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Equity Crowd Funding Helps to Democratize the Entrepreneurship in Financial Sector

Table of Contents

Executive summary.

Introduction.

Literature review..

Age.

Gender.

Ethnicity.

Geography.

Discussion.

Conclusion and recommendations.

References.

Executive Summary of The Role of Crowdfunding in Entrepreneurial Finance

Equity crowdfunding enable underrepresented group of individuals to be a significant part of institution without any discrimination of geography, ethnicity, age and gender. It is considered to be less risky than initial public offerings and helps in promoting public involvement in the process of undertaking investment. When the ethnicity is evaluated with regard to business founding, it denotes social structures and a bunch of connections among the individuals of an traditional group and the manner in which the prescribed social structures are being used by them. It has been analysed that adequate associations among funding, gender and ethic are quite tough to segregate provided that exogenous variables interrupt in the process of performance and finance. It has been argued that association between entrepreneurship and age depends on the nature and type of entrepreneurship as beginner and experienced entrepreneurs have distinct competencies, skills and information. Reward based operations are mostly launched by the individuals whereas equity based crowdfunding is mostly launched by a company. There is a difference in the motivation to bid for a reward from the investors that invest in the equity of the company. equity crowdfunding can be expected to raise the opportunities of funding for less connected and remotely located individuals.

Introduction to The Role of Crowdfunding in Entrepreneurial Finance

Policymakers, practitioners, scholars and the media share the growing interest in the equity crowd funding. It is considered as the new and powerful tool that has the potential to push the prevailing theories and develop the innovative ones. The development of information and communication technologies have completely altered the nature of ambiguity present in entrepreneurial outcomes and processes along with the measures to deal with such kind of situations (Vismara, 2019). Information and communication technologies also have the capabilities to lessen down the issues that were present in traditional entrepreneurial finance markets and resolve failure in market. Moral hazard problems and adverse selection can be reduced with the advent of ICT in the entrepreneurial finance. Availability of adequate finance is considered as a major requirement for entrepreneurship. The lack of ethnic entrepreneurs or inadequate access between genders to the essential resources to develop new sustainable ventures has received high media attention. Equity crowdfunding enable the issuers to advertise their securities to the large number of public and therefore, increase the diversification of potential and efficient investors (Hornuf & Schweinbacher, 2018). On the other hand, the traditional private deals were only meant for a small group of private individuals. Professional investors are tended to apply market logic at the time of making investment in crowdfunding whereas small and unsophisticated individuals taken into consideration the community logic (Lukkarinen et al., 2016). Equity crowdfunding enable underrepresented group of individuals to be a significant part of institution without any discrimination of geography, ethnicity, age and gender. It is considered to be less risky than initial public offerings and helps in promoting public involvement in the process of undertaking investment.

Adequate associations among funding, gender and ethic are quite tough to segregate provided that exogenous variants interrupt in the procedure of performance and finance. There is scarce evidence present with regard to whether raising of funds with the help of various crowdfunding platforms is considered comparatively easier for traditional underrepresented groups of individuals. Various studies laid emphasis on a particular aspect like geography or gender, while discussing the framework of reward based crowdfunding. However, there is difference between equity based crowdfunding and reward based crowdfunding. Reward based operations are mostly launched by the individuals whereas equity based crowdfunding is mostly launched by a company. There is a difference in the motivation to bid for a reward from the investors that invest in the equity of the company. It has been found that providing rewards to the investors do not raise the chances of success of campaigns of equity crowdfunding. The implications of organization and governance of the procedure of acquiring equity capital with the help of crowdfunding is different from pre-selling of a product or service in raising the funds through reward based crowdfunding. Offerings are made openly to the public in equity crowdfunding. The price is made fixed and the structure of ownership is clearly defined by the demand of shares posted by the investors.

Literature Review of The Role of Crowdfunding in Entrepreneurial Finance

Under this section, the literature of entrepreneurial finance will be reviewed with regard to the four dimensions, namely, age, gender, geography and ethnicity.

