Founders' Commitment and Firm Financing: Multiple 'Skins in the Game' as a Signal to Investors
22 Pages Posted: 29 Dec 2018
Date Written: November 15, 2018
A new method of financing known as equity crowdfunding, propelled by internet technology and deregulation, has emerged rapidly as a promising new source of startup financing and a window into early-stage investment process. By studying companies raising funds on one of the largest US equity crowdfunding platforms, this study finds that companies with multiple founders with prior personal financial commitment (“Skin in the Game” (SITG)) raise more funds, suggesting a signaling mechanism to investors of founders’ cross-validation of the project’s prospects. Single founders lack such mechanism. The study uncovers a link between the team structure, a key organizational aspect, and signaling to future stakeholders. The same mechanism may be at work in other contexts, such as venture capital syndication and mutual fund management decisions. In addition, the work offers insights into the potential of crowdfunding.
Keywords: Equity Crowdfunding, Signaling, Startup Financing, Team Architecture
JEL Classification: G32, G20
Suggested Citation: Suggested Citation