Research Objectives

The key research goal of this program is to study crowdfunding and its relationship with venture capital as a channel to finance innovative /projects. We will also study the consequences of this type of financing for a firm's corporate governance and human resources policies.

This analysis will be performed according to the following research objectives:

Relationship Between Venture Capital and Crowdfunding

Venture Capital has been the most common source of outside financing for innovation over the past decades. There are two different kinds of venture capital: Venture Capital from independent investors (IVC), and that provided by corporations (CVC). The key difference between both types is that the first one's only goal is to maximise financial returns, whereas the second one also aims to obtain synergies between funded projects and the sponsor firm's own products. CVC has experienced exponential growth in the past few years. However, it is still a puzzle to the academic literature why some firms invest millions in startups (Google, IBM or General Electric, for example) while others completely avoid CVC. A first line of study would be to try to answer this question.

A second line of inquiry will be to ascertain if there are significant differences between the kind of innovations financed by large venture capital investors or small crowdfunding backers. Whereas VC investors typically have in-depth industry knowledge and are experts in the type of projects they finance, crowdfunding backers are usually consumers with no technical know-how that allows them to evaluate the risk or viability of a project. This difference in expertise suggests a priori that there should be differences in the type of innovations financed by either channel. Nevertheless the increase in crowdfunding's popularity and the evolution in the way backers are rewarded (debt, equity, etc.) is leading to an increase in the complexity of projects being financed through this method.

Our third research question is whether crowdfunding and venture capital are complementary or substitutive funding channels. The recent explosion in the amounts provided by crowdfunding relative to venture capital has been touted by some analysts as predicting the eventual demise of venture capital and its substitution by crowdfunding. Is this likely? Is it even desirable? Is there a viable funding model where crowdfunding serves as first stage finance and proof of concept (demonstrating demand for the innovation) and helps a second financing round through more established, larger venture capitalists? Are there fundamental differences between both financing channels that mean both can bring value to the economy? These are the questions this line of inquiry aims to answer.

The CAR3FIN and UAB (CREO) groups will work on these research questions. Data requirements for comparing venture capital and crowdfunded projects are very high and will require the creation of a database populated with proprietary data from established VC databases such as those maintained by Thomson One or Compustat and with data obtain by crawling available public information on both types of deals and patent filings.

Relationship Between Crowdfunding and Corporate Governance

To the extent that crowdfunding encourages the participation of stakeholders in the financing of a company, the corporate governance of the financed firms will be affected. An extension of this line is the study of social crowdfunding and its impact on both the corporate governance and social responsibility policy of the companies receiving crowdfunding. Moreover, we also analyze the opposite direction of causality, namely what are the most appropriate forms of governance to stimulate crowdfunding.

The corporate governance structure of a firm will influence the investing decisions of crowdfunding backers. In particular, we expect the presence in a firm's corporate governance of significant stakeholders such as employees or more traditional investors with a social dimension (green banking) to increase the interest of diverse stakeholders (consumers, specialist investors, etc.) in financing the firm through crowdfunding.

 CAR3FIN and UAMFIN groups will analyze the corporate governance characteristics of firms that receive crowdfunding, and compare to their traditionally funded peers. A second stage of this research program will be to determine wether there have been significant changes in investment policy, CSR and/or information disclosure after firms received crowdfunding.

The Organisation of Crowdfunding: Actors, Mechanisms and Metrics

We will analyze current practices in the organization of crowdfunding. Our goal is to understand the organizational process of crowdfunding, the ways in which different actors interact, the institutional logic used to make decisions, the mechanisms that allow and constrain decision making, and the metrics that can be used to measure the different parts of the crowdfunding process and ascertain its success or failure.

The study of the crowdfunding process from the point of view of institutional theory helps understand the main logics (at the individual, organizational and field level) that determine the behavior of actors in the crowdfunding process, as well as conflict in logics that emerge from them.

The institutional analysis in the process of project definition, project selection by the platforms and by financiers will help us understand which projects are likely to succeed as well as the institutional constrains that the entrepreneurs will have to deal with.

 The CAR3FIN and CAR3RH groups will perform this study through an etnomethodological analysis. They will perform an in-depth case study. Data will be gathered first through a 3-month long netnographic study of an organisation, to observe key actors and mechanisms; then a 6-month long netnographic study (Kozinets, 2002) will be performed to study online communities and processes; over 40 interviews will be performed and internal documents on policy, strategy, rules, etc. will be analysed. The data analysis will be inductive-deductive with the goal of developing a theory of crowdfunding processes.

Crowdfunding and Talent Retention

We want to study the effect crowdfunding can have on the amount and the kind of innovation. By simplifying the transition of employees of established innovative companies to entrepreneurship, crowdfunding can make this shift more frequent.

Furthermore, financing through the crowd can lessen the investment requirements typical of early stage finance and provide timely feedback about consumer interest in the project. All of which may allow the potential entrepreneur to gage the potential for her project before leaving her current job. This would reduce the risk involved in becoming an entrepreneur and therefore increase the flow of talented employees towards the entrepreneurial world.

As a result, established innovative firms would need to internalise in their decision to fund new projects the cost of potentially loosing a valuable employee. Alternatively, they could find ways to channel employee ideas so that a project turned down by the firm would not lead to the loss of human capital. Corporate Venture Capital programs could be such a way. These programs allow employees to work in developing their projects, but in a form that maintains their links to the firm.

A second issue to analyse is the possibility of retaining employees of the sponsor firms (those that receive crowdfunding). The potential use of crowdfunding structures in which employees could participate receiving stock in the firm as compensation could clearly impact retention rates. Rates that could also be impacted by the firm’s CSR policy (where relationship with employees has a prominent place). This policy is likely to be impacted in turn by stakeholder financing (crowdfunding).

 To test the effect of crowdfunding on employee retention in established firms, the CAR3FIN and CAR3RH groups will use, in a first study, data on the evolution of entrepreneurship in sectors with a stronger incidence of crowdfunding. A second, more detailed but with more reduced out-of-sample validity, study will tackle the analysis of the characteristics of the potential entrepreneurs that use crowdfunding platforms. The analysis from the point of view of employers will be a theoretical one.

Early Financing and Innovation

The research question is “are user developed products more successful on crowdfunding platforms than those launched based on estimates about potential market demand?”. Success will be determined by wether the project was financed, what percentage of its funding goals it achieved and the speed at which it achieved them. Our research question is relevant because it will allow us to understand if crowdfunding is a way to connect the (previously unrecognised) needs of users to the funds needed to develop products based on them.

The second research question we propose is to study the connection between financing sources in the early stages of a firm (venture capital, crowd funding, etc.) and the type of innovation (incremental or radical) the firm is involved in. As different stakeholders provide funds to the firm and develop closer relationships, their provision of intangibles will be affected and with it the type of innovation the firm will be able to generate.

 The CAR3FIN group together with Professor von Hippel from MIT (the father of the theory of user innovation) will work on this objective. Researchers will use text and survey analysis to determine if a product was developed to serve the needs of a particular user.

Literature Review

The group maintains a public Zotero-based literature review on crowdfunding that can be accessed here