Investor types and campaign dynamics in investment crowdfunding: A herding and collective action perspective

Digitisation has transformed, diversified, and democratised the venture finance field with the rise of investment crowdfunding. Early venture finance markets are characterised by unattractive risk–return propositions and high information asymmetries. The inflow of new investors through crowdfunding has raised concerns regarding the quality of their investment decisions. Herding and information cascades have been at the core of the theoretical explanations of campaign dynamics in investment crowdfunding. However, this interpretation ignores the role of public-good-type externalities produced by early ventures. Based on the assumption that early ventures produce double externalities – knowledge spillovers and sustainable or social impact – we propose viewing (crowd) investor behaviour and campaign dynamics through a herding and a collective action lens. We discuss how herding and collective action can explain investment types, behaviour, and investment crowdfunding dynamics. To understand public–private funding dynamics, we first identified four investor types: idealists, change agents, gain seekers, and professionals. This was done by combining and exploiting multiple datasets of three innovative early ventures' crowdfunding campaigns. Using platform transaction data, we used these types to predict investors' behaviours and to describe campaign dynamics. Using herding and collective action theory, we describe three mechanisms that shape campaign dynamics between types of investors: rational herding, gatekeeping, and reciprocating. We argue that the combination of the two aforementioned theoretical lenses offers an advanced understanding of investment crowdfunding and provides guidance for platforms and regulators to navigate the tension between access to finance for ventures and investor protection. For regulators, our results suggest withdrawing from a ‘one regulation protects all’ approach and instead tailoring measures to different investor types in order to advance digital and democratised early venture finance, taking into account private and public returns on their investment.