Equity Crowdfunding and the socialization of entrepreneurial finance

Equity crowdfunding is a financial innovation designed to overcome market failures in entrepreneurial finance. We propose that the architecture of equity crowdfunding platforms allows investors to exploit the complementarity of signaling and network effects in a reduced transactions costs environment. We test our hypotheses using proprietary data about the complete history of actual investor transactions the largest equity crowdfunding platform in the world. We show that the dynamic process in the supply of funds is responsive and adaptive to new information but not explosive. Moreover, our hypotheses on signaling and network effects and their interactions advance the idea that entrepreneurs and investors exchange soft and hard information. We show that unlike hard signals from entrepreneurs, which are discounted, hard information from investors has significant direct effects on predicting the likelihood of successful funding. However, it is soft information from both entrepreneurs and investors that benefits most from network effects.