson etal. (2022) argue that equity crowdfunding offers specific non-financial values, such as value creation during the campaign. They developed a contingency-based model of funding fit. Although these preliminary findings give first insights into different motivational drivers, it is again not clear what determines ventures’ investor choice under different circumstances. There is a need to disentangle the organisational backgrounds of crowdfunded ventures further and relate them to motivational aspects, which is the aim of this paper. 3 Methodology 3.1 Research approach As addressed in the literature review, research about ventures’ motivations to use equity crowdfunding is in its infancy. Therefore, an exploratory and qualitative research design was used to gain first insights on that topic. It was decided to use multiple case studies as they allow to identify key behavioural patterns across cases (Eisenhardt and Graebner 2007). Furthermore, their detail, richness and case 532 J.Löher variance help to understand the relation between outcome (motivational aspects) and different causes (contextual conditions of the venture) (Flyvbjerg 2006). In addition, the selection of multiple cases instead of a single case builds a stronger base for the subsequent development of a model, based on replication logic (Eisenhardt and Graebner 2007). Three main activities were conducted to gather data from different sources for later analysis: First, a database with detailed information of all ventures that made use of equity crowdfunding in Germany since its emergence in 2011 was built. Subsequently, interviews with a selected subsample of these ventures were conducted and finally, database information, media coverage and additional sources were screened to validate respondents’ narratives and to receive further information about the selected cases. In this way, data was triangulated from different sources to increase validity and strengthen the substantiation of constructs (Eisenhardt 1989). 3.2 Database andsampling The research was embedded into a bigger research project that analysed the German equity crowdfunding market. The data collection was therefore discussed with different senior researchers and supported by two research assistants. To obtain a comprehensive overview of the nascent market we first built a database with key information about all 163 campaigns made by 145 ventures on four major German equity crowdfunding portals (Seedmatch, Companisto, Innovestment, Fundsters) between August 2011 and March 2015. Eighteen of these campaigns have been follow-on funding rounds, in which a venture gathered capital via equity crowdfunding for the second time. 89% of all campaigns were successful in reaching their minimum investment target. To convince potential investors, capital-seeking ventures create an online profile on one of the analysed portals. Besides a short video, this profile provides visitors with key information about the business model and its prospects. To build our database, we screened these company profiles for general information about each campaign (e.g., collected amount, number of investors, campaign duration) and specific information about the business (e.g., founding team, previous investors, valuation). We collected the same information for each campaign to enable later comparisons and to delineate the main tendencies in the market. Furthermore, the detailed information in our comprehensive database served as the main foundation for our interview sampling strategy with campaign initiators. Due to the fact, that our database contained all equity crowdfunding campaigns that have been conducted on major platforms in Germany at that date, we were able to purposefully select our sample, based on different criteria. For these interviews, we made use of purposeful variation-based sampling to identify key themes across heterogeneous cases (Patton 1990). We saw the danger that the interview data might be influenced by hindsight bias. Thus, solely questioning entrepreneurs retrospectively might not always lead to an appropriate reconstruction of the event. As mentioned above, we triangulated data from different sources to mitigate that risk. Furthermore, to make sure that respondents still possess detailed information about the entire background of their campaign we solely considered businesses that had realised one successful campaign within the last twelve months. In a first step, we 533 The equity crowdfunding choice: Ademand-side perspective identified 52 ventures from our database that met this time criterion. In a second step, we purposefully selected and contacted key decision makers of 15 ventures out of these 52 ventures that had heterogeneous characteristics regarding the platform they had used (at least one of every platform), the amount of capital they had raised (ranging from comparably smaller funding requests to large funding requests), the number of funders of their campaign and their total number of conducted equity crowdfunding rounds. Thus, some of the crowdfunded ventures had already conducted a second crowdfunding round. In addition, we contacted the CEO of a venture that initiated a campaign on a fifth platform (that was not in our database) but had diverging characteristics regarding our requirements. Finally, eleven key decision makers of ten ventures agreed on an interview (Table1). In total, the ten ventures they speak for had realised twelve crowdfunding rounds on five different German equity crowdfunding portals. On average, each of these ventures raised 569,481 euros in total (median: 350,000 euros) and 474,567 euros per funding campaign (median: 300,000 euros) from 609 investors. The