Campaign overfunding and bounded rationality in equity crowdfunding

In the 21st century, a new way of raising funds called crowdfunding has taken off. Among the variety of different crowdfunding subcategories, equity-based crowdfunding has gained popularity, as regulators have opened up the market. While the money is flowing into the campaigns in increasing amounts, a phenomenon called overfunding has become more pronounced. This paper adds perspective to the drivers of overfunding in equity crowdfunding while also looking at the crowd’s decision-making process affecting the phenomena. The study follows previous research made by Koch (2016) in the reward-based context and the work of Herbert Simon (1947), and Kahneman and Tversky (1974) in the behavioral finance literature. Explorative and quantitative research methods are used jointly to study the progress of overfunding due to the lack of comprehensive previous studies. Invesdor Oy, a dominant player among the equity crowdfunding platforms in the Nordics (Lukkarinen et al., 2016: 6), provides the data for this report. The information encompasses 185 projects from the opening of the platform in 2012 up till September 2017. The platform operates on an ‘all or nothing’ model where the money returns for the investor if the campaign does not reach the initial funding target. However, the campaigns can exceed the initial target by large margins as projects can continue to receive contributions until the deadline. Consequently, the maximum amount sought can differ extensively from the original goal. A ratio of finally reached funding X and the initially defined funding goal Xgoal measures the overfunding phenomena. Studying campaign conditions, information disclosure, external context and project segmentation, the study demonstrates that duration, forum posts and external investments are associated with overfunding in equity crowdfunding. The shorter the campaign duration, more pronounced is overfunding. The finding diverges from the earlier overfunding study made by Koch (2016) in the reward-based crowdfunding setting. In addition, the more forum posts and external investments from angel investors the campaign gets, the stronger is overfunding. The finding is similar to earlier reports on overfunding (Koch, 2016; Virtala, 2017) which have examined the effects of communication and external help to campaign success. Percentage-wise, overfunding seems to be a more pronounced phenomenon in equitythan reward-based crowdfunding. Furthermore, the explorative research design suggests that especially present heuristic, herding behavior, anchoring, collective conservatism, satisficing and vividness will affect the overfunding phenomena. In addition, the study has implications for practitioners. With closely the same amount of effort and resources, small enterprises could exceed their funding targets and eventually accelerate their growth story. Moreover, regulators and platform operators should take into consideration the possible drawbacks of the crowd’s heuristics and deliberate spreading of misinformation: some stakeholders could use them as their own advantage without thinking the potential harm for the whole community.