LIFE AFTER EQUITY CROWDFUNDING: analysing the financial performance of equity crowdfunded firms in Belgium, using a matched sample

This article examines the impact of equity crowdfunding on small business performance, focusing on financial outcomes and survival rates. Using data from the Belgian platform Spreds and methods like matching techniques and generalized linear models, the study found that equity-crowdfunded (ECF) firms generally perform worse and face higher failure rates compared to non-equity crowdfunded (NECF) firms. These findings raise questions about whether the outcomes are driven by the types of firms opting for crowdfunding or the characteristics of the platforms, and if equity crowdfunding truly represents an attractive investment opportunity for both businesses and investors.

EQUITY CROWDFUNDING AS A NEW TYPE OF FINANCING

Crowdfunding platforms can be classified into two categories: platforms that offer financial crowdfunding and those that focus on non-financial crowdfunding. Financial platforms primarily facilitate debt-based and equity crowdfunding. In debt-based crowdfunding, investors lend money to a business with the expectation of earning interest, while in equity crowdfunding, they acquire ownership in the company (Zhao et al., 2020). Non-financial crowdfunding platforms typically offer donation-based and reward-based models (VLAIO, 2024). In donation-based crowdfunding, contributors give money without expecting financial returns, whereas reward-based crowdfunding provides tangible products or services to backers (Zhao et al.I, 2020).

While donation-based and reward-based crowdfunding have been widely studied (Kraus et al., 2016; Lin et al., 2016; Cumming et al., 2019; Mollick, 2014), debt-based and equity-based crowdfunding are relatively new. However, these forms of crowdfunding are rapidly gaining popularity, with the number of campaigns and the total amount of funds raised steadily increasing. For instance, the financial crowdfunding market in Belgium has seen significant growth since 2012, with 273 campaigns launched between 2012 and 2017, of which 232 were successfully funded. In 2017 alone, €20 million was raised through both debt and equity crowdfunding (FSMA, 2018).

Although much of the research focuses on what drives funding success, recent studies by Drover et al. (2016), Hornuf et al. (2018), Signori and Vismara (2018), and Walthoff-Borm et al. (2018) have begun to focus more on the outcomes of equity crowdfunding. Despite these advances, detailed research specific to the Belgian market remains limited. This study aimed to fill that gap by comparing the financial performance and survival rates of equity-crowdfunded (ECF) companies with non-equity-crowdfunded (NECF) companies in Belgium. Building on similar studies conducted in the UK by Walthoff-Borm et al. (2018), the research seeks to answer a key question: How do ECF companies perform financially, and what are their chances of survival compared to NECF companies in Belgium? 

To answer this question, the analysis focused on three main objectives:

1. Provide insights into companies that have successfully raised equity crowdfunding. 
2. Compare the financial performance of ECF companies with NECF companies. 
3. Evaluate the survival chances of these companies post-financing.

INFORMATION ASYMMETRIES: ADVERSE SELECTION & MORAL HAZARD

Empirical evidence from the UK (Walthoff-Borm et al., 2018; Signori & Vismara, 2018) shows that ECF companies tend to underperform compared to their non-equity-funded peers. These studies suggest that this underperformance is linked to issues of information asymmetry, such as adverse selection and moral hazard.

ADVERSE SELECTION

Information asymmetry arises when external investors lack sufficient information about the companies they invest in, leading to adverse selection—where investments may be made in less viable or riskier businesses, increasing the likelihood of failure (Arthurs and Busenitz, 2003). While thorough due diligence could mitigate these risks, such processes are often costly and not feasible for individual crowdfunders who typically invest smaller amounts (Cumming et al., 2021). Investors may therefore rely on the decisions of earlier backers, creating what is known as an information cascade (Vismara, 2018). As a result, projects that initially attract significant funding continue to draw more investment, regardless of their true value. This makes it difficult to distinguish high-quality projects from others on the platform, particularly for startups lacking track records (Isenberg, 2012).

MORAL HAZARD

Beyond the lack of information, unclear or non-transparent policies can further challenge investors (Belleflamme et al., 2014). In equity crowdfunding, investors often back companies without meeting the entrepreneurs in person. It is also financially impractical for investors to engage in active monitoring, such as taking board seats or conducting regular management meetings, which increases the risk of moral hazard (Cumming et al., 2021). This lack of oversight can prevent investors from fully understanding or evaluating a company’s operations, especially for firms focused on experimentation and exploration, where governance transparency may be weaker (Schulze et al., 2021). These circumstances can lead to lower financial performance and less favorable long-term outcomes.