Age

Facebook is co-founded by Mark Zuckerberg at nineteen and Microsoft was founded by Bill Gates in 1975 when he was nineteen. These instances provide the significance of young entrepreneurship that has not been completely investigated. The intention of entrepreneurship declines with age because of the rise in opportunity cost of time with the age (Zhang & Acs, 2018). While on the other hand, it has been analysed that the opportunities with regard to entrepreneurship rises with age due to rise in physical, human and social capital (Lajqi & Krasniqi, 2017). It has been argued that relationship between entrepreneurship and age depends on the nature and type of entrepreneurship as beginner and experienced entrepreneurs have distinct competencies, skills and information (Gielnik et al., 2018). The propensity of entrepreneurship is found to rise with age in some of the studies while declining in some other studies. The role of proponents’ age has been neglected in the studies of equity crowdfunding. The entrepreneurial experience of the entrepreneurs contributes effectively to the success of entrepreneurs in equity crowdfunding (Piva & Rossi Lamastra, 2018). Moreover, it has the potential to expand the categories of individuals acquiring external equity with regard to age factor. Teenagers are at a stronger foot to take advantage of this new opportunity as the crowdfunding might be considered as a significant way for young entrepreneurs. Equity crowdfunding is exclusively meant for attracting modern and young investors. The investors who are new to this field are more likely to carry out investment in equity crowdfunding option as compared to other sources of investment. In reviewing various literatures, it has been analysed that there is healthy relationship among the theory of social network and retention of equity. The functions and operations in equity crowdfunding are carried out as per the development and evolution of social network of the organization. The enhancement in their relations with the potential investors persuade them to undertake investment in equity crowdfunding.

Gender

There is existence of gender differences in the capital markets. Though, no indication of discrimination has been found with regard to turndown rates, a smaller number of women apply for debt-based sources of capital and high rate of interest is charged from them on the loans or in some cases may have high collateral requirements in comparison to men. Gender discrimination can also be seen in retrieving external equity, men receive a higher proportion of venture capital financing as compared to women (Lins & Lutz, 2016). Women are considered to have comparatively less experience and are less likely to participate in the networks comprising of high net worth individuals. Venture capitalists are more attracted towards masculine characteristics in association with leader emergence as they have expectations of growth and profitability from the venture in which they have invested funds (Eddleston et al., 2016). However, in crowdfunding, gender studies are found to be more democratic. Women are able to grab capital more successfully as compared to male founders in reward based crowdfunding (Mollick & Robb, 2016). It has been found that 35% of the venture leaders and 44% of the total investors are women on the kickstarter platform (Cumming et al., 2019). In another study, it has also been found from the Swedish crowdfunding platform that women are more likely to undertake investment in those projects where the proportion of male investors is substantially high (Vismara et al., 2017). However, all these above mentioned studies is less applicable to equity crowdfunding than reward based crowdfunding. Men are directed by agentic objectives and thus put emphasis on the achievement of those goals while women, on the other hand, are directed by the communal goals and thus focus on the establishment of interpersonal relationships (Vismara et al., 2017). Women tend to have larger feelings as compared to men regarding the ethical issues meant for disclosure purposes. Female leaders show a matter concern to the public while men possess attributes that support competition.

With regard to equity based crowdfunding in entrepreneurial finance, the number of female investors in businesses led by females is twice as compared to businesses that are being led by men (Leitch et al., 2018). Less number of investors and therefore low amount of funds got attracted towards the equity crowd funding campaigns that are initiated by women as compared to those initiated by men.

Ethnicity

Ethnicity is considered as a category that replicate common history of a group, geography, cutur, language and nationality. Ethnicity in entrepreneurship and underrepresentation of some groups is a matter of due attention (Rath & Swagerman, 2016). When the ethnicity is evaluated with regard to business founding, it denotes social structures and a bunch of connections among the people of an ethnic group and the manner in which the prescribed social structures are being used by them. The accessibility of startup capital is accustomed by race. In the theory of statistical discrimination, it has been found that potential supporters mainly use race as a substitution for the qualities that left unobserved and indicate that the investment will fail in the near future. On the other hand, in the taste based discrimination, the potential supporters discard the minority founders, regardless of their skills, experience and qualifications. Crowdfunding has moved the locus of investment decisions from small number of experts and expand it to a broader population of potential investors (Dushnitsky & Zunino, 2019). Crowdfunding platforms has significantly removed the causes of racial inequalities in entrepreneurship with regard to providing access to various internal and external sources of capital. However, in recent studies, it has been estimated that minority founders may like continue face this kind of biasness in these platforms as well.

Geography

It has been noted from literature of Venture Capitalist that the probability of investing declines with the geographic distance in a venture due to ongoing monitoring efforts and due diligence costs (Guenther et al., 2018). It has been found that investors mostly prefer geographically nearby investment opportunities. Moreover, the arguments related to home bias are concerned with effective monitoring capabilities and less information asymmetries and low cost of association (Colombo et al., 2019). Crowdfunding provide access to various portals at zero cost and facilitate exposure, enhance access to the required and relevant information and raise familiarity with regard to entrepreneurial projects for potential investors. Policymakers have found crowdfunding as a cost effective means to acts a bridge in geographic boundaries. They undertake efficient measures to reduce the economic frictions that are related to distance by introducing several funding platforms based on internet. These internet or online platforms are seemed to eliminate several distance related issues like provision of input, gathering and access to relevant information and monitoring and controlling the progress of investment (Martens, 2016). Therefore, equity crowdfunding can be expected to raise the opportunities of funding for less connected and remotely located individuals. Moreover, social networks exist locally not only in social space but also in physical space. It has been found that personal interaction is very essential element for developing relationship banking. In both, reward based crowdfunding and in equity crowdfunding, social network based connections among entrepreneurs and investors are considered to be highly valuable. In addition, there are various that might be imposed on investment while undertaking the investment decision to invest outside the home country territories. Equity crowdfunding overcome all the barriers that are based on geographical boundaries.

