55 Pages Posted: 14 Jul 2017 Last revised: 13 Aug 2017
Date Written: August 11, 2017
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: 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