Equity Crowdfunding: Knowledge and the Selection of New Venture Investments

Abstract

Equity crowdfunding has become a popular method for new ventures to raise money by accessing a crowd of potential investors that contribute small amounts of capital in return for equity ownership. This research provides a theory and empirical support to explain how the crowd’s knowledge affects the types of opportunities that are likely to be selected by the crowd. Drawing on absorptive capacity from organizational learning theory, the research develops and tests a model of equity crowdfunding that explains how inherited knowledge and investment experiences will affect the selection of new venture investment opportunities through the development of the crowd’s absorptive capacity. Furthermore, the research suggests that technology and memory decline limit the absorptive capacity of the crowd because they reduce the amount of knowledge that is available among the crowd for their decision making in uncertain conditions. The results contribute to the research in equity crowdfunding by showing the types of knowledge and limitations of knowledge the crowd is likely to experience in the development of their absorptive capacity. The model also contributes to the equity crowdfunding literature by arguing that the absorptive capacity of the crowd is a significant determinant in the types of opportunities that are likely to be successful.