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St.

Petersburg University
Graduate School of Management
Master in Management Program

APPLYING ARTIFICIAL INTELLIGENCE TO ENHANCE


CROWDFUNDING: DEVELOPMENT OF A FRAMEWORK

Master’s Thesis by the 2nd year student


Concentration – General Track
Daniil NESINOV

Research advisor:
Associate Professor
Dr. Tatjana SAMSONOWA-DENEF,
Dr. Michael KÖNIG

St. Petersburg
2018
АННОТАЦИЯ
Автор Несинов Даниил Андреевич
Название ВКР Применение искусственного интеллекта для
стимулирования краудфандинга: разработка методологии
Образовательная Менеджмент; Стратегия, Инновации и административное
программа управление
Направление подготовки 38.04.02 «Менеджмент»
Год 2018
Научный руководитель Самсонова-Денеф Татьяна Александровна и Майкл Кёниг
Описание цели, задач и В настоящее время инвесторы, финансирующие компании
основных результатов на ранней стадии развития, испытывают ряд проблем:
1) только 3% от всех инвесторов на данной стадии успешны;
2) процесс оценки компании на данной стадии крайне
сложный из-за отсутствия какой-либо финансовой
исторической информации. Более того, специалистам-
оценщикам также необходимо определить прогноз роста
компании, предполагаемого ответа конкурентов и так далее.
Тем не менее Краудфандинг, как инструмент привлечения
денежных средств для таких компаний, показывает
значительный рост за последнее время (CAGR с 2009 по
2015 год составляет 38%). Однако процесс фондирования с
помощью Краудфандинга (в работе мы анализируем
Акционерный Краудфандинг) имеет ряд проблем
(Поляризационный эффект, Склонность к подтверждению
своей точки зрения, Социальное влияние). Целью данной
работы является проверка, является ли комбинация
искусственного интеллекта и коллективного разума
решением вышеописанных проблем, а также проблемы
оценки компаний на ранней стадии. В результате работы
выявлено, что данная комбинация улучшает важные
показатели (процент успешных инвестиций, время
заключения сделки), также подтверждено, что инвесторы
более предпочтительны к новому методу оценки; опытные
инвесторы чаще выбирают данный метод оценки и что
главной проблемой презентации нового метода является
отсутствие изображения исторических результатов
инвестирования. Вся эта информация послужила
фундаментом для создания финального фреймворка
использования комбинации искусственного интеллекта и
коллективного разума в процессе оценки компаний на
ранней стадии через Краудфандинг.
Ключевые слова Краудфандинг, оценка стартапов, искусственный интеллект

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Master Student’s Name Nesinov Daniil
Master Thesis Title Applying artificial intelligence to enhance crowdfunding:
development of a framework
Educational Program Master in Management; MSc of Science in Strategy, Innovation
& Management Control
Main field of study 38.04.02 Management
Year 2018
Academic Advisor's Name Samsonowa-Denef Tatjana and König Michael
Description of the goal, Nowadays investors, which finance companies at the Seed stage
tasks and main results (the first stage of any company development), are experiencing
problems in the funding process:
1) only 3% of all investors at this stage are successful;
2) the valuation process at this stage is extremely difficult due to
the lack of any financial historical information. Moreover, it is
needed to determine the company's growth forecast, the expected
response of competitors, etc.
Nevertheless, Crowdfunding, as a tool for raising funds for such
companies, shows significant growth in recent times (CAGR
from 2009 to 2015 is 38%). However, the funding process via
Crowdfunding (in the paper we analyzed Equity Crowdfunding)
has a number of problems (Polarization effect, Confirmation
bias, Social influence bias). The purpose of this paper is to verify
whether the combination of expert communities and AI can solve
the problems of typical Equity Crowdfunding. As a result of the
work, it was revealed that this combination improves important
indicators (the percentage of successful investments, the time to
close a deal). Moreover, it is also confirmed that investors prefer
the new valuation method; experienced investors more often
choose this method and that the main problem of the new
method’s presentation is the lack of historical investment results.
All this information served as the foundation for the final
framework of using the combination of AI and collective
intelligence in the process of evaluating companies at the Seed
stage via Equity Crowdfunding.
Keywords Crowdfunding, startup’s valuation, artificial intelligence

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TABLE OF CONTENTS
Introduction .....................................................................................................................................5
Chapter 1. THEORETICAL REVIEW OF CROWDFUNDING, COLLECTIVE
INTELLIGENCE AND AI..............................................................................................................8
1.1. Raising capital for entrepreneurial ventures .....................................................................8
1.2. Crowdfunding as a tool of financing ..............................................................................15
1.3. Theoretical background of the term «Collective intelligence» .......................................16
1.4. Applying Artificial Intelligence to enhance Crowdfunding ...........................................18
Summary of chapter 1 ................................................................................................................21
Chapter 2. RESEARCH METHODOLOGY ................................................................................24
2.1. Setting and data ................................................................................................................24
2.2. Case study ........................................................................................................................26
2.3. Survey design ...................................................................................................................28
2.4. Variables and measures ...................................................................................................33
Summary of chapter 2 ................................................................................................................35
Chapter 3. RESULTS AND DISCUSSION ..................................................................................36
3.1. Case study ........................................................................................................................36
3.2. The survey........................................................................................................................46
Summary of chapter 3 ................................................................................................................52
Conclusion .....................................................................................................................................56
List of references ...........................................................................................................................59
Appendices ....................................................................................................................................65
Appendix 1. Received official responses from companies ........................................................65
Appendix 2. Received responses from companies’ representatives (via « Linkedin») .............67
Appendix 3. Interview guideline ...............................................................................................72
Appendix 4. Interview with Tom Kehler, CTO of Crowdsmart ................................................73
Appendix 5. Interview with Peter Green, Co-founder and Head of Product in Republic .........78
Appendix 6. Interview with Samed Sökmen, Investment Manager of Companisto ..................80
Appendix 7. Interview with Antony Tikhonov, Business Development Manager at Seedrs ....83
Appendix 8. The survey «Applying AI to Equity Crowdfunding» ...........................................85

