NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Online Syndicates and Startup Investment

Christian Catalini, Xiang Hui

NBER Working Paper No. 24777
Issued in June 2018
NBER Program(s):Productivity, Innovation, and Entrepreneurship

Early crowdfunding platforms were based on a premise of complete disintermediation from traditional experts. This approach becomes problematic when equity is involved because of asymmetric information between entrepreneurs and investors. Moreover, it favors regions that already attract a disproportionate share of capital offline. We find that the introduction of intermediaries through online syndicates reverses this trend, leading to a large 33% increase in capital flows to new regions. At the same time, this "democratization effect" relies on the presence of intermediaries with professional networks that can bridge these new regions with California. Evidence from a large-scale field experiment with over 26,000 investors corroborates the idea that social networks constitute a key friction to additional democratization, since they shape how online investors screen and evaluate intermediaries. Intermediaries use their reputation to vouch for high potential startups that would otherwise be misclassified because of information asymmetry. This allows them to arbitrage opportunities across regions and shift capital flows to startups from new regions that are 36.9% more likely to generate above median returns. We discuss implications for the design of equity crowdfunding platforms.

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Document Object Identifier (DOI): 10.3386/w24777

 
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