(2019). The Crowd for Lemons: Venture Investors Perceptions of an Equity Pecking Order Academy of Management Proceedings, 2019 (1).
Crowd-based means of financing are emerging as a novel way for entrepreneurs to secure scarce early-stage financing. With venture capital still being the most important source of funding for young innovative ventures in later stages, this raises the question of potential interactions between crowdfinancing and traditional forms of start-up funding. In this study we investigate whether professional venture investors perceive a seed-financing hierarchy by entrepreneurs, and whether this equity pecking order is affected by venture quality and could therefore serve as an uncertainty-reducing signal to prospective investors. Drawing on a choice experimental research design we find causal evidence that VCs believe that “lemons” (low-quality start-ups) have a higher relative likelihood of turning to crowd-based financing as first means of external equity funding rather than to traditional sources, than “peaches” (high-quality start-ups), suggesting a perceived negative selection bias for crowd-based financing. Theoretical and managerial implications are discussed.