ten ventures were founded between December 2010 and July 2013. Their campaigns have been conducted between January 2013 and June 2014. Ventures six and nine conducted two equity crowdfunding rounds. However, their very last campaign was within the last twelve months before the interview to meet our sampling criteria. At their campaign start these ventures were between three months and three years old. 3.3 Data collection ofselected cases The semi-structured interviews were conducted between December 2014 and February 2015. The interviews were made by phone (8) and in person (2) and lasted on average 52min. The semi-structured guideline included three main blocks of questions about (1) the interviewee and his business, (2) the crowdfunding process, and (3) general assessments about recent developments in the market. Especially the first block contained detailed questions about motivational aspects, including the decision-making process, financing history and prior investors, motivation to use crowdfunding and the availability of alternative financing options. Especially for ventures that conducted multiple funding rounds, it was made sure that respondents talked about their entire financing background and investor history to understand the context of their decision-making for both campaigns. The first version of the interview guideline was influenced by literature and extended over time when respondents brought up relevant topics. The interviews were recorded for later transcription. To validate the respondents’ narratives additional data for each of the ten cases was gathered. I therefore screened their portals profile information in much more detail. In addition, each case was investigated using the DAFNE and MARKUS databases by Bureau van Dijk to receive more detailed information about the oftentimes changing ownership structures. Furthermore, different online media such as entrepreneurship newsletters, press releases, crowdfunding portals, ventures websites and social media profiles were intensively screened to obtain additional information about events that happened before and especially after the interviews (e.g., follow-up funding rounds, 534 J.Löher Table 1 Overview of the sample Case Industry/Business Model Respondents role Amounts raised (in euros) No. of investors Portal used 1 Portal for language trips Managing Directors & Co-Founders (2) 101-200k 1–100 A 2 Online lottery broker Managing Director & Co-Founder 401-500k 501–750 B 3 Search engine for apps Managing Director & Co-Founder 201-300k 751–1000 C 4 E-book flat rate provider Marketing & Sales Manager, Co-Founder 401-500k 1001–1500 C 5 Electric motor bikes producer Shareholder & Founder 51-100k 1–100 D 6 Mobile payment system provider Managing Director & Founder 301-400k 501–750 B 7 Retailer of homewares CEO & Co-Founder 2000-3000k 1001–1500 E 8 Producer of wooden lifestyle products Managing Director & Co-Founder 51-100k 101–200 A 9 Toy rental service Managing Director & Co-Founder 401-500k 1001–1500 C 10 Fertility diagnostics Managing Director & Co-Founder 201-300k 301–400 B 541 The equity crowdfunding choice: Ademand-side perspective 4.4 Type 3: Contractual optimiser Different from the former two types, the contractual optimiser can choose between different risk capital options. Their decision to use equity crowdfunding is determined by the investment conditions, while non-financial aspects play a neglectable role. Their aim is therefore to secure access to financial means with the best contractual conditions. An example of this type is case 2 (online lottery service provider). Before the venture initiated an open call for funding, it was financed by the financial means of the founders (50 – 100k euros), different angel investors and a VC. Furthermore, the team was in deep and long-lasting negotiations with another VC, that later invested in the firm. The CEO stated that crowdfunding offered the opportunity to access financial means quicker than other options. Besides, he argued that he was not satisfied with the general investment conditions that other investors offered. ‘It turned out that most business angels in Germany are former founders that made millions somehow and seek large shares for small money (…). Of course, the valuation was important.’ Besides, the speed of the financing process and valuation the founding team was inspired by a large amount of capital that a venture out of their local network raised on the same platform. The venture provides an online service, and their business has, therefore, a technological background that targets a mass market. The service was already functioning, and they generated the first turnover. Consequently, the venture planned to spend a considerable part of the crowdfunding capital on activities to penetrate the market. This is also the case for venture 9 (toy rental service). Like venture 2, the young company provided an online service. The venture also had a finalised product and planned to spend part of the crowdfunding capital on marketing activities to launch their product and penetrate the market. The development stages of these ventures are therefore similar to type 2. However, aspects related to investors did not play a role for their portal choice. While the potential investment volume was decisive for venture 2, venture 9 stressed the importance of a reliable legal construct. Furthermore, both ventures had already experiences with different risk capital investors that previously invested in the firm. 4.5 Type 4: Value‑add optimiser Ventures that belong to the last category also have different risk capital options available. However, unlike the former group, they consider the value-adding features as decisive for their crowdfunding choice. Thus, contractual aspects play a role for these ventures, but they are more taken for granted. Consequently, they seek to secure access to financial means with the best mix of (acceptable) contractual conditions and value-adding features. An example of this type is venture 4, a flat-rate e-book provider. Before the campaign, the venture was mainly financed by an incubator. Before their 542 J.Löher campaign initiation, the company had a concrete offer from an angel investor but decided to use equity crowdfunding instead. ‘I think we would have had probably similar financial conditions with the business angel, but then we said crowdinvesting gives us added values that the angel could not give us.’ More specifically, the respondent stressed the importance of different added values, including market and product testing or raising awareness in the target group. At the campaign launch, the venture had a finished prototype, and the capital was needed for further product development, advertising system development, expansion of the book catalogue and service marketing. Their explicit decision to use the specific portal was influenced by aspects related to its audiences, such as the number of investors and sector focus. Another example is venture 7, an online retailer of homewares. Before the campaign, the company had already conducted multiple financing rounds with different BAs and VCs. The reasons why the venture decided to use equity crowdfunding were mainly related to marketing aspects, including brand awareness, viral and social media support. The founder stressed these aspects multiple times. ‘So the core argument for me was always the marketing side, (…) the big challenge that we have is to create brand awareness (…). So I found the idea fascinating (…) to say we build something great, people who like this brand, who are convinced of the business, come along on this trip and scream it out into the world. This also includes components such as social media, or generally referral marketing. These were very central arguments why we tried it out. Together with the soft marketing side.’ The venture was already at a stage, where it received financing rounds, that were often in seven-digit dimensions. It was therefore also decisive that the financing round was financially worth the effort and that the contractual arrangement allowed follow-on financing rounds. The venture had already significant turnover, and the requested capital was intended to force market penetration and expansion. Consequently, ventures of this type approach huge markets with scalable business models. All ventures had a finalised product and were at least close to their first turnover. The gathered capital was used to either launch the product or service or expand into new markets. Factors related to the investors also influenced platform decisions. Thus, besides a reliable legal construct and perceived competence, aspects like the number of investors and the sector focus were considered as important. However, different to contractual optimisers, prior risk capital experience of the value-add optimisers substantially varies. Table4 summarises the findings, showing that there are differences in ventures backgrounds between typologies. Ventures thus follow different intentions with their decision. These intentions are influenced by multiple contextual factors, that are often related to the availability of alternatives or factors associated with the use of specific added values in the ongoing organisational context. Furthermore, the findings suggest, that some ventures see crowdfunding as a complement and 543 The equity crowdfunding choice: Ademand-side perspective Table 4 Motivational typology—comparative overview Sources used: A = interviews, B = funding profile, C = media screening, D = website screening, E = different databases Type 1 Type 2 Type 3 Type 4 Name Typology Plain capital seeker Capital seeker plus Contractual optimiser Value-add optimiser Intention to use Crowdfunding Secure access to financial means Secure access to financial means and make use of value-adding features Secure access to financial means with the best contractual conditions Secure access to financial means with the best mix of contractual conditions and value-adding features Investors’ role (A) Passive Active Passive Active Product/Service characteristics (A, B, C, D) Technological foundation, offline lifestyle products with limited scalability possible, niche markets possible Technological and non-technological, offline-lifestyle products with limited scalability possible, niche markets possible Technological foundation, only online services with high scalability that target huge mass markets Technological foundation, only online or med-tech models with high scalability that target huge mass markets Status Seed: finished prototype Start-up: final product/service– first sales Start-up: finished product–first sales Start-up–growth: final product– significant sales Capital use (A, B) R & D: product development R & D–expansion: further product development, marketing, internationalisation R & D–Market penetration: further product development, marketing, enlarge product range/product features R & D–expansion: further product development, marketing, enlarge product range, internationalisation Organisations risk capital experience (A, B, C, E) Low Low Medium–high Low–high Platform selection based on (A) Reliable legal construct, perceived competence Reliable legal construct, perceived competence, number of investors, sector focus Reliable legal construct, investment volume Reliable legal construct, perceived competence, number of investors, sector focus Entrepreneurs financial commitment (A) High Medium Medium Low–medium 544 J.Löher not as a substitute for other risk capital sources. Thus, during the campaign and ex-post, they realised additional funding rounds with additional equity investors. 