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Introduction
Topicality. The global economic crisis in 2008 has changed the ways investors look at
entrepreneurial ventures, high-risk projects. In order to minimize risks many traditional institutes
(i.e. banks) decide not to participate in fundraising for these projects. Due to this reason, many
entrepreneurs move toward alternative ways for fundraising (Golic, 2013). One of them is
Crowdfunding, which is an internet-based technology that allows numerous people to invest or
donate their money in exchange for parts of the chosen company (Equity parts) or certain
rewards, interests (Debt). Nowadays this method has gained significant interest from investors
all over the world. Equity Crowdfunding, the object of this study, allows startups to get the
needed capital; investors, on other hand, get a unique opportunity to try to predict a company’s
future success and then invest their money. They can do this with the help of collective
intelligence, as a form of distributed intelligence, which arises from the collaboration and
competition of many individuals in order to solve a cognitive problem in a way that cannot be
solved by isolated people. The focus of our study is the problem of how to predict the success of
a company in order to make decision to invest in it. However, three main problems of collective
intelligence can be the causes of the limits of Equity Crowdfunding, which we will discuss in
more detail in the chapter «Theoretical review of Crowdfunding, collective and artificial
intelligence».
In this paper, we are most interested in entrepreneurial ventures in the Seed stage because
ventures in that stage have the lowest rate of success. Moreover, they also have the highest
chance of failure to raise funds. Furthermore, investors have some difficulties in evaluating
companies at the Seed stage because of the lack of track record and decent forecast model (i.e.
business plan). Due to this reason, traditional valuation tools also do not fit here.
With regard to the above, the question arises: how to increase the likelihood of a correct
forecast of the company's success, bypassing the limits of the modern Crowdfunding. Therefore
we aim to verify whether the combination of expert communities and artificial intelligence
(further AI), which is the core of a new approach to Equity Crowdfunding platforms’ valuation,
can solve the problems of traditional Crowdfunding.
The subject of the master thesis is the combination of artificial and collective intelligence
in Crowdfunding.
The object of the study is the process of valuing a company with the aim of predicting
success by Crowdfunding investors.
The scope of the research derives from three main fields: Crowdfunding, collective
intelligence and AI and is illustrated at Figure 1.

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Figure 1. The scope of research
Source: developed by the author

The goals of the study are to verify whether the combination of expert communities and
AI can solve the problems of traditional Equity Crowdfunding and to develop a framework for
applying AI to enhance Equity Crowdfunding.
In order to reach the goals we will answer two research questions:
1) How does the combination of AI (machine learning in particular) and collective
intelligence affects percentage of successful returns (failure to exit and to get funding in the next
stages) compared to the typical Equity Crowdfunding process (valuation by a platform’s team)?
2) How does the combination of AI (machine learning in particular)) and collective
intelligence influences the speed of investing (time for making investment decisions, investment
process, and return of investment) compared to the typical Equity Crowdfunding process
(valuation by a platform’s team).
The methods applied for achievement of goals are mainly described in the
«Methodology» part of the paper.
The research gap is the inconsistency of information available with increasingly
emerging interest from business environment. The findings of the paper give answers to research
questions and provide forthcoming investigators with insights for future research.
The theoretical relevance of the master thesis is justified with the fulfillment of the
research gap identified in theoretical review – the absence of works dedicated to the combination
of AI and collective intelligence in Equity Crowdfunding valuation process.
The managerial applicability is supported by the results of our analysis, which can
provide advantages to Crowdfunding platforms (and investors) using the developed framework
to evaluate the future entrepreneurial ventures.
The structure of the research is the following: the master thesis consists of introduction,
three chapters, conclusions, references list and appendixes. The introduction reveals the goal,

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research objectives and managerial problem of the master thesis. The first chapter describes the
theoretical review of entrepreneurial ventures, fundraising stages, Crowdfunding, collective and
artificial intelligence. It also identifies the research gap, which corresponds to the first objective
of investigation of literature. The second chapter describes methodology of the paper:
triangulation method, case study and survey. The third chapter provides the results from case
study and survey, and the final framework of the application of AI in the Equity Crowdfunding
valuation process. The main findings, theoretical and managerial contribution of this master
thesis alongside with the directions for future research are summarized in conclusions. The
structure of the research is illustrated in Figure 2.

