From Crowdfund Insider
MIT Sloan Assistant Professor Christian Catalini has targeted his research on the economics of innovation, entrepreneurial finance and crowdfunding. Catalini is part of an elite few academicians who are analyzing the emergent investment crowdfunding space, so when he shares his findings, and associated perspective, it is worth paying attention.
Catalini, along with his co-authors, Ajay Agrawal and Avi Goldfarb at the University of Toronto, have labeled syndicates the “killer app of equity crowdfunding”.
There has been much discussion and debate if it is the wisdom of the crowd or herd mentality that reigns in investment crowdfunding, but according to Catalini a hybrid mix of professional insight, alongside the crowd, is easily the best.
In their working paper entitled, “Are Syndicates the Killer App of Equity Crowdfunding?”, the trio affirms that lead investors, be they angels or VCs, can inform potential crowdfunding investors about deals they might not otherwise be aware. Equity crowdfunding syndicates fill a major gap in online investing, at least in part the need for investors to be able to actually meet issuers instead of just communicating virtuatlly.
“When evaluating a team at such an early stage, investors want to be able to get a read on the founders,” says Catalini. “They want to be able to understand the team dynamics and get a real sense of factors such as how they react under pressure. Because that’s hard to do on the Internet, angel investing has tended to be geographically localized.”
Information asymmetry, where non-local investors are left unaware of particular technologies or markets in which they might want to invest because of geography is a challenge. “Many value-creating transactions that could have occurred do not simply due to the distance between investor and venture,” according to their research. “The lack of long distance angel investing is largely due to informational problems that make non-local early-stage deals costly to evaluate and monitor.”
Equity crowdfunding syndicates “solve that information problem through the division of labor among investors”.
Read the full post at Crowdfund Insider.
Christian Catalini is the Fred Kayne (1960) Career Development Professor of Entrepreneurship and Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management.