THE ROLE OF THE CROWDFUNDING PLATFORM

In addressing information asymmetries such as adverse selection and moral hazard, the governance mechanisms that work for traditional public firms often do not apply to equity crowdfunded (ECF) firms. For example, public companies are actively monitored by information intermediaries such as stock analysts who provide in-depth information—a level of transparency typically lacking in ECF firms. As a result, the governance tools available to investors in ECF firms are largely determined by the specific crowdfunding platform.

Several equity crowdfunding platforms, including Seedrs (UK), Crowdcube (UK), Invesdor (Netherlands), and the Belgian platform Spreds, which this study focuses on, employ a nominee structure to consolidate ownership. This structure, where a single legal entity holds shares on behalf of multiple investors, enhances monitoring, reduces shareholder dispersion, and lowers coordination costs (Cumming et al., 2021).

In theory, this structure should mitigate moral hazard by giving the nominee more influence over entrepreneurs (Cumming et al., 2021). However, the due diligence conducted by these platforms is often limited, typically concentrating on risks like money laundering, while broader issues such as information asymmetry receive less attention. As a result, concerns over adverse selection and moral hazard may persist, potentially affecting the performance and survival of companies on these platforms. These factors have shaped the development of the following hypotheses:

Hypothesis 1: ECF companies will show lower financial performance compared to matched NECF companies.

Hypothesis 2: ECF companies will have a higher likelihood of failure after financing compared to matched NECF companies.

METHODOLOGY

PROJECT SELECTION & DATA OVERVIEW

To gain a deeper understanding of the Belgian equity crowdfunding market and to explore insights into successfully crowdfunded firms, this research focused on Spreds, the only platform in Belgium specializing in equity crowdfunding. Initially, 187 projects were identified using the Spreds website, the Wayback Machine, and available informational notes or terms and conditions documents. It is important to note that this dataset may not fully represent all projects initiated by Spreds, as some may have been excluded from the platform’s website due to failures, efforts to maintain positive investor perceptions, or other internal criteria set by the platform. After applying specific exclusion criteria, the final dataset was refined to include 129 ECF companies that launched campaigns between 2013 and 2022. This dataset represents a key contribution to the study. For more detailed information on project refinements, data sources, and insights from the interview with Spreds, please refer to the complete work.

The final dataset highlighted several key observations regarding equity crowdfunding on Spreds. It was found that the platform facilitates capital access across a range of sectors, with a notable emphasis on management and consulting services, including computer consultancy. Additionally, most successfully crowdfunded projects have an average age of 2 to 3 years, underscoring Spreds’ role in supporting entrepreneurial initiatives. While valuations vary across industries, the average equity stake offered is approximately 12%. These insights provide a valuable foundation for understanding how equity crowdfunding functions in the Belgian market, particularly through Spreds.

MATCHED SAMPLE ANALYSIS

Following the examination of the various projects, the next phase of the report addressed the second objective: comparing the financial performance of equity-crowdfunded firms (ECF) with that of non-equity-crowdfunded firms (NECF). A matched sample approach was employed for this analysis.

The primary goal of a matched sample analysis is to understand the causal effect of a treatment (Vujic, 2023). In this study, the treatment of interest is equity crowdfunding. To illustrate this concept, consider a scenario where a firm employs four adults: two low-skilled adults who participate in an on-the-job training program (the treated group) and two high-skilled adults who do not (the control group). Simply comparing the wages of these two groups would not accurately measure the impact of the training program, as the difference in wages might also be influenced by the varying skill levels. A valid comparison would involve comparing low-skilled workers who have and have not received the training, thereby controlling for skill levels (Vujic, 2023). Similarly, this analysis compares the financial performance and survival of companies that have received equity crowdfunding with those that have not, to determine whether observed differences can be attributed to the impact of equity crowdfunding. For this analysis to be meaningful, it is crucial that the compared groups share similar characteristics.

