Do Networks Matter? An Examination of the Role of Coinvestors in Equity Crowdfunding

Abstract

Due to information asymmetries in financial markets, investors tend to share information with their coinvestors to avoid adverse selection. Equity crowdfunding platforms enable coinvestment without direct communication between investors, leading to homophily-driven coinvestments – that is, coinvestments that result from similarities between crowdfunders. These confounding mechanisms in coinvestment patterns give rise to empirical challenges in identifying the influence of investor networks on equity crowdfunders’ decision-making. We addressed this by conducting a mixed-methods study. We quantitatively analysed campaign-level investor-pair data and found that after a focal investor pledges to a campaign, a subsequent investor's funding propensity increases with the number of previous coinvestments between them. Social networks between coinvestors matter in such relationships because their time intervals are shorter than those of other investor pairs. These intervals become even shorter when a campaign raises little funding. Our complementary qualitative findings confirm the role of social networks but suggest that only offline networks affect investors’ decision-making. Our research has important implications for entrepreneurs’ fundraising strategies, platform governance and policy.