5 Discussion 5.1 Theoretical implications In recent years, equity crowdfunding has become increasingly popular for many entrepreneurs. So far research about their motivational background has often remained superficial. The primary target of this study is to address this void. The findings thereby have multiple implications for theory. First, the study contributes to research about motivational drivers of crowdfunded ventures, developing a differentiated picture of the role equity crowdfunding is expected to play in these firms. Unlike previous studies, the relationship between ventures’ decision-making context and motivational outcomes was explored. So far, it was mainly suggested, that equity crowdfunding is especially used by ventures, that have no alternative financing options available or that seek access to financial means quickly and with little dilution of equity and autonomy (Brown etal. 2018). However, the findings extend research that calls for a more differentiated understanding in this context (Estrin etal. 2018; Stevenson etal. 2022). The study shows, that the commonly held assumption of necessity-driven ventures holds for those that were either in early development stages, have a non-technological foundation or target a very narrow customer segment. However, while some of them seek capital (type 1), others considered crowdfunding-specific marketing and feedback-related aspects as encouraging for their risk capital choice (type 2), suggesting that they are not solely necessity-driven. In contrast, part of the analysed cases had access to alternative risk capital providers, but they purposefully selected equity crowdfunding, based on its specific characteristics. These ventures have a strong technological foundation, provide business models with huge scalability that target B2C-mass markets. However, even within this group the motivation, and thereby the expected role that crowdfunding plays diverge. While some were motivated by the quick access to capital, its potential amount and the business valuation (type 3), others tried to benefit from crowdfunding-specific value-add during and after the campaign (type 4). In this way, the study reveals a much more differentiated understanding of venture motivation to use crowdfunding. Furthermore, the findings provide insights into the peculiarities of how ventures and investors find each other in this specific risk capital context. Second, the paper contributes to the emerging stream of literature about how ventures generally evaluate and select their risk capital investors (e.g., Drover etal. 2017; Fairchild 2011). The findings suggest that, besides a general openness to accept offerings from equity investors (Mason and Harrison 2002; Mason and Kwok 2010; Mason and Stark 2004), it is critical for entrepreneurs’ decision that there is a fit between organisational challenges and the characteristics of a specific risk capital investor. Prior studies were mainly theoretical and focused especially on the decision between VC and BA financing. However, the financing landscape changed substantially during the last years. Most of these potential partners provide entrepreneurs 545 The equity crowdfunding choice: Ademand-side perspective with access to a specific set of benefits and drawbacks. The perceived characteristics of these new actors and how they influence ventures’ risk capital choice is not sufficiently understood. In this context, the findings explore investor choice in one of these emerging settings. They suggest that ventures without access to risk capital alternatives make use of what is available or at hand, which is in many respects in line with the concept of entrepreneurial bricolage (Baker and Nelson 2005). However, the more alternatives they have, the more they seem to follow goal-oriented resource acquisition and therefore pursue an optimising strategy (Desa and Basu 2013). Hence, some entrepreneurs have a clear idea which specific role crowdfunding should play in their financing mix. The determinants of this behaviour are complex and call for a more diversified resource-based orientation in future research. Therefore, a theoretical model of four different motivational types was developed that could stimulate future research in other early-stage financing settings. Third, in this way, the findings contribute to discussions about the borders of the pecking order theory in the context of innovative young ventures. In line with the theory entrepreneurs in the analysed cases invested considerable own financial means (internal financing) in their venture and were either rejected or discouraged from bank financing (external debt financing). The findings, therefore, confirm the findings of WalthoffBorm etal. (2018), who suggested that crowdfunded ventures lack internal funds and additional debt capacity. However, the pecking order does not specify a rank order between different external equity providers. The findings suggest that, once entrepreneurs decided to access external equity financing, their preferences became much more individual. Entrepreneurs’ choices inhibit (strategic) considerations that go beyond the cost and control arguments. The study shows that ongoing organisational challenges and the perceived added values that ventures can extract from a funding source also determine their partnering decision. Consequently, the paper calls for a more fine-lined discussion of ventures´ investor choice in this scarce resource context. The “rank order” that ventures allocate to external equity providers under different circumstances is not sufficiently understood. I would, therefore, recommend to combine the pecking order theory with particular forms of resourcefulness to better understand financing, or more specifically, partnering decisions in different contexts. 