Discussion on The Role of Crowdfunding in Entrepreneurial Finance

This essay provides significant contributions towards growing opportunities facilitated by equity crowdfunding in entrepreneurship. It has been found that age play a significant role in equity crowdfunding as business organizations with youngers members have higher probability to provide equity crowdfunding offerings than IPOs and have larger chances to finish the equity crowdfunding in a successful manner. Geographical barriers can be effectively overcome by the equity crowdfunding (Mochkabadi & Volkmann, 2020). In traditional markets of entrepreneurship, women entrepreneurs were found to be financially backward and have less chances to raise finance with the help of equity crowdfunding. Similarly, other underrepresented minor groups of individuals also have very low chances to raise the required amount of capital. However, in equity crowdfunding, all small and professional investors are considered in an identical way (Mochakabadi et al., 2020). Both these kinds of investors have different perceptions about investment, their attitude with regard to ethnicity also affect their decisions in a different way. The investors who are new to this field are more likely to carry out investment in equity crowdfunding option as compared to other sources of investment. In reviewing various literatures, it has been analysed that there is healthy relationship among the theory of social network and retention of equity. However, there is a need for further research on this in future time period applying the institutional logics behind the findings (Su et al., 2017). Small investors generally take into consideration community logic whereas professional investors look after the market logic. The democratization latent of equity crowdfunding is required to be expanded towards the supply side which comprises of investors from the demand side which comprises of entrepreneurs in order to deliver in depth and thorough understanding of the financial inclusion in the entrepreneurial finance. More and further studies are required to be researched in the area of equity crowdfunding to develop the understanding of the requirement of connection among investors and entrepreneurs (Brown et al., 2019). It has been found in various entrepreneurship studies that investors are mostly attracted towards those entrepreneurs that they believe have similar kind of interest and share various similarities (Estrin et al., 2018). No investigation in the area of equity crowdfunding has been done with regard to religion of individuals and their different socio-economic status.

Conclusion and Recommendations on The Role of Crowdfunding in Entrepreneurial Finance

It can be concluded that there are rising number of studies exploring the opportunities and distinctions behind equity crowdfunding and its several online platforms. Equity crowdfunding helps to democratize entrepreneurship in the financial industry and thus raise the opportunities for underrepresented groups of individuals to acquire adequate funds. The implications of organization and governance of the procedure of acquiring equity capital with the help of crowdfunding is different from pre-selling of a product or service in raising the funds through reward based crowdfunding. There is scarce evidence present with regard to whether raising of funds with the help of various crowdfunding platforms is considered comparatively easier for traditional underrepresented groups of individuals. Various studies laid emphasis on a particular aspect like geography or gender, while discussing the framework of reward based crowdfunding. Ethnicity, geography, age and gender are considered as the major factors that influence the individual capacity to obtain access to the external sources of capital. This issue arises in both kind of equity and debt financing, where, minorities, female and rural entrepreneurs faces discrimination while raising funds from external sources of capital. Equity crowdfunding enable underrepresented group of individuals to be a significant part of institution without any discrimination of geography, ethnicity, age and gender. It is considered to be less risky than initial public offerings and helps in promoting public involvement in the process of undertaking investment. Crowdfunding provide access to various portals at zero cost and facilitate exposure, enhance access to the required and relevant information and raise familiarity with regard to entrepreneurial projects for potential investors. These internet or online platforms are seemed to eliminate several distance related issues like provision of input, gathering and access to relevant information and monitoring and controlling the progress of investment. Equity crowdfunding enable the issuers to advertise their securities to the large number of public and therefore, increase the diversification of potential and efficient investors. Geographical barriers can be effectively overcome by the equity crowdfunding. Crowdfunding platforms has significantly removed the causes of racial inequalities in entrepreneurship with regard to providing access to various internal and external sources of capital. In traditional markets of entrepreneurship, women entrepreneurs were found to be financially backward and have less chances to raise finance with the help of equity crowdfunding. The propensity of entrepreneurship is found to rise with age in some of the studies while declining in some other studies. The role of proponents’ age has been neglected in the studies of equity crowdfunding. The entrepreneurial experience of the entrepreneurs contributes effectively to the success of entrepreneurs in equity crowdfunding. The democratization latent of equity crowdfunding is required to be expanded towards the supply side which comprises of investors from the demand side which comprises of entrepreneurs in order to deliver in depth and thorough understanding of the financial inclusion in the entrepreneurial finance. More and further studies are required to be researched in the area of equity crowdfunding to develop the understanding of the requirement of connection among investors and entrepreneurs.

