The Validating Role of Crowdfunding

In recent years, online crowdfunding has been attracting increasing interest from the entrepreneurial community, rapidly becoming a valid alternative funding method to traditional financing “gatekeepers” for early-stage ventures and projects. However, scholars have questioned whether crowdfunding can be solely considered as an alternative source of seed and pre-seed capital, inviting researchers to investigate more in depth the multifaceted role of crowdfunding, its post-campaign consequences, and its influence on traditional funding sources (McKenny et al., 2017; Moritz & Block, 2016). Hence, in an attempt to shed light on the phenomenon and advance the current body of literature, this empirical study has focused its academic interest on researching how crowdfunding might complement other financing methods, and, in particular, how and under which circumstances is Success in reward-based crowdfunding campaigns related to the achievement of Venture Capital and Business Angel funding at a later stage. Drawing on prior contributions on crowdfunding and on Venture Capitalists’ and Business Angels’ screening and investment criteria, this research theorizes that success in reward-based “all-ornothing” crowdfunding can send a positive quality signal to professional investors, reducing their level of perceived risk around the venture and increasing, for an early entrepreneur, the chances of securing additional external funds after campaign closing. Furthermore, building on the foundations of this hypothesized positive relationship, four additional hypotheses were advanced suggesting that other contextual factors – namely, an entrepreneur’s successful previous experience, the existence of a functioning prototype, having a project definable as high-tech, and displaying third-party endorsement – might act as positive reinforcing effects (moderation hypotheses) on the likelihood of achieving external funding from Venture Capitalists and Business Angels. The empirical analysis was performed by mainly relying on manual data collection methods on a population of 400 projects launched on the reward-based crowdfunding platform Kickstarter between the 1st of January 2014 and the 30th of July 2014. On the basis of the results obtained from the performed analyses, this study was able to confirm the hypothesized positive effect of achieving success in a crowdfunding campaign on the chances of securing additional funding from Venture Capitalists and Business Angels at a later stage. Conversely, this research was not able to provide confirming evidence on the remaining moderation hypotheses. In particular, I argue that 7 the effects of achieving success in crowdfunding have been found to go well beyond the securing of financial resources from the crowd, as success can provide early proof on the soundness of the entrepreneurial project, demonstrate the existence of market demand, forecast future sales, and signal the entrepreneur’s commitment and preparedness. Hence, although it has emerged that Venture Capitalists and Business Angels are not significantly affected by the endogenous characteristics displayed by crowdfunding projects, this study provides evidence that these actors will positively weight crowdfunding success during their screening and deal evaluation phases, confirming, therefore, the suggested validating role exerted by reward-based crowdfunding in the eyes of traditional investors. Therefore, in light of the above, I suggest that crowdfunding should not be considered as a mutually exclusive alternative to other financing methods. On the contrary, given the implications that crowdfunding success signals, crowdfunding can become instrumental – a “springboard” – to access traditional funding sources: Venture Capitalists and Business Angels.