Crowd Equity Investors: An Underutilized Asset for Open Innovation in Start-ups

November 8, 2017
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More and more entrepreneurs approach crowdfunding to finance their ventures, collecting funds from a heterogeneous crowd of people. Crowdfunding lies within the Open Innovation paradigm, which emphasizes the importance of leveraging external source of knowledge to compensate for the scarcity of internal resources and competences.

Leveraging investor networks, generated in the course of equity-based crowdfunding campaigns, contributes to the success of start-up firms, as demonstrated by Francesca Di Pietro, Andrea Prencipe, and Ann Majchrzak in their article “Crowd Equity Investors: An Underutilized Asset for Open Innovation in Start-ups” (California Management Review).

Evidence from 60 European start-ups suggests that crowd investors provide firm founders with two main types of inputs: (i) knowledge –related to the product, strategy, and market– and (ii) network ties with industry players and other relevant stakeholders. Additionally, results suggest that start-ups exploiting crowd network are more likely to be successful two years later compared to start-ups that do not leverage the crowd as external knowledge source.

The start-ups’ characteristics play an important role in influencing the benefits that entrepreneurs receive form the crowd, suggesting that nature of open innovation is not the same for all the start-ups.

Specifically, firms at very early stage of development benefit more from knowledge exploitation activities, searching, for instance for product feedback and technology-related advice, compared to later stage firms which leverage crowd investors mainly to connect with industry players and relevant stakeholders. As for firms’ customer orientation, B2C-oriented start-ups are likely to benefit more from crowd involvement at early stage —that is, during the product development stage, compared to B2B-oriented start-ups which would gain more from investors in the later stages of development, in their search for connections to industry players and stakeholders.

The study suggests that entrepreneurs planning to use equity funding OI platforms shall consider the time and resources needed to manage external sources to avoid losing their focus on their firms’ core business activities. It also informs entrepreneurs’ decision about the type of crowdfunding to use reward (e.g. Kickstarter) vs equity funding, considering the additional benefits provided by the crowd as well as equity funding platform providers for how to market their platforms to entrepreneurs and how to design the platforms.