Figure 2. The structure of the Master Thesis


Source: developed by the author

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Chapter 1. THEORETICAL REVIEW OF CROWDFUNDING,
COLLECTIVE INTELLIGENCE AND AI
The first chapter is dedicated to the chosen topic’s theoretical relevance and to the
research gap’s identification in the existing literature, which is devoted to the process of applying
AI to enhance Crowdfunding. This chapter will discuss the following topics:
1) Ways to finance start-ups at different stages of their life cycle;
2) Crowdfunding, as the most popular way of startup financing, and its types;
3) Collective intelligence as a tool for the valuation in Equity Crowdfunding platforms;
4) Key issues of collective intelligence;
5) Trends of AI;
6) Ways to overcome collective intelligence problems by using AI.
1.1. Raising capital for entrepreneurial ventures
Since 1980s, entrepreneurship has become the major factor of economic growth. Sander
Wennekers and Roy Thurik (1999) claim that during that time high unemployment and
stagflation caused a new interest in supple side economics, concurrently, there was a review of
small firms’ role and increased attention to private enterprise, all that over time caused economic
growth. Further entrepreneurship has enhanced technical innovation level and increased
employment opportunities. The above theory was based on Schumpeter’s work (1934), who
stressed the importance of innovative entrepreneurs as the main driver to promote economic
growth. He stated that entrepreneurial activity encourages technological development. More
recently, Shane and Venkataraman (2000) explain entrepreneurship as checking three questions:
how, by whom and with what effects opportunities a company may create future goods and
services.
Scientific research of entrepreneurship has a huge academic interest so far. We made the
analysis of published articles related to «Entrepreneurship» in the Google Scholar database for
every 3 years starting from 2000. The study shows positive trend in this topic discussion: the
number of publications in 2015 increased by 505% compared to that number in 2000 (Figure 3).

Figure 3. The number of publications related to «entrepreneurship»


Source: Google Scholar database
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As Shane and Venkataraman describe, entrepreneurship is not only about starting a
new business. It is a complex process when existing resources are combined in a new innovative
way, which can lead to production process and providing new products or services to customers.
Now we can conclude that a new innovative company is a partnership or temporary organization
designed to search for a repeatable and scalable business model. New ideas enter the market and
are altered into economically sustainable enterprises. New firms are the catalyst of the process of
transforming entrepreneurial judgment into profit (Spender, 2014). Moreover, current research
(Kask and Linton, 2013, Pangarkar and Wu, 2012) points out that forming mutually beneficial
relationship with external partners is a priority for the success of entrepreneurial ventures.
However, according to many research studies one of the most serious problems for small
innovative companies is capital raising. For instance, David J. Denis (2004) states that the ability
to access capital is one of the most important issues facing entrepreneurial firms.
In general, financing method for all companies is correlated to firms’ stage of life cycle.
Small enterprises usually access capital though the selling of venture equity. It is important to
note, that this process is unpredictable, since neither owners, nor investors know how to calculate
the firm’s intrinsic value and they do not know how to predict main metrics (growth, revenue
etc.). At this moment, previous financial theories do not have a specific answer to this question.
The search for the solution for abovementioned problem is the try to cover the research gap,
which will be mentioned later. We will start to consider the problem with startup life or
financing cycle, which is usually divided into five stages according to the company's
development level (Figure 4).