Each of the 129 equity-crowdfunded firms was therefore matched one-to-one with a non-crowdfunded company, ensuring both shared similar characteristics in age, size (measured by total assets), and industry sector during the year of the crowdfunding campaign. Industry alignment was verified by matching the first three digits of the NACE-BEL codes. The matching process was conducted manually using the Belfirst data source, with a focus on the coarsened exact matching method (Walthoff-Borm et al., 2018), which simplifies analysis by grouping data into broader categories. For instance, if a crowdfunded company had total assets of approximately 150k, the search aimed to find a non-crowdfunded counterpart in the same industry and age range with assets between 125k and 175k, effectively seeking the nearest neighbour match.

Achieving perfect matches for all 129 crowdfunded companies proved challenging, particularly because financial data was only available for some companies in the year following their crowdfunding events, rather than in the year of the campaign itself. Consequently, some companies were excluded and the final sample consisted of 208 companies, evenly divided with 104 equity-crowdfunded firms (ECF) and 104 non-equity crowdfunded firms (NECF).

ANALYSES CONDUCTED

Having outlined the construction of the matched sample, this analysis unfolded in three stages, designed to address specific research hypotheses:

1. Comparative analysis: This initial stage compares key variables, including financial performance, between ECF firms and NECF firms during the crowdfunding year, the preceding year, and the subsequent two years. The purpose is to uncover differences in financial outcomes between these groups, thereby addressing Hypothesis 1, which posits that ECF firms will exhibit lower financial performance compared to their NECF counterparts. This approach is supported by studies such as Puri and Zarutski (2012), and Walthoff-Borm et. al (2018).

2. General Linear Model (GLM) application: Subsequently, a General Linear Model (GLM) is employed to assess the impact of equity crowdfunding on firm performance one year post-campaign. This analysis focuses on quantifying the direct effects of crowdfunding, using the same variables as in the comparative analysis but with an emphasis on estimation and influence assessment. This analysis directly tests the quantitative impact posited in Hypothesis 1. Variables such as age, size, leverage, liquidity, intangibility, and labor costs were included (Paeleman et al., 2023). Return on assets (ROA) was used as a key measure of financial performance (Javed et al., 2015; Kamruzzaman, 2019; Karadayi, 2023).

3. Survival analysis: The final stage examines the survival rates of both groups, thereby testing Hypothesis 2: ECF firms are more likely to fail post-funding compared to matched NECF firms. This analysis aims to clarify the long- term viability of crowdfunded firms relative to their non-crowdfunded counterparts, also fulfilling the third objective of this thesis.

RESULTS: FINANCIAL PERFORMANCE INVESTIGATION & SURVIVAL ANALYSIS

COMPARATIVE ANALYSIS

During the matching analysis, descriptive statistics were compared for the two subsamples (ECF and NECF) in the year of matching. Statistical tests (two-tailed t-tests for the means) indicated that ECF companies generally underperformed in terms of return on assets compared to NECF companies. This finding supports Hypothesis 1, indicating that ECF firms have lower financial performance.

However, given that effectively utilizing funds from crowdfunding may take time, the analysis was extended to include one and two years post-campaign. These extended analyses continue to show significant differences in return on assets, further validating the initial hypothesis. Figure 1, which shows the return on assets for both groups compared to the year of matching, clearly illustrates this contrast: ECF groups consistently show negative returns, whereas NECF groups maintain positive figures. This raises questions about the long-term impact of equity crowdfunding on financial performance: Are the observed differences in financial performance solely due to the effects of equity crowdfunding and, therefore, the choice of financing?

Ideally, financial performance would only differ in the year of the campaign and the years following it due to equity crowdfunding, with no differences in performance (measured by return on assets) before the crowdfunding year. However, the collected data suggests otherwise, indicating that other factors are also influencing outcomes. For example, ECF firms exhibit a higher debt ratio compared to NECF firms in the year prior to crowdfunding. This suggests that while the differences in performance might reflect some impact from the crowdfunding itself, they may also be linked to the unique challenges faced by firms opting for crowdfunding, such as difficulties in securing traditional financing and achieving profitability.

The challenge of distinguishing selection effects from causation is inherent in the use of matched samples. The upcoming General Linear Model (GLM) analysis is designed to further investigate whether there is a significant effect of ECF on firm performance, potentially exploring a combination of both selection and direct influences from crowdfunding.

