Academic journal article Academy of Entrepreneurship Journal

Exploring Agency Dynamics of Crowdfunding in Start-Up Capital Financing

Academic journal article Academy of Entrepreneurship Journal

Exploring Agency Dynamics of Crowdfunding in Start-Up Capital Financing

Article excerpt

INTRODUCTION

The venture capital industry is a key stakeholder in the market for providing equity finance for new business ventures (Cumming 2006). The provision of equity financing is necessary for new start-up ventures to form, operate and develop their relative contribution to the business innovation process (Cassar 2004). Over the last decade, the market for venture capital in Australia and throughout the world has experienced rapid growth both in terms of capital under management and the number of venture capital firms providing finance (Bivell 2008). Whilst this growth has been substantial, there is growing evidence that the focus and interest of venture capital is moving beyond early stage innovative start-up firms to later-stage investments (Bivell 2008; Osnabrugge 2000). This shift in focus has created a significant 'funding gap' for early stage start-up ventures and has renewed both academic and practitioner interest in possible methods of promoting the aggregated pool of available capital to early stage start-up enterprises that are pre-revenue and yet to reach commercialisation stages (Cassar 2004; Cumming 2007).

Crowdfunding is an emerging online trend representing a new potential pool of capital as a source of start-up equity financing. A central tenant of crowdfunding is that the crowd funds what the crowd wants. In this context the crowd represents members of online virtual communities and users of social media and social networking sites (SNS). Crowdfunding is derived from another social media phenomenon termed crowdsourcing. Crowdsourcing is defined as the act of taking a job traditionally performed by a designated agent (usually an employee) and outsourcing it to an undefined, generally large group of people in the form of an open call (Howe 2006; 2009). Although crowdsourcing (and thus crowdfunding) has not been the subject of prior academic research, previous research in the information technology literature has investigated the development of open source software and distributed computing (Anne and Anurag 2005; Hippel 2001) and the increasing popularity of online virtual communities and SNS (Boyd and Ellison 2008; de Souza and Preece 2004; Ellison et al. 2007; Gerard et al. 2004; Jenny and Diane 2005; Utz 2009). Overall, prior research suggests that SNS may provide access to embedded resources within the online community (Boyd and Ellison 2008) and may actually facilitate in bridging current social capital limitations (Ellison et al. 2007; Utz 2009).

Within the context of start-up capital, there is some suggestion that social networking methods may provide a solution to early stage equity financing gaps resulting from market failure (Shane and Cable 2002; Shane and Stuart 2002; Zhang and Wong 2008). Therefore, crowdfunding, as a vehicle for accessing resources embedded within online social networks, may provide access to a new source of capitalisation for entrepreneurs. We define crowdfunding in the venture capital context as a source of start-up equity capital pooled via small contributions from supporting individuals collaborating through social media. However, to date, the factors influencing crowdfunding adoption in the venture capitalist industry have not been examined. Moreover, venture capitalist perceptions of this equity-financing model have not received attention in the entrepreneurship literature.

Hence, the purpose of this research is to investigate the emergence of crowdfunding and how it might be appropriately adopted within the start-up equity financing context. Given the relational character of start-up venture financing (Dushnitsky and Lenox 2006), venture capitalist's perceptions of agency dynamics in the investor-investee relationship provides an appropriate lens for analysing the likely acceptance of crowdfunding in start-up financing. Thus, this research aims to investigate the agency dynamics relevant to the adoption of crowdfunding investment models in start-up financing from the venture capitalist's perspective. …

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