5.2 Practical implications The findings have multiple practical implications. First, established risk capital providers gain insights into what is essential for capital-seeking ventures in this new setting and why some ventures might finally turn down their offerings and instead prefer equity crowdfunding. Thus, although many innovative ventures complain about a financing gap, the most attractive ventures presumably receive offerings from multiple sides. Established investors can use this knowledge to convince entrepreneurs and stress their services in relation to equity crowdfunding. Furthermore, they can make use of crowdfunding for their portfolio companies in follow-up financing rounds when they perceive the expected characteristics as appropriate for these firms. Second, ventures can better assess if crowdfunding is the appropriate form of financing for their business. The expressed motivations show that equity crowdfunding provides more than 546 J.Löher just financing. The study explores which organisational characteristics all crowdfunded ventures have in common. Like with established risk capital sources, equity crowdfunding does not seem to be a fruitful ground to finance ideas or very early research and development stages. Start-ups still need to rely on their own financial commitment or different bootstrapping mechanisms or even reward-based crowdfunding at these early stages, which nearly all the analysed ventures did before they initiated their campaign. The results show that this still nascent form of financing is particularly used by ventures that seek capital for their market entrance or penetration or those that are at late development stages and close to their market entrance. Third, platforms get insights into what ventures expect from their campaign. Consequently, they can work on their service to satisfy ventures’ expectations. Thus, they need to come up with technical solutions that enable the realisation of the expected benefits (e.g. marketing or feedback tools). Fourth, the background findings are an important step to increase the predictability of why ventures decided to use equity crowdfunding. Potential investors therefore get a more differentiated picture about ventures motives and the roles they are expected to play for their investees. 5.3 Limitations andfuture research The study is not without limitations: First, it focuses on successful campaigns, since Germany follows a closed-market approach in which only a small number of preselected ventures get access to the platforms (Löher 2017). Of those ventures, nowadays more than 95% receive funding. Consequently, non-successful campaigns play a neglectable role in this context. However, platforms in other countries might follow an open-market approach in which preselection is less restrictive, leading to numerous unsuccessful campaigns and interesting research avenues about their motives. Second, this paper aims to explore why ventures use equity crowdfunding. Therefore, it has a qualitative design with ten case studies. Consequently, this analysis can just be a first step. To test the developed model and to better understand the exact relationship between ventures’ funding choice and different factors of their organisational background, large-scale quantitative research would be of great importance. Against this background the study provides a fruitful starting point to e.g., conduct large-scale surveys with crowdfunded ventures. In this way also potential biases that might derive from the sampling size and the sampling procedure might be resolved. Third, one problem can be that ventures have communicated in interviews their desired rather than their actual financing situation. Furthermore, I saw the danger that ventures that conducted more than one funding round mixed up the campaigns they conducted. I tried to diminish this risk by triangulating data from different sources and by thoroughly asking questions about their entire financing history. Nevertheless, further research could apply different research designs and data sources to increase the validity of the results. Fourth,the data was collected ten years ago at a time when platforms, founders and funders were still learning about this new financing alternative. Consequently, motivations might have slightly changed during this period as the market evolved and all the actors became more familiar with equity crowdfunding. This could have led to slight changes in ventures’ motivation. Fifth, even 15 after years since its emergence, equity 547 The equity crowdfunding choice: Ademand-side perspective crowdfunding remains a niche phenomenon in Germany. In other countries (e.g., the UK) equity crowdfunding plays a bigger role in the financing of young entrepreneurial ventures. Consequently, the void and what equity crowdfunding can offer to these firms might differ, which limits the generalisability of the findings. The findings also raise questions for further research: Theory and practice would considerably benefit from a more precise understanding of the specific characteristics of emerging risk capital providers and how they influence ventures’ partnering decisions. Therefore, research should first delve deeper into the variation within and across different financing sources regarding