Equity Crowdfunding and Access to Capital for User Entrepreneurs: Evidence from a Randomized Field Experiment

Abstract

We examine whether equity crowdfunding democratizes access to funding to non-traditional user entrepreneurs. User entrepreneurs start by creating a product to serve their own unmet needs with no expectations of a monetary profit, then later decide to commercialize the product through entrepreneurship. In contrast, traditional (producer) entrepreneurs take a more profit-driven path to entrepreneurship and start by identifying an opportunity that has commercial potential. Through a randomized field experiment, we randomly reveal to some investors that a firm producing a product used by musicians is founded by a musician and conceal this founder-related information from other investors. Revealing the information suggests that the firm is a user innovator firm and concealing it suggests that the firm is a traditional producer firm. We find that investors are significantly more interested in the traditional producer firm. Through an additional field experiment we identify that the bias against user entrepreneurs is statistical (based on a response to limited information) rather than taste-based (based on an idiosyncratic dislike). Our findings suggest that user entrepreneurs can mitigate investor bias by displaying signals of quality such as about firm growth and broad product appeal.

Keywords: equity crowdfunding, randomized field experiment, entrepreneurship, user innovation, statistical discrimination