Figure 4. Startup Financing Cycle


Source: Kmuehmel, VC20

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As clearly seen from the figure, there are five types of funding or life cycle of startups:
the Seed stage, early stages (1st round, 2nd round), 3rd round and 4th round (Mezzanine), and
beyond. We describe all of them below.
1. The Seed stage – the initial stage of a new entrepreneurial venture. At this stage,
owners usually seek capital from family members, friends and other ordinary people, not-
professionals (usually they all are called «FFF» investors) in order to support entrepreneurs’
ideas, products or services, different concepts. For instance, these early financing can be directed
toward market research, developing a business plan or testing an idea. In this stage typical
investors are:
a) Angel investors. Mason (2008) states that angel investors are «high net worth
individuals who can invest their own money in small companies in order to get a minority equity
stake as well as active involvement in portfolio companies». They provide small entrepreneurial
companies with a certain size investment need (usually from $250,000 to $1 mln), which is not
considered interesting for venture investors because they have higher transaction costs (for
instance, due diligence, monitoring) (Carpenter and Peterson, 2002; Jeng and Wells, 2000).
Angel investors give entrepreneurial companies not only the necessary financing, but also
industrial and geological knowledge, experience in a particular field and special networking
(Politis, 2008; Landstrom, 1993). Moreover, recently these investors start to organize into groups
or clubs with the objectives: to increase the number of potential deals (for instance, by sharing
presentations of ideas from owners), to reduce transactions costs while performing joint due-
diligence work (Lahti and Keinonen, 2016; Gregson et al., 2013; Paul and Whittam, 2010).
Despite this fact, angel investments still correlate with a high degree of risk. Consequently, the
investors search for returns of 10X or higher. It is therefore important for a businessperson to
understand an angel’s approach, motivation and capabilities. Otherwise, making deals for a
financing from any given angel investors can be a waste of time and resources for both
participants.
b) Crowdfunding investors. Lambert and Schwienbacher (2010) define «Crowdfunding»
as «an open request for the financial resources’ provision in the donation forms or in exchange
for some rights (e.g. additional interests or stake of a company) in order to support initiatives for
specific purposes». Crowdfunding began its development thanks to the development of Internet
technology (Belleflamme et al., 2010). Its main goal is to fundraising (usually small amounts of
money) for creative and innovative ideas from a large group of individuals, typically not
professionals or specialized experts (compared to the previously described group of angel
investors). Crowdfunding investors work in special fundraising platforms, which, when
combined with social media websites (for instance, «Facebook» or «Twitter») are able to attract
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a huge number of investors and entrepreneurs. Moreover, Crowdfunding is usually utilized for
borrowing money or raising equity from entrepreneurial ventures.
c) Government and private grants. Generally grants are provided by a grant maker
(usually it is a foundation, governmental agency, trust or association of corporations).
Interestingly, such grants are not required to be repaid. However, small business grants are few
in numbers: available grants usually tend to be focused on very specific area (for instance,
projects in bio-med business). Other limiting factors are taking into account only specific types
of companies (i.e., only for non-profits companies). Nowadays there are a lot websites, which
aim to attract entrepreneurs. However, these sites usually lead either to a sponsored lending
program or to a paid service program. The bottom line is that the search for grants as a means of
financing start-ups generally has a low probability of return; it is also very time-consuming for
entrepreneurs.
In order to get funding from angel investors or via Crowdfunding, Seed stage companies
often need to be valued. The big problem with that is their lack of any financial documented
history and a decent forecast model (i.e. business plan). Without this information to rely on,
entrepreneurial ventures and their investors (angel and Crowdfunding investors, grant makers)
have to rely on more creative ways to value the company.
2. Early stage (includes the first and the second financing rounds). In this stage (similar to
the Seed stage), some aspects of a company remain incomplete. For instance, the management
team may be unfinished, the main product or service is still in research or development stage and
has not been in the market or benefit from yet. Moreover, the company may not receive any
patents for their products or services yet and their websites have «beta» (not complete) versions.
In this stage, entrepreneurs seek funding from angel investors and venture funds. We previously
described the term «angel» investors. Now let us move to «venture fund».
Venture funds provides capital for companies in order to support their growth and
development in exchange for the part of the company (Equity parts). Monikaa and Sharmaa
(2014) state that «with the rising knowledge-intensive economy, venture capitalists (VCs) play
the most crucial role to identify and financing the new and highly innovative firms». Mechner
(1989) concludes that the decision criteria of investing or not have been facing many challenges.
Moreover, he considers it as «the most complex task of decision making process». However, the
statistics show that firms, which have raised funds from VC, have better survival rate as
compared to firms without this type of fundraising (Hofer, 1990; Timmons, 1990). The objective
of VC is to earn return by selling their equity part to a strategic player or through an IPO (initial
public offering) of a company. The business model of VC is based on collecting money form
high net worth individual or other participants of the market (i.e., institutional investors, pension
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funds) and then investing these funds in return for a management fee and success fee (the fund
gets this fee in case of successful return from the invested money). Therefore, usually VC
employ managerial and technical experts with a deep and specific industry or business
experience in order to professionally manage the available sum of money (assets under
management – AUM), deciding whether to invest in a particular startup. It is therefore very
important that the entrepreneur fully understand the objectives and approach of the venture
capital firm in order to utilize their time and resources as efficiently as possible.
3. Growth stage (or third round of financing in later stages) – the stage, where features of
a company become more and more complete and there is clear progress of the development.
Typically, a company starts to generate revenues in this stage. Moreover, patents for secure
technology or process can be issued. Entrepreneurs typically pursue larger (compared to previous
stages) funding from angel, Crowdfunding investors and from venture capitalists.
4. Mezzanine financing stage (or fourth round of financing in later stages) – the stage,
where owners of entrepreneurial ventures seek mezzanine or bridge funding. This type of
funding usually consists of convertible debt or preferred shares, which are more costly for
owners than common shares and provide investors certain rights to the holders of common
equity. Mezzanine financing may be called «bridge financing» because it provides funds for a
company prior its IPO. Companies in this stage generally have proven business models, have
multi-functional teams of experts in different areas; have commercialized their main products or
services, achieving the stable level of sales, and look for additional fundraising to expand the
growth. The objective of the mezzanine funding is to add the capacity necessary to significantly
accelerate the growth curve of a company. In this stage, typical investors are venture capitalists.
5. Exist stage – the final stage of fundraising. Sometimes (if there was not fourth stage of
fundraising) it requires a bridge round from VCs and culminates in an IPO or sale to a strategic
player.
Sebastian Quintero in his work «Dissecting startup failure rates by stage» points out that
the rate of failure (the opposite of the rate of success) decreases as a venture goes through
financial stages from the Seed stage (the worst rate) to the exit stage (the best one) (Table 1).
From the table, it is clearly seen that when a company, that becomes more mature and
established, is more likely to succeed and its investors have better probability to exist with
required returns. Moreover, only three percentage of all Seed stage investors are usually
successful to exit. He also states that the rate of failure to raise additional funds noticeably drops
from the Seed stage (79,4%) to the early stage (in his words, Series A, 50%) (Figure 5).

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Table 1. The rates of failure of ventures in different financial stages
Funding Sequence Failure to Raise the Following round Failure to Exit
Seed (to Series A) 79.4% 97.0%
Series A (to Series B) 50.0% 88.7%
Series B (to Series C) 55.8% 84.1%
Series C (to Series D) 62.1% 80.7%
Series D (to Series F) 66.4% 78.1%
Series E (to Series B) 69.2% 74.3%
Series F (to Series G) 75.0% 74.5%
Overall Average 62.6% 81.2%
Source: Sebastian Quintero (2017)

Figure 5. Ventures failure rates by stage (1990-2010)


Source: Sebastian Quintero (2017)
Interestingly, there is the directional regress from the early stage to the series B
(55.8%) — resulting in a kink in the line plot below. It suggests that going from the Seed stage to
the series A is extremely difficult, but if owners of entrepreneurial venture fundraise capital in
the series A then their odds of raising capital in the next stage are approximately 50%. However,
then it is harder and harder to get the needed funds (see the upward trend in the figure 5) until the
line interests the series F.
Crowdfunding industry is going to attract more funding (in absolute value) than venture
capital by 2018, according to a recent report by Massolution (Figure 6). In 2010, there was a
comparatively small market of Crowdfunding with value of $7 billion. However, in 2014, this
industry showed very rapid growth, reaching value of $22 billion; in 2015 – $34.5 billion. In
comparison, the VC industry values an average of $30 billion each year. Meanwhile, the
Crowdfunding industry is doubling or more, almost every year, and is spread across several
types of funding models including rewards, donation, Equity, and Debt/lending. Later we will
describe the difference among them.

