Social capital in a syndicate investment platform - Effects on syndicate lead performance

ABSTRACT Investors on equity crowdfunding platform often face an information asymmetry problem due to the lack of information on assessing the true value of new ventures (Agrawal, Catalini, & Goldfarb, 2016). Moreover, average crowd investors may be either unqualified or unwilling to conduct the requisite due diligence. Equity crowdfunding syndicates emerged in recent years as an innovative form of entrepreneurial financing to overcome these challenges. They serve as a way for “syndicate leads” to leverage their knowledge and bring in substantial funds from a crowd of “backers” (Agrawal et al., 2016). Syndicate leads source investments and secure allocations of funds for investment while conducting due diligence. In exchange, backers pay the syndicate lead a fee (carried interest) for any subsequently profitable investment. This whole process is facilitated on platforms such as AngelList and SyndicateRoom. Despite the growing popularity of equity crowdfunding syndicates, scholarly understanding of the phenomenon is currently limited. Prior research shows equity crowdfunding syndicates shift the focal investment activities of the crowd from startups to syndicate leads (Agrawal et al., 2016). Given the important role played by syndicate leads, it is vital to develop theory-based understandings of their performances. Our study uses social capital theory to examine the effects of syndicate leads’ social capital within and beyond the platform on the performance of syndicate leads. Using data from a sample of 181 syndicate leads on AngelList, a world leading equity crowdfunding platform in the US, our study offers two contributions to social capital literature in the entrepreneurial finance context. First, we differentiate syndicate platform with non-syndicate platform social capital, based on the categories of bonding/internal social capital and bridging/external social capital (Adler & Kwon, 2002). Second, we build upon multidimensional social capital theory and distinguish syndicate leads’ social capital into structural, relational and cognitive aspects (Nahapiet and Ghoshal, 1998). This study represents a first attempt to understand this new form of entrepreneurial financing. We provide a research model with related hypotheses for how syndicate platform multidimensional social capital and non-syndicate platform multidimensional social capital of syndicate leads are related to their performance.