Understanding investor co-investment in a syndicate on equity crowdfunding platforms
| DOI | https://doi.org/10.1108/IMDS-09-2022-0538 |
| Published date | 28 March 2023 |
| Date | 28 March 2023 |
| Pages | 1599-1623 |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
| Author | Jing Wu,Ling Liu,Yu Cao |
Understanding investor
co-investment in a syndicate on
equity crowdfunding platforms
Jing Wu and Ling Liu
School of Management Science and Engineering,
Southwestern University of Finance and Economics, Chengdu, China, and
Yu Cao
School of Accounting, Southwestern University of Finance and Economics,
Chengdu, China
Abstract
Purpose –Considering the unique characteristics of equity crowdfunding platforms includingthe removal of
stringent structural barriers (e.g. lack of co-location), high visibility and traceability of investor characteristics,
large pool of available investors and simplified transaction process, the authors aim to examine how the two
most prevalent mechanisms (i.e. homophily and repeated ties) unfold in this context by incorporating the
contextual characteristics. The authors theorize an inverted U-shaped relationship between leader-backer
similarity and the likelihood of co-investment in a syndicate on equity crowdfunding platforms. In addition, a
leader–backer dyad is more likely to form new syndicates if the students have more prior co-investment ties.
Design/methodology/approach –The empirical study is based on data from the AngelList syndicate
platform and a linear probability model (LPM) with fixed effects is adopted to estimate the syndicate formation.
Findings –The authors find that the similarity between a leader and a backer has an inverted U-shaped
relationship with the leader and backer’s likelihood of co-investment in a syndicate, which is different from the
dominanthomophily-based tie formation in venture capital (VC) syndicates and other digital platform contexts.
Although equity crowdfunding platforms encourage the possibility of exploring new partners, investors are
more likely to co-invest with others who have stronger prior ties.
Originality/value –This research theoretically contributes to the scant literature of equity crowdfunding
syndicates by contextualizing two most prevalent mechanisms (i.e. homophily and repeated ties) driving tie
formation in VC syndicates and digital platforms.
Keywords Equity crowdfunding, Syndicate, Co-investment, Lead investors, Backers, Homophily,
Repeated tie
Paper type Research paper
1. Introduction
Crowdfunding engenders digital pla tform ecosystems that consist of cro wdfunders,
fundraisers and the focal crowdfunding platforms, transforming the nature of
entrepreneurial processes and outcomes (Nambisan, 2017). Crowdfunding taps the “crowd”
to provide an alternative source of finance, especially for early stage start-ups with fewer
resources and higher uncertainty (Bernstein et al., 2017). Among the different types, equity
crowdfunding platforms (e.g. AngelList, Crowdcube, CircleUp and Crowdfunder) provide a
capital market where investors can fund small ventures and start-ups in return for equity
(Mollick, 2014). Equity crowdfunding not only has strategic implications for the fundraising
and incubation of start-ups (Belleflamme et al., 2014), but also provides opportunities for
individual accredited investors to enter investment markets (Bapna, 2019).
Co-investment
and equity
crowdfunding
1599
This research was supported by MOE (Ministry of Education in China) Project of Humanities and Social
Sciences (Project no. 20YJA630071). The authors would like to thank Dr. He Li and Ms. Zhang Chen for
the technical discussion of this research.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0263-5577.htm
Received 2 September 2022
Revised 7 January 2023
Accepted 13 February 2023
Industrial Management & Data
Systems
Vol. 123 No. 5, 2023
pp. 1599-1623
© Emerald Publishing Limited
0263-5577
DOI 10.1108/IMDS-09-2022-0538
Equity crowdfunding model does not come without disadvantages. Individual investors
with limited information and domain knowledge are likely to make investment decisions by
following their peer s (Zhangand Liu, 2012), which may lead to irrationalinvestment behaviors
(Liu et al., 2015) and increase decision biases(Salganik et al., 2006). Given the large number of
individualinvestors who often have a relativelysmall percentage of contribution(Belleflamme
et al., 2014), it will be difficult to coordinate these diverse investors and properly incentivize
them to commit enough resources (Chen et al., 2016). To this end, some leading equity
crowdfunding platforms such as AngelList, OurCrowd and SyndicateRoom have introduced
syndicatemechanisms, aiming to complementthe leaders’knowledgeand responsibilitieswith
the backers’funds (Chen et al., 2015;Rosenkopfand Padula, 2008). In an equity-crowdfunding
syndicate, a leader who is often an experienced investor identifies investment projects and
opens the opportunity to other accredited investors(known as backers). Backers co-invest in
leaders’projectsand pay a percentage of theirreturns upon a successful exit to theleader and
the platform (i.e. known as carriers). Through syndication, backers can get access to high-
quality start-upsby following experienced investors, while lead investors can also fill capital
gaps, close deals faster and earn returns from backers’carries (Agrawal et al., 2016). The
illustrative example of AngelList syndicate is shown in Appendix.
To further enhancethe effectiveness and beneficial impacts of thesyndicate mechanism in
equity crowdfunding, it is vital to understand how lead investors and backers coalesce and
evolveas they co-invest with differentsyndicate partners in variousinvestment projects (Hahn
et al., 2008;Li and Rowley, 2002).It is critical for lead investors to maintain an active pool of
backers in order to complete the goal of closing a deal. Backers also need to make strategic
decisionsabout which leader they want to co-investwith, since selecting leaders with superior
track records in makingsuccessful deals increases backers’returns. In addition,investors are
embedded in a social network through a syndicate in which information, knowledge and
resources can be exchanged (Uzzi, 1997). Investors’co-investmentdecisions have an influence
on the resultant syndicate network structure (Rosenkopf and Padula, 2008). Social network
theory demonstrates that investorswith a better position (e.g. a high centrality,structural hole
or network density) in the syndicate network are superior in accessing limited resources,
information and knowledge (Uzzi, 1997), which leads to better investment opportunities,
decisions andperformance. Furthermore, the overallsyndicate network structurein an equity
crowdfunding platform defines how investors are inter-connected and, therefore, determines
the flow (i.e. both the speed and volume) of information, resources and knowledge among
investors.Investors’co-investment tiesthus ultimately affects syndicatefunding’s investment
performance and the sustainability of equity crowdfunding syndicate platforms by
transforming the social network structure(Rosenkopf and Padula, 2008).
In the offline venture capital (VC) market, investors respond to uncertainty by forming co-
investment relationships with others in nearby geographical areas (Sorenson and Stuart,
2008;Zhang et al., 2017). In addition, investors choose partners who have similar status (i.e.
homophily mechanism) or interacted with them in the past (i.e. repeated ties mechanism)
(Cheng and Tang, 2019;Podolny, 1994). Compared to the offline VC market, the equity-
crowdfunding syndicate has several unique characteristics that may change the paradigms
of partner selection. First, taking advantages of digital platforms, equity-crowdfunding
syndicates overcome stringent structural (such as geographical) barriers that are imposed by
social structures (Gu et al., 2014). By doing so, equity crowdfunding platforms reduce
investors’offline interactions but instead facilitate more online activities. Investors on these
platforms also deal with new environmental uncertainties due to factors such as new
investment process and lack of co-location. Second, equity crowdfunding platforms exhibit
high visibility and traceability of investors’characteristics, since digital platforms track and
display investors’activities and performances (Jiang et al., 2018). Third, although syndicates
in both offline VC market and equity crowdfunding platforms utilize the model of leader
IMDS
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