Emotions and Values in Equity Crowdfunding Investment Choices 1. Christian Goglin

and, finally, for doing me the honor of participating in my thesis jury.

      I am also grateful to Professors Véronique Bessière and Armin Schwienbacher for having accepted the demanding role of referee in my thesis jury. Reading their work has fed my reflection and their comments will be sources of enrichment for my future. I hope that they will find the expression of my respectful gratitude here.

I would like to thank the members of Crego for their constructive and kind remarks during laboratory seminars. In particular, I would like to thank Mr. Gérard Charreaux for his always valuable remarks, Mr. Fabrice Hervé for his support and wise recommendations and Mr. Bertrand Belvaux for his suggestions concerning the analysis of the data. Finally, I would like to thank Mrs. Évelyne Poincelot and Miss Kirsten Burkhardt for their pertinent remarks.

      I will not forget the professors of my research master’s degree in management sciences, some of whom were able to bring abstract concepts or theory to life through their passionate communication.

      I would like to thank the members of the CRESE research laboratory at the Université de Franche-Comté for their hospitality and the sound advice from their economists, in particular, Mr. François Cochard and Ms. Karine Brisset.

      Many thanks also to the doctoral students Ms. Gaztelumendi and Ms. Bataillard for their diligent participation in pretesting experiments.

      I would also like to thank the university staff who collaborated or facilitated the organization of experiments, particularly Ms. Bois-Prinet, Mr. Frédéric Pellerin, Mr. Renaud Aubert, Ms. Chloé Roger, Mr. Guy-Daniel Ligan, Ms. Esla Fachinetti, Ms. Florence Demougeot, Ms. Chittaro and Mr. Millereux.

      Finally, I would like to thank my wife, who has personally contributed to the experimentation and has supported me unconditionally in this adventure, as well as my daughter, who was born only a few months before this big move and who, for many weekends, had to put up with a studious father. I dedicate this work to them as well as to my late maternal grandmother, my “mamie”, without whom nothing would have been possible.

      Introduction

      […] we neither strive for, nor will, neither want, nor desire anything because we judge it to be good; on the contrary, we judge something to be good because we strive for it, will it, want it, and desire it.

      Baruch Spinoza, quoted in Miller (2015)

      This introduction begins with a brief introductory statement on the genesis of this research, then continues with a presentation of the context, the justification and exposition of the research object, the methodological approach taken, and the expected contributions of this book before concluding with a presentation of the general plan of this book.

      The starting point for this research topic is a simple premise: “behaviors and, more specifically, the choices of investors operating on equity crowdfunding (ECF) platforms were, a priori, necessarily marked by a strong emotional dimension.” From this first approximate conjecture, the result of a spontaneous interpretation that comes from the psychology of common sense, the next step was to follow a rigorous, scientific approach. First of all, this inductively inferred conjecture required a literature review in the field of entrepreneurial finance.

      Research context

ECF is a recent financing method. Therefore, of course, the scientific literature on the subject is not very developed. The first works, which are descriptive, focused on themes such as the success of fundraising campaigns or the motivations of the participants on the platforms. The historical sectors or professions of crowdfunding, donation and reward-based crowdfunding were first explored, and these results were then used as a basis for research into ECF, which is more financially-oriented. In fact, this innovative method of financing, by subscribing to the capital of a young company, involves a host of investors who are a combination of friends and family, business angels and crowdsourcing participants (Onnée and Renault 2014).

The question of the choice of projects by investors is essentially dealt with from the perspective of information theory or signal theory (Akerlof 1970; Spence 1973)¹. Information asymmetry is particularly strong for companies at the seed stage, where potential investors seek to interpret the available information on the project to detect quality signals (Ahlers et al. 2015). The information available to potential investors is protean, consisting primarily of information provided by management, including the project description, a video of the entrepreneurs’ pitch, the business plan and all of the fundraising campaign’s posts. Secondarily are all the social interactions on the platform (Lin et al. 2013; Freedman and Jin 2014). This includes exchanges between investors or questions and answers between investors and managers. The kinetics of the campaign (Hornuf and Schwienbacher 2015b) and the completion rate of the fundraising target (Agrawal et al. 2014) are also important quality signals. All this information leads the investor, who is not competent to judge the appropriateness of investments on their own, to imitate, which is a behavior at the origin of the herd behavior which can lead, to a certain extent, to information cascades, i.e. a situation where only the decisions of other agents determine investment choices.

      Social interactions can also take place outside the platform, for example, for friends and family who will in fine invest on the platform. In this case, literature considers that friends and family have private information that can be assimilated to a quality signal (Agrawal et al. 2015). It should also be noted that, although distance is another factor explaining the choice, it is strongly correlated with friends and family.

A second approach is implicit; it consists of inferring the determinants of individual choices from those of the crowd as a whole. Indeed, the choices of the crowd result, according to methodological individualism (Boudon 2004), from the aggregation of individual choices. More precisely, studies of the success of campaigns reveal the choices made by the crowd. However, the main determinants of the success of fundraising campaigns are social in nature. In addition to the herd behavior already mentioned, Mollick (2013) shows that the size of an entrepreneur’s social network is a key success factor. However, the social network is merely an extension of the group of friends and family to circles of indirectly connected individuals. Therefore, the explanation for this effect is likely to be twofold: the number of Facebook friends or Twitter followers can be interpreted per se as a quality signal; moreover, when the members of this social network participate in the campaign, the explanation of private information about the leaders and their chances of success, given for friends and family, is also applicable.

      Finally, these different explanations for the choice of projects are all based explicitly or implicitly on signal theory, in which the decision-maker is endowed with an instrumental rationality and seeks, by capturing quality signals, to maximize its usefulness, which can be identified by the risk/return ratio for finance. This perspective, which derives from the neoclassical school’s postulates of rationality that prevail within the efficiency of financial markets, reduces choice to its cognitive dimension, which excludes any emotional or affective explanation.

      Nevertheless, a body of emerging research converges to admit that the choice of projects may be based on reasons other than an exclusive maximization of the expected utility, and even places emotions at the heart of the phenomenon of ECF investments.

      Thus, the choice of ECF projects can be connected to the intrinsic motivations of investors. Ryu and Kim (2014) establish this link and show that if the investor is driven by a motivation such as “philanthropy”, “recognition” or “relationship”, then the reward, i.e. the expected return, has no effect on the choice, contrary to the expected social contribution.

      Bessière and Stéphany (2017) believe that crowds act based more on their perceptions than on in-depth analysis; the decision is holistic, intuitive and affect plays an essential role, as does familiarity with risk perception, the latter being altered by the affect heuristic.

In