Abstract

Crowdfunding, a means to finance business ventures by raising small amounts of money from a large number of investors, has emerged as a popular alternative to traditional financing routes (e.g., loans, venture capital, and equity). In this context, where information asymmetry is rampant, external entities are increasingly likely to pay attention to secondary sources of evidence (Rao, 1994) or valuable signals that help them to perceptually differentiate across ventures and assign value. These signals convey that an entrepreneur’s proposed venture is perceptually and qualitatively different from other ventures. Without such signals, information asymmetry is comparably increased, value is diminished, and prices are discounted (Riley, 1989). We propose that affiliation with and or support from external entities is perceived as valuable and credible signals by potential funders. Affiliations with legitimate third parties and venture backed projects provide a signal that separates low and high quality campaigns. Thus, we suspect that potential funders recognize these external affiliations, view the campaign as legitimate and take action.

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