GENERALIZED LINEAR MODEL

The GLM results demonstrated the impact of equity crowdfunding on company performance, particularly in terms of return on assets one year after crowdfunding. The consistently negative and statistically significant coefficients for ECF companies in the linear regression support Hypothesis 1, indicating that ECF companies generally perform worse financially than their NECF counterparts. Moreover, the negative coefficients for leverage align with the pecking order theory (Myers, 1984), highlighting the challenges small companies face when dealing with higher debt levels. Additionally, the significant negative coefficients for liquidity suggest that small businesses may struggle to effectively manage the funds raised during their crowdfunding campaigns. Detailed results are presented in the appendix (Table 1).

FIRST CONCLUSIONS ON FINANCIAL PERFORMANCE: A DUAL IMPACT

The key takeaway from the previous analyses is the dual impact of using equity crowdfunding. Firstly, significant differences observed between ECF and NECF firms during the comparative analysis suggest that specific types of firms are drawn towards equity crowdfunding. This observation aligns with the findings of Walthoff-Borm et al. (2018), who investigated whether firms turn to equity crowdfunding as a first or last resort. Their research, conducted in the UK, indicates that firms typically resort to crowdfunding platforms as a last option—often when they lack internal funds and are unable to secure additional debt capacity. Similarly, in Belgium, firms listed on equity crowdfunding platforms tend to be less profitable and have more intangible assets compared to their non-listed counterparts. Secondly, the GLM analysis reveals a significant negative impact from the ECF dummy on firm performance in the year following the crowdfunding event.

This highlights the dual impact of selection and direct influences from equity crowdfunding. ‘Selection’ refers to the tendency of a specific type of firms—those facing particular financial challenges—to opt for equity crowdfunding. ‘Influence’, on the other hand, pertains to the causal impact equity crowdfunding has on the performance of these firms after they receive funding. Ultimately, this analysis suggests that while equity crowdfunding might attract firms in financial distress, it does not necessarily mitigate these challenges or improve performance in the short term.

SURVIVAL ANALYSIS

Arhinful (2023) emphasizes that increased financial leverage heightens the risk of failure, as firms may encounter difficulties in repaying loans. This risk is particularly pertinent for equity crowdfunding (ECF) firms, which were observed to have significantly higher debt levels relative to their size in the year preceding crowdfunding. Signori and Vismara (2018) reported a 17.9% failure rate among equity crowdfunded firms, closely aligning with the 17% failure rate identified by Walthoff-Borm et al. (2018). The descriptive analysis of survival chances supports existing literature and thereby confirms Hypothesis 2. Among the 208 companies analysed, 30 declared bankruptcy, with 26 being equity crowdfunded and only four not funded through equity crowdfunding, as illustrated in Figure 2. This analysis indicates that ECF companies are more likely to fail. Furthermore, although Spreds funded its first project in 2013, the first bankruptcy in the dataset did not occur until 2019, aligning with the observed trend that companies often fail approximately five years after receiving crowdfunding. Notably, the management and consultancy sectors appear to be particularly vulnerable.

CONCLUSION & FURTHER RESEARCH

This study investigated the financial performance and survival rates of equity crowdfunded (ECF) firms compared to non-equity crowdfunded (NECF) counterparts. Building on recent research by Walthoff-Borm et al. (2018), Signori and Vismara (2018), and Cumming et al. (2021), the study tested two hypotheses: first, that ECF firms underperform financially; and second, that they exhibit higher failure rates post-funding. These hypotheses arise from concerns about information asymmetries, where entrepreneurs have more knowledge about their companies than external investors, complicating the selection of firms with the most potential.

Using data from Spreds, a Belgian equity crowdfunding platform, the findings reveal that ECF firms generally underperform during the year of their crowdfunding campaign, supporting the first hypothesis. This underperformance is attributed to the dual impact of selection—where financially unstable firms resort to crowdfunding—and influence, where crowdfunding does not effectively address underlying financial challenges. The survival analysis further provided evidence for the second hypothesis, showing that ECF firms are more likely to fail, typically around five years after receiving funding, with sectors like Management and Consulting being particularly vulnerable.

Overall, this research suggests that while equity crowdfunding is a valuable financing tool for newer and smaller firms, it carries significant risks that investors must consider. The research underscores the importance of thorough due diligence and effective governance practices to mitigate these risks. Additionally, it highlights the evolving nature of the equity crowdfunding landscape, particularly in Europe, and recommends that future research focus on enhancing governance practices and developing secondary markets to improve liquidity and market discipline.

APPENDIX