Equity Crowdfunding: Game Changer or Empty Promise for Inclusive Entrepreneurship

Does allowing the general public to invest in startups democratize capital access by supporting underrepresented entrepreneurs? Despite growing interest in equity crowdfunding among entrepreneurs and policymakers, it is unclear how crowd investors choose investments and whether their decisions differ from those of professional investors. Extant theories suggest two conflicting views on whether equity crowdfunding can improve capital access for underrepresented entrepreneurs. Sociological research on resource exchanges suggests that broadening the pool of investors would help entrepreneurs overcome structural barriers. However, research on the wisdom of crowds suggests that crowd investors would be attracted to the same types of startups as professional investors, thereby perpetuating funding disparities. To resolve this puzzle, I examine the differences in firm and founding team characteristics of startups funded by crowd and professional investors. Leveraging novel data on startups that participated in Regulation Crowdfunding in the U.S. and data on startups that could have decided to crowdfund, I find that equity crowdfunding helps improve capital access for some groups of underrepresented entrepreneurs, but not all. Equity crowdfunding has reduced structural barriers for entrepreneurs overlooked by professional investors for reasons related to embedded resource exchange dynamics (i.e., shared educational and professional background, region, and industry). Yet gender and racial biases appear to persist among crowd investors.