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Figure 6. Annual funding comparison (billions dollars)
Source: Massolution’s report (2015)
To sum up, to get funds in the Seed stage is the most difficult task in the total fundraising
for entrepreneurial companies because:
1) ventures at this stage have the lowest rate of success (table 1);
2) ventures at this stage have the biggest percent of failure to raise funds (figure 5).
Moreover, as already noted, investors have some problems to value companies at the
Seed stage because of the lack of any financial and historical track record and a decent forecast
model (i.e., business plan). Furthermore, traditional valuation tools also do not fit in this stage:
1) Discounted cash flow. This is problematic to use in practice, as it is too dependent on
the terminal valuation (the exit price) of the business and because it is difficult to calculate NPV
(net present value of a company’s cash flow) when there is the lack of financial documented
history. In addition, the certainty around forecast data decays the further out one goes.
2) Comparative multiples. This is also known as the market method. Investors at the Seed
stage rarely rely on it because it is difficult to find true comparatives or there is no history of
transaction of similar companies.
3) Heuristic. Usually (due to the absence a reliably method of valuation) many investors
value based on «what things are typically worth at this stage». For Seed stage investments, the
typical rage is $250k - $1M. Alternatively, investors might consider what founder equity is left
after their investment.
In conclusion, investing in a company at the Seed stage is the most risky and difficult
process for any type of investors. Moreover, there is a trend, which shows that people through
Crowdfunding platforms apply collective thinking in order to value companies at the this stage.
However, some problems arise with the method that will be discussed in the next paragraph.
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1.2. Crowdfunding as a tool of financing
Crowdfunding has become one of the current financial trend because of growing Internet
popularity, which transforms the socio-economic environment. Crowdfunding allows owners of
entrepreneurial ventures to fund investments from people with different backgrounds through
Internet in order to develop products or services (Belleflamme et al., 2010). The industry is
developing very quickly and attracting more and more entrepreneurs to get the needed funds.
Moreover, we can conclude that now Crowdfunding is one of major alternative to traditional way
of funding (i.e. angel and venture investments). For instance, one of the most well-known name
in this industry, raising over $2 billion since its launch in 2009 – «Kickstarter». Furthermore, it
also has helped to fund more than a 100,000 projects. However, there is also the need to
distinguish among types of Crowdfunding.
Type №1. Rewards-based Crowdfunding. In this type of Crowdfunding, investors
(usually they called «backers») typically contribute small amount of money (from $1 to $1000)
in exchange for a reward from the company. The reward is usually a main product or service of a
new company (i.e. a watch from a company that is going to manufacture watches).
Type №2. Donation-based Crowdfunding. In this type, people (usually the called
«donors») donate some amount of money in exchange for appreciation and the feeling of
supporting a company’s aims and motivation they believe in. Donation-based Crowdfunding is
typically used by a non-profit organization in order to raise money for any meaningful public
purposes (i.e. building a school in rural territory of Africa).
Type №3. Equity Crowdfunding. In this type, investors contribute larger amount of
money (compared to two previous types) in exchange for a part of Equity in a company. As a
result, Equity Crowdfunding is used to start a company or accelerates the growth. Thus, this
method is most suitable for comparison with traditional methods of fundraising (VC or angel
investments). If the business succeeds, then its value will go up, as well as the value of a share
of new Equity holders (investors). However, the opposite is also true. It indicates that its
potential is the greatest with startup businesses that are seeking smaller investments to achieve
creation.
Type №4. Debt Crowdfunding. In this type, people («lenders») give a loan with the
expectations to make the principal and interest back. Thus, they are also believe in the success of
the company that would be able to pay the money back. From a company perspective, it is also
favorably because instead of borrowing one larger amount of money from one bank, they can
borrow smaller amounts of money from a group of people.
In this paper, we will consider the Equity Crowdfunding type, because we are interested
in entrepreneurial ventures that are looking for funds to start a business or accelerate the
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development. Moreover, they agree to give small parts of ownership of a company (Equity part)
in exchange for the needed funds. Furthermore, as already noted, this type is the most suitable
for comparing for traditional types of fundraising. Therefore, we describe the typical process of
investing through the Equity Crowdfunding:
1) a company creates an online profile in one of Equity Crowdfunding platforms and
submits its funding campaign;
2) the Crowdfunding platform reviews and approves the campaign;
3) investors evaluate the company; participate in the conversation among themselves and
with the owners. Finally, the commit to invest. The whole process at this stage can be defined by
term «collective intelligence», which will be described in the next part of the paper.
4) the company approves and closes investors commitments, documents are signed, funds
are transferred.
1.3. Theoretical background of the term «Collective intelligence»
Collective intelligence is the process, at which two or more people independently get the
information through social interaction that can be then used to solve a cognitive problem in a
way that cannot be solved by isolated humans (Krause et al 2009). Levy (1997) claimed that
collective intelligence is a form of spread intelligence, which arises from the partnership and
competition of many individuals. Woolley (2010) described this term as the general ability of a
group to perform a wide variety of tasks.
This research topic is not new: it appeared in papers by Hofstadter (1979) and Russell
(1983). Recently, where there is the emergency of the Internet, the idea of collective intelligence
has received a boost as it has become feasible to involve large crowds of people easily online.
Therefore, there is huge expectations about this study (i.e. creation of the global brain
(Heylighen 2011). Surowiecki (2005) provides the term «Wisdom of crowds», where large
groups can achieve better results than any single individual in the group did. For instance, the
average results of several individuals’ estimations can be accurate even if individual results are
not (i.e. determining the probability of future success of a company). The researcher also writes
that this effect is based on independence, diversity and aggregation.
Independence means the estimations of individuals are not reliant on the assumptions of
others. Lorenz et. al (2011) claims that insignificant social iterations can weaken the wisdom of
crowds, that happens through three process:
1) the social influence process can reduce the independence of results without increasing
its accuracy;
2) the range reduction process can cause the correct value to become less central in the
distribution, thus giving the a false hint about the place of truth;
16
3) the confidence process can increase people’s confidence in their estimations without
improving collective accuracy.
Diversity is usually based on difference in demographic, professional background and in
the ways; people try to solve problems (Hong and Page 2004). Both the test with humans
(Krause et al. 2011) and the simulation model (Hong and Page 2004) show that under certain
conditions a group with a diverse and independent problem solvers can outperform a high-ability
(an average individual in the second option has better skills to perform a particular task than an
average individual in the first group) problem solvers. Moreover, the better problem solvers were
biased in their estimations, while the first group was accurate (Krause et al. 2011).
Aggregation is the process of processing and combining individual estimations. Simple
averaging might be the most suitable method of aggregation. However, due to the rise of
Internet, the new method of aggregation were developed:
1) forecast markets (Bothos et al. 2009);
2) data visualization (Chen 2007);
3) social classification or folksonomies (Gruber 2007; Zettsu and Kiyoki 2006).
Problems with collective intelligence, arising in Crowdfunding campaigns
Social researchers know many examples, where a group’s behavior is not intelligent.
Mayers (2012) points out that sometimes groups can strengthen opinion of other members of the
group (usually leaders of their groups). This can be described by the effect of polarization:
discussing a topic with the group’s members can make the initial thoughts and believes more
extreme than before the discussion. For example, an investor in an Equity Crowdfunding
platform, having studied the presentation of a project, gives a low probability of success of this
company. After, having the discussion with other compatible investors, she even worsened the
probability of the company's success. Thus, solid groups with a strong leader and isolation from
different points of view are open to group thinking (Gerstenfeld et al. 2003). These group’s
members are usually closed-minded to new and contradictory information.
The second problem is the confirmation bias, which refers to the search and interpretation
of information in ways that are limited to existing opinions and expectations (Nickerson 1998).
For instance, the confirmation bias can lead individuals to ignore information, which is against
their original thoughts, to look only for positive or negative cases. As a result, the confirmation
bias increases polarization of groups: through both process individuals take the new information
as supporting their side (Nickerson 1998).
The third problem is the social influence bias, which shows that the aggregated opinions
of people can influence decision making of persons. Kuppuswamy and Bayus (2014) conclude
that many investors are subject to social influence bias. In other words, investors’ willingness to
17
give funds to a project positively correlates with the current percentage of funding that the
project has already got.
All these problems can be the causes of Equity Crowdfunding limits:
1) Engaging the right crowd. One of the most important task for Crowdfunding is the
finding investors with the diversified background, specific knowledge and motivation to
participate. Confirmation bias and polarization of a group, which consists of not «the right
crowd» can produces low quality results (i.e. a mistake in forecasting a loss-making (or vice
versa-prospective) company).
2) The lack of iterative development process. There is a possibility that the owners of a
company, having received a feedback from investors, can immediately adjust their business
process. Thus, it will improve the perception of investors, which will allow receiving the
required amount of money. Without the iterative development process, the owners would be less
likely to receive the necessary funds.
3) The need for significant resources to manage crowds. The process described above
requires from the owners of a company both significant financial and non-financial costs (for
example, staff time for processing feedbacks).
4) Creating intelligence from crowd data. At the same time, the amount of data a typical
Crowdfunding campaign produces is overwhelming. Thus managing this data to create
knowledge and get insight are also time-consuming.
5) The too-common dominance of «loud» participants over real experts. It will lead to the
creation of the confirmation bias and polarization of the group, which were described above.
All of the above problems do not allow us to accept the modern Crowdfunding as the best
way to get the required amount of money (from the point of view of the owners of companies at
the Seed stage) and determine the probability of success of a company (from the point of view of
investors).
However, the combination of expert communities and AI is the core of a new approach to
collective intelligence, which can solve the problems of Equity Crowdfunding.
1.4. Applying Artificial Intelligence to enhance Crowdfunding
Nowadays there is the strong interest for the research about AI. For instance, many
industries have curiosity in potential uses of AI. According to the report «CB Insights. The race
for AI: Google, Twitter, Intel, Apple in a rush to grab AI startups» (2016) the main technologies
companies since 2011 have acquired about 140 entrepreneurial projects with focus on AI.
Moreover, during only first half of 2016, investments in AI exceeded the amount in the whole
2015, and about 200 AI-related firms have raised more than $ 1.5 bn in the stock market.

