Pricing the value of cash flow rights in crowdinvesting : an analysis of innovestment backers

In this paper, we analyze the pricing of cash flow rights in startup companies based on a unique dataset of crowdinvesting backers. Our sample consists of 44 campaigns and includes 1,450 bids made by 499 backers during the period from November 6, 2011 to March 25, 2014 on the German crowdinvesting portal Innovestment. In contrast to all other European crowdinvesting portals, Innovestment is running a multiunit sealed bid second price auction where backers can specify the price they are willing to pay for an investment ticket with the portal and startup specifying a lower threshold. We exploit this unique auction mechanism to analyze backers' willingness to pay for cash flow rights in a startup company. We find that campaign characteristics, investor sophistication, progress in funding, herding, and stock market volatility influence backers' willingness to pay in an economically meaningful fashion, whereas we do not find any evidence for a local bias or sniping at the end of an auction. Our findings indicate that portal design and self-regulation might well trump government rules in the pursuit to protect investors.