References for The Role of Crowdfunding in Entrepreneurial Finance

Brown, R., Mawson, S., & Rowe, A. (2019). Start-ups, entrepreneurial networks and equity crowdfunding: A processual perspective. Industrial Marketing Management80, 115-125.

Colombo, M. G., D’Adda, D., & Quas, A. (2019). The geography of venture capital and entrepreneurial ventures’ demand for external equity. Research Policy48(5), 1150-1170.

Cumming, D., Meoli, M., & Vismara, S. (2019). Does equity crowdfunding democratize entrepreneurial finance?. Small Business Economics, 1-20.

Dushnitsky, G., & Zunino, D. (2019). The role of crowdfunding in entrepreneurial finance. In Handbook of research on crowdfunding. Edward Elgar Publishing.

Eddleston, K. A., Ladge, J. J., Mitteness, C., & Balachandra, L. (2016). Do you see what I see? Signaling effects of gender and firm characteristics on financing entrepreneurial ventures. Entrepreneurship Theory and Practice40(3), 489-514.

Estrin, S., Gozman, D., & Khavul, S. (2018). The evolution and adoption of equity crowdfunding: entrepreneur and investor entry into a new market. Small Business Economics51(2), 425-439.

Gielnik, M. M., Zacher, H., & Wang, M. (2018). Age in the entrepreneurial process: The role of future time perspective and prior entrepreneurial experience. Journal of Applied Psychology103(10), 1067.

Guenther, C., Johan, S., & Schweizer, D. (2018). Is the crowd sensitive to distance?—How investment decisions differ by investor type. Small Business Economics50(2), 289-305.

Hornuf, L., & Schwienbacher, A. (2018). Market mechanisms and funding dynamics in equity crowdfunding. Journal of Corporate Finance50, 556-574.

Lajqi, S., & Krasniqi, B. A. (2017). Entrepreneurial growth aspirations in challenging environment: The role of institutional quality, human and social capital. Strategic Change26(4), 385-401.

Leitch, C., Welter, F., & Henry, C. (2018). Women entrepreneurs’ financing revisited: taking stock and looking forward: New perspectives on women entrepreneurs and finance.

Lins, E., & Lutz, E. (2016). Bridging the gender funding gap: do female entrepreneurs have equal access to venture capital?. International Journal of Entrepreneurship and Small Business27(2-3), 347-365.

Lukkarinen, A., Teich, J. E., Wallenius, H., & Wallenius, J. (2016). Success drivers of online equity crowdfunding campaigns. Decision Support Systems87, 26-38.

Martens, B. (2016). An economic policy perspective on online platforms. Bertin Martens (2016) An Economic Policy Perspective on Online Platforms. Institute for Prospective Technological Studies Digital Economy Working Paper5.

Mochkabadi, K., & Volkmann, C. K. (2020). Equity crowdfunding: a systematic review of the literature. Small Business Economics54(1), 75-118.

Mochkabadi, K., Kleinert, S., Urbig, D., & Volkmann, C. K. (2020). Innovativeness and Legitimacy in Equity Crowdfunding. In Academy of Management Proceedings (Vol. 2020, No. 1, p. 17184). Briarcliff Manor, NY 10510: Academy of Management.

Mollick, E., & Robb, A. (2016). Democratizing innovation and capital access: The role of crowdfunding. California management review58(2), 72-87.

Piva, E., & Rossi-Lamastra, C. (2018). Human capital signals and entrepreneurs’ success in equity crowdfunding. Small Business Economics51(3), 667-686.

Rath, J., & Swagerman, A. (2016). Promoting ethnic entrepreneurship in European cities: Sometimes ambitious, mostly absent, rarely addressing structural features. International Migration54(1), 152-166.

Su, J., Zhai, Q., & Karlsson, T. (2017). Beyond red tape and fools: Institutional theory in entrepreneurship research, 1992–2014. Entrepreneurship Theory and Practice41(4), 505-531.

Vismara, S. (2019). Sustainability in equity crowdfunding. Technological Forecasting and Social Change141, 98-106.

Vismara, S., Benaroio, D., & Carne, F. (2017). Gender in entrepreneurial finance: Matching investors and entrepreneurs in equity crowdfunding. In Gender and entrepreneurial activity. Edward Elgar Publishing.

Vismara, S., Benaroio, D., & Carne, F. (2017). Gender in entrepreneurial finance: Matching investors and entrepreneurs in equity crowdfunding. In Gender and entrepreneurial activity. Edward Elgar Publishing.

Zhang, T., & Acs, Z. (2018). Age and entrepreneurship: nuances from entrepreneur types and generation effects. Small Business Economics51(4), 773-809.

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