18
According to Margaret Rouse (2016) AI is «the simulation of human intelligence
processes by machines, especially computer systems». The processes include:
1) learning – gaining information and rules to use it;
2) reasoning – using information and rules to reach the needed conclusion (approximate
or definite);
3) self-correct – self-studies to learn and minimize mistakes.
From the first appearance, AI has experienced about 60 years of development. According
to Crevier D. (1993), J. McCarthy, M.L. Minsky and A. Newell and other scholars (1956) first
established the concept of «artificial intelligence» at Dartmouth College in the US. The
definition of AI was «ability of machines to understand and learn in a similar way to people’
behaviors, indicating the possibility of simulating human intelligence».
Since 1970s, AI has extended in the field of research, including mechanical theoretical
evidence, pattern recognition, game theory, machine learning and intellectual control. The
research processes associated with these areas led to the development of many technologies and
to the creation of various schools of symbolism and behaviorism.
According to Yunhe Pan (2016), now the development of AI is driven not only by
research, but also by business with its accompanying goals. There are the four main external
factors that promote the formation of AI:
1. The information environment. Nowadays it has changed greatly because of the
popularity of the Internet. Sensitive devices are widely distributed throughout the cities, and the
extraordinary rapid expansion of networks connecting people and groups around the world
continues to reflect and summarize requirements, knowledge and capabilities. Moreover, the
world has grown form a binary system (physics and human society – PH) to a ternary system
(cyber, physics and human society – CHP).
2. The growing social demand for AI. New goals and challenges in intelligent cities,
transportation, manufacturing and smart products, as well as driverless automobiles and
smartphones require the development of AI. Thus, many companies have promoted the research
and development of AI.
3. The stimulation of collective intelligence. Examples of this goal may be:
a) hybrid intelligence systems combining machines; humans and networks;
b) more complex intelligence systems, such as intelligent cities.
4. The new data resources that related to AI. AI relies on data-based algorithms and
creates a new information environment. These calculations will depend on the rise in the number
of Big data, sensors and networks, as well as information in different environments. Therefore,
the development of AI, associated with Big data, sensors and networks is an inevitable trend.
19
In this paper, we consider the use of AI to improve the collective intelligence in Equity
Crowdfunding platforms. Therefore, we consider in more detail the third factor described above.
Michelucci P. and Dickinson JL. (2016) divided crowds into three types according to difficulty
level (figure 8):
A. Crowdfunding used to realize task allocation. Some types of Crowdfunding allow
breaking large tasks down into microtasks, which people can easily solve (i.e. categorizing
images). Microtasks are transported to a large crowd through a user-friendly interface, and the
data is aggregated for further processing.
B. Complex workflows. Complex workflows involve the crowdworkers in roles that
workers at every step use and complement the information provided by previous people.
C. Problem-solving ecosystems. In creating problem-solving ecosystems, researchers
begin to learn how to combine the collective intelligence of many diversified people with AI to
build the right models of complex, symbiotic systems that can solve many problems (i.e. forecast
of the future success of the company at the Seed stage). Prototypes of these systems provide
interactive online workspaces that allow people to participate in activities where they contribute,
integrate, link, evaluate and integrate data and concepts into a common analytical framework.

