Crowdfunding Success as a Quality Signal to Venture Capital

This study examines how venture capitals (VCs) value crowd-based decisions compared to expert decisions from the perspective of signaling theory. We collect data on both crowd-funded startups and matching angel-funded startups. We track sequential financing rounds and analyze whether VCs show different valuations of the two types of startups. Our results show no statistically significant difference in VC preference between crowd-funded startups and angel-funded startups. In terms of initial funding amount, we show that startups raising large amounts on a crowdfunding platform are more likely to attract the attention of VCs than startups obtaining similar amount of funding from angel investors. We also find that the effect of crowdfunding is stronger for startups located in startup cluster areas. Finally, our results support the view that securing funding from the crowd increases the chances of obtaining follow-on VC funding for the non-hardware startups.