Rossie Unsuccessful Equity Crowd Funding

Alice Rossi ( University of Bergamo, Dalmine, Bergamo,
Italy),
Tom Vanacker (Ghent University, Ghent, Belgium and University of Exeter Business School, University of Exeter, UK), and Silvio Vismara(University of Bergamo, Bergamo, Italy).

Family ownership is one such ownership where the owners are uniquely concerned with the preservation of socioemotional wealth (SEW).
SEW also known as effective endowments. 
It refers to the perceived value of non-economic factors such as family values, family dynasty, longevity, altruism, transgenerational vision, pride, and emotional connection.

This paper contributes to equity crowdfunding literature, family Business, and entrepreneurial Failure.

Family business start-ups are more persistent than nonfamily business start-ups in strategic persistence.
Start-ups that search for equity crowdfunding on Crowdcube might have few alternative means because they usually lack internal funds and already have excessively high leverage ratios.
Unsuccessful equity crowdfunding campaign could potentially threaten start-ups’ survival.

H1: After an unsuccessful initial equity crowdfunding offering, family business start-ups are more likely to persist and raise new equity financing than nonfamily business start-ups.
To test this, post-offering outcomes of family and nonfamily business start-ups that launched an equity crowdfunding offering but were unsuccessful are assessed.

H2: After an unsuccessful initial equity crowdfunding offering, family business start-ups are more likely than nonfamily business start-ups to switch to delivering shares with voting rights when raising equity financing.
This is tested by examining whether family business start-ups are less likely to deliver voting rights for the first unsuccessful campaign and then become more likely to switch to providing voting rights when raising new equity after an unsuccessful equity crowdfunding campaign.

Characterizes family business start-ups in terms of how they structure their offerings.
Provides evidence and examples of the (unexpected) presence of family business startups in equity crowdfunding.
Family business start-ups are about twice as likely to raise equity after an unsuccessful equity crowdfunding offering.
SEW considerations explain the persistence of family business start-ups in equity crowdfunding.
Although family business start-ups are initially less likely to dilute their control by sharing voting rights with external investors, they subsequently accept the delivery of voting rights to secure funding



“Equity crowdfunding: New evidence from US and UK markets" (2021) Review of Corporate Finance 1 (3-4), 407-453.

1. “Equity crowdfunding: New evidence from US and UK markets" Rossie et al, 2021. Review of Corporate Finance 1 (3-4), 407-453. 51 Citations Shiva Indukoori 1

2. Authors 1. Alice Rossi Department of Management, Information and Production Engineering, University of Bergamo, Dalmine , Bergamo, Italy. 2. Tom Vanacker Faculty of Economics and Business Administration, Ghent University, Ghent, Belgium, University of Exeter Business School, University of Exeter, Exeter, UK. 3. Silvio Vismara Department of Management, University of Bergamo, Bergamo, Italy. Shiva Indukoori 2

3. Introduction This paper investigates which start-ups better absorb the negative shock of an unsuccessful campaign. T o identify this the paper examines the ownership structure that is more likely to consistently secure equity capital, even if the initial campaign is unsuccessful. Family businesses tend to exhibit more persistence in their behaviors compared to nonfamily businesses. Shiva Indukoori 3

4. Introduction Family ownership is one such ownership where the owners are uniquely concerned with the preservation of socioemotional wealth (SEW). SEW also known as effective endowments.   It refers to the perceived value of non-economic factors such as family values, family dynasty, longevity, altruism, transgenerational vision, pride, and emotional connection. Shiva Indukoori 4

5. Contributions This paper contributes to equity crowdfunding literature family Business entrepreneurial Failure Shiva Indukoori 5

6. Early Studies Family business start-ups are more persistent than nonfamily business start-ups in strategic persistence. Start-ups that search for equity crowdfunding on Crowdcube might have few alternative means because they usually lack internal funds and already have excessively high leverage ratios. Unsuccessful equity crowdfunding campaign could potentially threaten start-ups’ survival. Shiva Indukoori 6

7. Hypothesis H1: After an unsuccessful initial equity crowdfunding offering, family business start-ups are more likely to persist and raise new equity financing than nonfamily business start-ups. To test this, post-offering outcomes of family and nonfamily business start-ups that launched an equity crowdfunding offering but were unsuccessful are assessed. H2: After an unsuccessful initial equity crowdfunding offering, family business start-ups are more likely than nonfamily business start-ups to switch to delivering shares with voting rights when raising equity financing. This is tested by examining whether family business start-ups are less likely to deliver voting rights for the first unsuccessful campaign and then become more likely to switch to providing voting rights when raising new equity after an unsuccessful equity crowdfunding campaign. Shiva Indukoori 7

