TY - JOUR

T1 - How lead investors build trust in the specific context of a campaign

T2 - a case study of equity crowdfunding in China

AU - Xiao, Li

N1 - Copyright © 2019, Emerald Publishing Limited

PY - 2019/12/6

Y1 - 2019/12/6

N2 - Purpose: The purpose of this paper is to explore the role of trust in the unobservable decision-making process of lead investors and follow-on investors in the specific context of equity crowdfunding (ECF) campaigns. Design/methodology/approach: This work employs a case study approach. The author conducts a three-year inductive field study of Chinese ECF – AngelCrunch. The author gathered both campaign and platform-level data from the selected case covering a period of seven years from 2011 to 2018. The data set used for this study includes the characteristics of 189 online campaigns, 25 face-to-face interviews with the platform managers, early-stage investors and entrepreneurs, first-hand observations and quarterly reports on online campaigns supplemented with informal interviews with the authors for the reports. Findings: The findings from this study provide early insights onto the unobservable decision-making process of ECF investors. It demonstrates that lead investors use both selective signalling information and physical interactions with the entrepreneurs to build competence and relational trust on which they rely for making an early pledge. It also shows that follow-on investors differ from lead investors in the process of building trust for decision-making. Furthermore, this work uncovers the role of ECF platforms in facilitating the process of building interpersonal trust for the decision making, with challenges to maintain the notion of platforms in raising a small amount of capital from a large crowd. Research limitations/implications: This study is constrained by the limited scale of qualitative elements available. The findings of the study have implications for platform managers, investors and policy makers. Originality/value: Building on entrepreneurial finance and trust theory, this work demonstrates how lead investors build competence and relational trust on which they rely to make an early pledge in the context of ECF. The perception of a lead investor and the commitment together with the selective and formative information by the entrepreneur/s are key in follow-on investors’ decision making. This study uncovers that crowdfunding enables additional and valuable information to be assessed by crowd investors to manage extreme risk and uncertainty occurred in early-stage investments. This work also demonstrates that virtual world has its limitations to build interpersonal trust for managing extreme risk.

AB - Purpose: The purpose of this paper is to explore the role of trust in the unobservable decision-making process of lead investors and follow-on investors in the specific context of equity crowdfunding (ECF) campaigns. Design/methodology/approach: This work employs a case study approach. The author conducts a three-year inductive field study of Chinese ECF – AngelCrunch. The author gathered both campaign and platform-level data from the selected case covering a period of seven years from 2011 to 2018. The data set used for this study includes the characteristics of 189 online campaigns, 25 face-to-face interviews with the platform managers, early-stage investors and entrepreneurs, first-hand observations and quarterly reports on online campaigns supplemented with informal interviews with the authors for the reports. Findings: The findings from this study provide early insights onto the unobservable decision-making process of ECF investors. It demonstrates that lead investors use both selective signalling information and physical interactions with the entrepreneurs to build competence and relational trust on which they rely for making an early pledge. It also shows that follow-on investors differ from lead investors in the process of building trust for decision-making. Furthermore, this work uncovers the role of ECF platforms in facilitating the process of building interpersonal trust for the decision making, with challenges to maintain the notion of platforms in raising a small amount of capital from a large crowd. Research limitations/implications: This study is constrained by the limited scale of qualitative elements available. The findings of the study have implications for platform managers, investors and policy makers. Originality/value: Building on entrepreneurial finance and trust theory, this work demonstrates how lead investors build competence and relational trust on which they rely to make an early pledge in the context of ECF. The perception of a lead investor and the commitment together with the selective and formative information by the entrepreneur/s are key in follow-on investors’ decision making. This study uncovers that crowdfunding enables additional and valuable information to be assessed by crowd investors to manage extreme risk and uncertainty occurred in early-stage investments. This work also demonstrates that virtual world has its limitations to build interpersonal trust for managing extreme risk.

KW - entrepreneurial finance

KW - equity crowdfunding

KW - early-stage investors

KW - competence and relational trust

KW - China

U2 - 10.1108/IJEBR-05-2019-0265

DO - 10.1108/IJEBR-05-2019-0265

M3 - Journal article

VL - 26

SP - 203

EP - 223

JO - International Journal of Entrepreneurial Behavior & Research

JF - International Journal of Entrepreneurial Behavior & Research

IS - 2

ER -