Terms of endearment: Financing terms, risk, and ambiguity aversion in crowd investing

Abstract

Angel investors show evidence of heuristics in their decision making, but to date ambiguity aversion has been poorly studied in this context. Using a decision theory lens, we examine 240 investment opportunities on a crowd investing platform for scientific startups and explore disparities in outcomes based on the financial contract, specifically the use of debt. We find combinations of risks linked to decreased funding amounts; specifically, debt leads to lower funding amounts if the deal has one of two distinct risks: market, as evidenced by a business in the engineering sector; and team, represented by a higher fraction of females. Interest rates do not impact outcomes. These findings have important implications for entrepreneurial finance, decision theory, and science policy.

Keywords: crowdfunding, entrepreneurship, financing, convertible securities

JEL Classification: O32, G24