Syndicated Equity Crowdfunding: How Do Investors Evaluate Experts and What Are the Consequences?

Abstract

This paper studies a novel intermediated model of equity crowdfunding, also known as syndicated equity crowdfunding. In this model, experts curate and invest in early-stage firms on behalf of investors. We first study investors' upstream decision of choosing experts by randomizing investors' information on experts' characteristics. The experiment reveals that investors strongly respond to experts' social networks in terms of wanting to learn more about them. Additionally, investors also respond to experts' past performance only when it exhibits favorable traction information. We then study the downstream consequence of the novel model on investment performance. We find that syndicated investments are correlated with higher returns than are direct investments, and this performance gap is more pronounced for startups with lower quality signals outside of entrepreneurial hubs, suggesting that experts can surface high-potential startups that might be otherwise overlooked. We discuss the implications of these results.

Keywords: equity crowdfunding, angel investors, syndication, venture capital, entrepreneurship

JEL Classification: O31, L26, G24, L86, O33