Exploring agency dynamics of crowdfunding in start-up capital financing

Abstract

In the last decade venture capital markets around the world have experienced growth both in terms of capital under management and the number of venture capital firms providing finance. Despite this there is growing evidence that a 'funding gap' exists at the earliest stages of new firm development. This paper provides an initial investigation into crowdfunding, identifying how it may be appropriately adopted within the start-up equity-financing context so as to contribute to the aggregated pool of capital available to new (pre-commercial) ventures. An agency theoretical perspective is adopted to investigate the necessary agency-cost control mechanisms unique to emerging crowdfunding models. Given the relational character of the investment process, the venture capitalist's perceptions of agency dynamics in the investorinvestee relationship provide an appropriate lens for analysing the likely acceptance of crowdfunding in start-up financing. Data are drawn using a qualitative methodology (convergent interviews) with Australian venture capitalists that provide early stage financing. A total of 11 venture capitalists were interviewed before convergence of common themes was reached. Results suggest that agency dynamics in crowdfunding models in start-up financing comprise a combination of investor specific factors, and ex-ante and ex-post investment factors.