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Crowdfunding a ‘robust source of entrepreneurial finance’ according to research

Platforms such as Crowdcube and Seedrs are becoming increasingly important sources of entrepreneurial finance, according to research released by the London School of Economics (LSE) today.

The findings, which analysed over two years’ worth of data from equity crowdfunding platform Crowdcube, looked at how crowdfunding investors behave, as well as how they made decisions about who to invest in and how much.

London is one of the world’s leading hubs for crowdfunding, with a number of high-profile drives in recent months.

Researchers Prof Saul Estrin and Prof Susanna Khavul, who also carried out interviews as part of their study, found that crowdfunding investors ‘behave in an economically rational way’, making considered decisions based on information such as company valuation and prospective future growth.

Estrin and Khavul also identified a collaborative mindset amongst investors, whereby investors were influenced by what others are doing in a gradual way.

In particular, they found that £1 invested on one day of the pitch generates an additional 51p of fresh investment on the following day, and an additional 76p over the next five days.

This gradual momentum undermines one of the main criticisms against crowdfunding; namely that a ‘herd mentality’ turns investing into a marketing exercise, overinflating the value of businesses who would normally struggle to attract investment.

Luke Lang, Crowdcube’s co-founder, welcomed the findings and commented: “We’ve always known that investors are smart, and it’s great to have this confirmed by LSE.

“The findings quash concerns that the crowd is made up of naïve ‘dabblers’ who stampede into supporting pitches that seem popular or cool.

“Crowdfunding is a rational marketplace, with investors and entrepreneurs collaborating and sharing knowledge in a way that leads to sound, well-informed decisions.”

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