Reducing information asymmetry on Dutch crowdfunding platforms
A qualitative study on the role of platforms in information provision
Master thesis research by Justin Malcorps
In June 2016, Justin Malcorps graduated from the Tilburg School of Economics and Management at Tilburg University. He followed the master Strategic Management and wrote his master thesis in the area of crowdfunding.
While banks are becoming more restrained in lending funds to entrepreneurs, crowdfunding is growing into a popular funding method in the Netherlands, doubling in size since 2012 (Douw & Koren, 2016). Since the variety and the increasing number of Dutch crowdfunding platforms have resulted in a saturated market, investors are becoming aware of the risks and demand more transparency on the information provided. Competing for fundraisers and funders, platforms remain reluctant in providing all the necessary information, which leads to information asymmetry. This research sets out to examine the dynamics associated with information provision from loan and equity-based platforms, by approaching the reduction of information asymmetry.
With 142 platforms active in the Netherlands and 128 million euros raised in 2015 (AFM, 2016), investors are learning that the risks of crowdfunding projects are sometimes very high, which may result in the loss of their investment (Dijkman, 2014). According to Financieel Dagblad (2016), funders simply need more information in order to judge the quality of a project and estimate the risks of their investments. Considering that the information asymmetry between investors and platforms needs to be reduced in order to make crowdfunding a viable alternative to traditional financing, this thesis aims to determine how crowdfunding platforms can reduce information asymmetries between fundraiser and funders in order to make project quality more transparent in the Netherlands.
The primary data were collected from eight semi-structured interviews and from 11 observations. Secondary data were gathered from industry reports on crowdfunding, presentations on a crowdfunding event and from academic journals on information asymmetries in crowdfunding.
The findings indicate that, in order for the Dutch crowdfunding industry to reach maturity, platforms need to become more transparent with their information provision and present risks in an easy-to-understand and nonthreatening format. In terms of solutions, this research provides two strategies on how to reduce information asymmetry: (1) platforms can implement a monitoring system in order to predict and reduce defaults and (2) platforms can build a trustworthy reputation. Platforms either have to transparently communicate the knockout criteria of the screening process, or capture the strictness of their screening by a performance ratio. Also, platforms have to transparently communicate their default rate in a uniform and correct way, enabling funders to compare the performance of platforms and allow them to deliberately make investment decisions. Although some platforms have not experienced a default yet, they should display their default rates in order to show their dedication to transparency from the start. Additionally, platforms could support the quality of their projects by transparently showing the sophisticated investors involved in a project.
This research suggests that creating a trustworthy reputation is an important strategy for platforms in order to solve issues related to adverse selection. It can be achieved through playing an active role in credit management and communicating their default rate in a transparent, correct and uniform way that reflects the quality of their proposed projects.
AFM. (2016, 05 17). Register crowdfunders. Retrieved from AFM: https://www.afm.nl/~/media/Files/registers/register-crowdfunders-181516.ashx
Dijkman, A. (2014, 03 29). Crowdfundproject Blauw in 2011 al 'technisch failliet'. Retrieved from Daskapital: http://daskapital.nl/2014/03/crowdfundingproject_blauw_was.html
Douw & Koren. (2016). Crowdfunding in Nederland 2015. Amsterdam: Douw & Koren
Financieel Dagblad. (2016, 02 26). Kijk eens kritisch naar uw crowdfundbelegging. Retrieved from Financieel dagblad: http://fd.nl/werk-en-geld/1140332/kijk-eens-kritisch-naar-uw-crowdfundbelegging