8. Data of Unsuccessful initial equity offerings NUMBER OF ISSUES : 1,769 Total offers : 4,226 After excluding the offers that differ from Equity Crowdfunding: 4,083 After excluding season issues: 3,200 After excluding successful initial equity crowdfunding: 1,769 Ownership : Family Business (301) and Non-Family Business (1,468) Post Offering Outcomes : New Equity Round(167), Failure(700), Active(902) PERIOD : Feb 2011 to Oct 2020 DATA SOURCES Startup offerings : Crowdcube , Seedrs , and SyndicateRoom Private Equity Offers : Crunchbase Unsuccessful Equity Crowd Funding : Orbis Europe Shiva Indukoori 8

9. The study 3,200 Startups that launched an equity crowdfunding offering. Exclude equity crowdfunding offerings by start-ups that have already launched equity crowdfunding offerings. 1,431 successful (45%) and 1,769 unsuccessful (55%) initial equity crowdfunding offerings. 1,769 unsuccessful (55%) initial equity crowdfunding offerings were differentiated based on the ownership as family and nonfamily business startups. They are monitored from offer closing day till March 2021. Shiva Indukoori 9

10. Family Business Family business start-ups can be defined based on Family management Family ownership Family governance All startups didn’t have a formal BoD 37% had only one director Shiva Indukoori 10

11. Failed Companies For failed companies, the event date is one of the following commencement date of the first insolvency case if the start-up is in administration liquidation, according to the Orbis Europe database. Shiva Indukoori 11

12. Family Vs Non-Family Business Startups Family business start-ups might be more likely to obtain funding after an unsuccessful offering They are different from nonfamily business start-ups in terms of specific characteristics The study had 301 family business startups and 1,468 Non-Family business startups. Shiva Indukoori 12

13. Analysis Entropy balancing : To adjust for differences between family and nonfamily business startups. It has important advantages over conventional matching procedures. Competing risks proportional hazard duration model : To determine the hazard rate for the post-campaign outcome scenario of interest in the presence of other possible competing scenarios. Two-step Heckman procedure: To address the potential source of selection bias as there is a possibility that the selection in the unsuccessful sample is not random. Probit : To investigate the delivery of voting rights. Shiva Indukoori 13

14. Shiva Indukoori 14 Category Variables Out come Variables New Equity Round, Failure Family Ownership Family Offering Characteristics (Control Variables) Voting Rights (initial), Equity Offered, Target, Tax Relief. Startup Characteristics (Control Variables) Non-Executive Directors, Patents, Age, Total Assets, Directors, Excessive debt levels, Credit Worthiness, London Model Variables

15. Independent Variables Family ownership Characteristics of the offering Dummy variables Start-up Year Industry Platform Shiva Indukoori 15

16. Control Variables Characteristics of the offerings Voting Rights Initial (Dummy): Delivery of voting rights Equity Offered : Percentage of equity offered Target : Target capital in ₤ Tax Relief (Dummy): EIS or SEIS Shiva Indukoori 16

17. Control Variables Characteristics of the Company Nonexecutive Directors : Presence of Nonexecutive Directors Patents : Intellectual capital by a dummy variable Age : Start-up age Total Assets : Start-up size Excessive Debt Levels : Total debt > total assets. Credit Worthiness : Score London : Location Target : Target capital Shiva Indukoori 17

18. Model Dimensions Unsuccessful Initial Equity Crowd Offerings (1769) Startup Ownership (1769) Family Business Startups (301) Non-Family Business Startups 1,468) Post Offering Outcomes (1769) New Equity Round (167) Failure (700) Active (902) Shiva Indukoori 18

19. Shiva Indukoori 19

20. Shiva Indukoori 20

21. Shiva Indukoori 21

22. Models Model 1 : Identifies (un)successful offerings. Model 2 : Competing risk model for the new equity round. Model 3 : Failure Model. Model 4 : Delivery of voting rights in the initial unsuccessful offering. Model 5 : Delivery of voting rights in the new equity round. Shiva Indukoori 22

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24. Conclusions Characterizes family business start-ups in terms of how they structure their offerings. Provides evidence and examples of the (unexpected) presence of family business startups in equity crowdfunding. Family business start-ups are about twice as likely to raise equity after an unsuccessful equity crowdfunding offering. SEW considerations explain the persistence of family business start-ups in equity crowdfunding. Although family business start-ups are initially less likely to dilute their control by sharing voting rights with external investors, they subsequently accept the delivery of voting rights to secure funding Shiva Indukoori 24