Figure 7. Different types of crowd


Source: Michelucci P. and Dickinson JL. (2016)
Adjusted by the author
20
Development of Assumptions
In order to make the first draft of the framework (previously described), three
assumptions have been developed to address the main research questions of this paper. The
assumptions are made by the author himself due to the lack of existing research about using AI
in Equity Crowdfunding, that have been discussed in the introduction and literature review.
According to Taru Kosonen (2016), Equity based Crowdfunding attracts investors
through unique motives. We want to check whether the valuation process is important for
investors and which they are going to trust. Therefore, the first assumption is following:
Assumption 1: There is significant difference in investors’ motivation to finance
entrepreneurial companies, ROI of which has been solely valuated by the Equity Crowdfunding
platform team, in comparison to finance startups, ROI of which has been calculated by the
combination of AI (machine learning) and collective (human) intelligence of a group of 10 to 30
investors.
According to Alex Pearson (2016), depending on the previously invested amounts, the
motivation of investors in Equity Crowdfunding is different. We want to check whether there is a
difference in the choice of the valuation methods between experienced investors and not.
Therefore, the second assumption is below:
Assumption 2: People who have invested their saving via Equity Crowdfunding platforms
prefer the valuation process based on the combination of AI (machine learning) and collective
(human) intelligence of a group of 10 to 30 investors.
According to John Johdet (2016), investors are primarily driven by enjoyment factors,
followed by philanthropic and the newly added financial payoffs, in their decision to invest in
Equity Crowdfunding. We want to check how investors perceive the presentation the new
approach of the valuation process and what needs to be improved. Consequently, the third
assumption is following:
Assumption 3: One of the main problems of showing the valuation process based on the
combination of AI (machine learning) and collective (human) intelligence of a group of 10 to 30
investors from investors’ point of view is the lack of history data (% of successful returns).
Summary of chapter 1
In this chapter, special terms of financing of the Seed stages companies are described. It
also mentioned that Equity Crowdfunding as a tool that is devoted to finance this type of
companies has grown very fast. However, it has many problems:
1) Polarization effect: discussing a topic with the group’s members can make the initial
thoughts and believes extreme than before the discussion.

