When Firms are Potemkin Villages: Formal Organizations and the Benefits of Crowdfunding

38 Pages Posted: 11 Jan 2014 Last revised: 19 Aug 2014

Ethan R. Mollick

University of Pennsylvania - Wharton School

Venkat Kuppuswamy

University of North Carolina Kenan-Flagler Business School

Date Written: January 25, 2014

Abstract

Scholars have long been interested in the reasons why firms exist, arguing that they have efficiency and productivity benefits over other approaches to organizing. We examine why entrepreneurs often form firms, since entrepreneurial ventures are not large enough to accrue many of the expected efficiency benefits from formality. Instead, we argue that there are reasons besides efficiency (and regulation) that cause firms to exist. We suggest that an unrecognized implication of new institutional and ecological theory leads entrepreneurs to establish firms as a legitimating agent, and to allow them to act in industries with existing firm populations. We test this theory by examining a unique sample of crowd-funded startup companies, to empirically identify the advantages of formal versus informal organizations with different types of third party entities. We find that adopting the mantle of a formal organization helps entrepreneurs in contexts where they operate with other formal organizations, but not in interactions with other types of resource holders. We also demonstrate that crowdfunding may have substantial benefits for entrepreneurs beyond fundraising.

Keywords: firms, organizational theory, crowdfunding

Suggested Citation

Mollick, Ethan R. and Kuppuswamy, Venkat, When Firms are Potemkin Villages: Formal Organizations and the Benefits of Crowdfunding (January 25, 2014). Available at SSRN: https://ssrn.com/abstract=2377020 or http://dx.doi.org/10.2139/ssrn.2377020

Ethan R. Mollick (Contact Author)

University of Pennsylvania - Wharton School ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

Venkat Kuppuswamy

University of North Carolina Kenan-Flagler Business School ( email )

Chapel Hill, NC 27599
United States

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