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Can Capital Defy the Law of Gravity? Investor Networks and Startup Investment

55 Pages Posted: 14 Jul 2017 Last revised: 13 Aug 2017

Christian Catalini

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Xiang Hui

Massachusetts Institute of Technology (MIT)

Date Written: August 11, 2017

Abstract

In early crowdfunding platforms, backers would directly fund projects without relying on traditional experts to select and curate projects for them. This approach becomes problematic when equity is involved, since the degree of asymmetric information and the risk of moral hazard are higher than in reward-based crowdfunding. Platforms have therefore experimented with market design solutions targeted at counterbalancing these risks. We study how online syndication by professional investors changes the allocation of capital on the leading US platform. Using novel data on investments and startup valuations (2013-2016), we find that the introduction of intermediaries increases capital flows to non-hub regions, a result that relies on syndicate leads having pre-existing professional ties in these areas. Moreover, the early-stage deals closed through an intermediary in these new regions tend to be associated with better performance, suggesting that expert networks play a key role in arbitraging investment opportunities and expanding access to capital across US regions.

Keywords: equity crowdfunding, angel investors, syndication, crowdfunding

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

Suggested Citation

Catalini, Christian and Hui, Xiang, Can Capital Defy the Law of Gravity? Investor Networks and Startup Investment (August 11, 2017). Available at SSRN: https://ssrn.com/abstract=2997710

Christian Catalini (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-480
Cambridge, MA MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty-and-research/faculty-directory/detail/?id=58777

Xiang Hui

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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