the financial and non-financial benefits they finally bring to the firm. Based on this understanding more knowledge is needed about the trade-off that entrepreneurs make between these different financing sources under different circumstances. This is especially important given their increasingly heterogeneous nature. In this context, the findings give a detailed overview of specific motivational drivers in equity crowdfunding. However, compared to business angel and venture capital financing the market is still young. Thus far, it is not clear how ventures perceive crowdfunding and the contribution of the crowd ex-post. More knowledge about the real added values and under which circumstances these can be realised is needed (e.g. different platform structures and venture behaviour). Further research could also address the different levels of financial literacy of capital-seeking entrepreneurs and their influence on partnering decisions. Thus, entrepreneurs possess different levels of knowledge about e.g., the VC market and their financing options which might influence their partnering decisions. Based on portals preselection we would assume a higher level of financial literacy in the analysed context. However, this might not be transferable to other contexts and might considerably influence ventures’ motivation. Finally, a better understanding of the relation between the different motivations and performance is needed. Although some of the ventures did not seem to fall into the classic investment schemes of established earlystage investors (due to e.g. limited growth potential), they developed into a profitable business unit. Thus, ventures that have no alternatives available do not necessarily perform poorly (or can automatically be considered as “lemons”). It might be that their only option is exactly what they need for their development. A more fine-lined discussion is necessary to match investors and investees better. The financing landscape changed substantially during the last years, giving entrepreneurs nowadays access to a broader set of risk capital providers with different characteristics. Our knowledge about the demand-side perspective is limited. Against this background, the study delineates a detailed picture of ventures’ narrow and broader decision-making context and the specific role that an emerging resource provider is intended to play in these firms. The findings and the developed model provide a starting point for further research that aims to enhance our understanding of ventures’ investor choices in different settings. Appendix See Table5 548 J.Löher Table 5 Exploratory cross-case overview Case Characterisation Status at campaign launch Crowdfunding capital use Platform selection based on Motivational drivers Interaction outcomes with alternative investors Financing rounds (ex-ante/ex-post) 1 Education / Service / B2B + B2C / Online 1, 2, 3 6, 7 Reliable legal construct Perceived competence Investment amounts per investor Speed of financing process Media coverage Viral and referral marketing Not tried Yes/no 2 Gambling / Service / B2C / Online 1, 2, 3 6 Potential investment volume Business valuation Possible funding amount Speed of financing process Offer received Yes/yes 3 Software / Service / B2C / Online 1, 2 4, 5 Reliable legal construct Number of investors Sector focus Contractual features Product development Viral and referral marketing Tried but rejected No/no 4 Literature / Service / B2C / Online 1, 2 4, 5 Number of investors Sector focus Market test Product development Viral and referral marketing Offer received Yes/yes 5 Lifestyle / Product / B2C / Offline 1 4 Reliable legal construct Possible funding amount Tried but rejected No/yes 6 Finance / Service / B2B + B2C / Online 1 4 Reliable legal construct Perceived competence Business valuation Possible funding amount Contractual features Tried but rejected No/no 7 Retailing / Service / B2C / Online 1, 2, 3 6, 7 Reliable legal construct Potential investment volume Number of investors Possible funding amount contractual features Viral and referral marketing Brand building Offer received Yes/yes 8 Retailing / Service / B2C / Online 1, 2, 3 5, 6 Perceived competence Speed of financing process Product development Market test Business development Tried but rejected No/yes 9 Toys / Service / B2C / Online 1, 2 4, 5 Reliable legal construct Business valuation Possible funding amount Offer received Yes/yes 10 MedTech / Product / B2C / Offline 1, 2 5 Reliable legal construct Potential investment volume Speed of financing process Media coverage Not tried Yes/yes Status at campaign launch: 1 = Existing prototype, 2 = Final product/service 3 = Existing turnover; Crowdfunding capital use: 4 = R & D, 5 = Market launch, 6 = Market penetration, 7 = Expansion. 549 The equity crowdfunding choice: Ademand-side perspective Acknowledgements The author would like to thank especially Friederike Welter for her valuable and intensive feedback on numerous earlier versions of the manuscript and Andrea M. Herrmann for her valuable comments on a later version of the manuscript. Funding Open Access funding enabled and organized by Projekt DEAL. The author has no relevant financial or non-financial interests to disclose. Data Availability The quantitative dataset that includes the 163 campaigns is publicly accessible upon request at our research institution. Interview data contains sensitive information of the respondents and is therefore not publicly accessible. Declarations Conflict of interest The author declares that he has no conflicts of interests. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. 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