The Entrepreneur and Inverstor Relationship in Equity Crowdfunding. Agency or Trust concerns?

2017 edition

Hubert Augusto Joo Kitano

Crowdfunding can be considered a new and creative source of funding that has today become increasingly available for entrepreneurs looking to finance their venture through equity. As a concept the crowdfunding phenomenon is quite new but has developed and spread significantly in the past years. The aims of the proposed research are: to analyze the agent and trust relations among the investors, entrepreneurs and crowdfunding platforms; to determine the characteristics of the investors willing to fund start-ups; and to evaluate the investors’ development of trust based on their beliefs about the attitudes, behaviors and competences of the entrepreneur seeking financing through the equity crowdfunding model.

The line of research for the proposed topic of investigation lies in the field of entrepreneurial finance. Even though crowdfunding as a new fund-raising system can benefit the creation of new companies through easier access to financing, it also raises some concerns that are a direct consequence of the principal-agent relationship that exists in a crowdfunding system. The investor is largely without influence on how his/her investment is used by the entrepreneur and the proposed topic will research the characteristics of this relation further.

In the theoretical framework of this research project it is stated that the two theories, theory of agency and theory of trust, are complementary. While the theory of agency: a) assumes that the investor’s and entrepreneur’s objectives are established outside the agency relationship and are formalized in their respective utility functions; b) focuses on designing efficient contracts that reduce agency costs; and c) bases the control mechanisms on the application of a reward-punishment relationships, the theory of trust: a) recognizes that prior interactions can reduce and even eliminate conflict of interest between investor and entrepreneur; b) suggests that even when the reduction of governance costs is an important objective, the essential and critical goal is to create an adequate environment of constructive relationships that can reduce the need for control and lower the agency costs; and c) states that the application of mechanisms based on a reward-punishment relationship could widen differences between parties increasing the possibility of opportunistic behavior by the entrepreneur.

The methodology upon which the research process lies include field studies through primary and secondary data collection by adapting the constructs developed by McNight et al. (2002) regarding trust. A construct validity will be applied to the research process.