21
2) Confirmation bias, which refers to the search and interpretation of information in ways
that are partial to existing opinions and expectations (Nickerson 1998).
3) Social influence bias, which shows that the aggregated opinions of people can
influence decision making of individuals.
It is also noted, the combination of the AI and collective intelligence can be the solution
for all Equity Crowdfunding and the valuation of the Seed stage companies problems. Based on
discussed evidence, two research questions were raised, namely how does the application of AI
affect the percentage of successful returns and how it influences the time of making deals.
Moreover, we developed three assumptions in order to test investors’ perception of the valuation
new approach. Having analyzed the aspects of AI and collective intelligence, the first draft of
their application is presented below.
After analyzing the process of evaluating startups in an Equity Crowdfunding platform,
we found that it has some problems with collective intelligence of investors. Further, after
studying the current development of AI and its possible applications, we developed the first draft
of a framework.
The framework is based on the combination of expert communities, AI and collective
intelligence with the aim to predict the future success of an entrepreneurial venture at the Seed
stage. The framework engages an expert communities (different groups of industry or
geographical experts), which through a Crowdfunding platform score the future success of the
chosen company and provide feedback to its owners. It will help investors to save time on
research and improve quality of their deal flow. Simultaneously, ventures will get critical
feedback with the aim to increase odds for successful outcomes. All of the above will help to
solve the problems of Crowdfunding listed in the previous paragraphs. In our work, we will
check whether the application of this framework will have a far-reaching impact on the future of
Equity Crowdfunding, paving the way for more successful results.

Figure 8. The first draft of the framework


Source: developed by the author
The first framework consist of five steps (Figure 8):

22
1. Researching. Before starting the research perspective ventures, a Crowdfunding
platform should find the «right crowd» of experts in different industries or geographies. Then the
platform will offer selected experts to choose ventures for participation.
2. Evaluating. After reviewing the due diligence tab, experts offer feedback and rating by
completing investment questions:
a. Market opportunity;
b. Team capabilities;
c. Competitive advantages;
d. Their likelihood to invest.
These inputs build the base for AI to determine the likelihood of this venture to succeed.
3. Reviewing. After one expert posts his or her rating, he or she is able to rank fellow
valuation team member’s responses.
4. Decision-making. Experts are able to explore the comments and questions from the
other experts. The experts also have the chance to post additional questions. Moreover, the
Crowdfunding platform can encourage experts to re-rate the venture based on the new
information they have gathered.
5. Investing. From all the input of the valuation team and the responses from the venture
team, the AI calculates a score of how likely it is for this venture to succeed. Experts may also
have the opportunity to invest based on the final score from the AI system.

23
Chapter 2. RESEARCH METHODOLOGY
This chapter is dedicated to determination, justification and detailed description of
applied research methodology. It includes discussion on research context and explanation of the
rationale that lies behind choosing Equity Crowdfunding platforms, experts and investors as the
research subjects. The data collection process is detailed and the sample is profiled. Moreover,
this chapter provides the case and survey designs and characterizes major variables used in the
study.
The first part of this chapter will discuss methodology: purpose, approach and strategy of
the research. In the second part, the method is described, covering the data collection, case and
survey designs, sampling method and research ethics. In the final part of this chapter, the data
analysis will be discussed.
2.1. Setting and data
The purpose of this paper is to verify whether the combination of expert communities and
AI, which is the core of a new approach to Equity Crowdfunding platforms’ valuation, can solve
the problems of traditional Crowdfunding, by choosing the triangulation method. Rather than
examining what drives investors to invest via Equity Crowdfunding, which is descriptive type of
research, research purpose is more explanatory since it aims to understand how and why
investors want to invest and what the reasons are to do so (Saunders et al., 2012).
Research approach
Research approach alarms the relationship between theory and research. The approach
can either be deductive if a research is guided by existing theory, or inductive if theory is an
outcome of research (Bryman & Bell, 2011). This study has inductive research approach, since
the assumptions to be tested are made by the author himself due to the lack of existing research
about using AI in the valuation process in Equity Crowdfunding. To ensure reliable data and
reducing the risk of bias, the inductive approach makes sure that results will be independent of
the author’s personal values, as the findings will be solely based on statistical data and the
acceptance or rejection of hypotheses (Bryman & Bell, 2011). Moreover, this paper uses a
mixed-method approach. A mixed-method approach is the approach, when both qualitative and
quantitative methods of data collection will be used. Collis and Hussey (2003) claim that its
application is quite usual while conducting business research. «The use of different research
approaches, methods and techniques in the same study is known as triangulation and can
overcome the potential bias and sterility of a single-method approach» (Collis and Hussey,
2003). Therefore, we can call «a mixed-method approach» as a «triangulation» method. Denzin
(1978) says that the main advantage of triangulation is the greater validity and reliability of the

24
research results. The following four types of triangulation can be distinguished by Eastery-Smith
et.al. (2002):
1) data triangulation;
2) investigator triangulation;
3) methodological triangulation; and
4) triangulation of theories.
Within this work, methodological triangulation was applied. Since methodological
triangulation involves using more than one method to gather data, such as interviews, surveys,
observations and documents. Morse (1991) says that methodological triangulation can be
simultaneous or sequential. «Simultaneous triangulation is the use of the qualitative and
quantitative methods at the same time. Sequential triangulation is used of the results of one
method are essential for planning the next method. The qualitative method is completed before
the quantitative method is implemented or vice versa» (Morse 1991, p.120)
For this work, sequential triangulation was applied, including:
1. Extensive literature research, which was the first step to investigate the research;
2. Case study research that allowed for the data collection and validation of the relevance
of the research area; and
3. Survey research where the findings were eventually validated via a quantitative survey.
To sum up, the literature review that was presented in the Chapter 1 forms a basis for the
development of a catalogue of questions. There were used for the preparation of the case study.
Accordingly, the results from the case study were used to prepare questions in the survey.
Data collection
The data used in this paper is from the literature review, but also from the qualitative case
study and the quantitative empirical study (survey). As mentioned in the methodology section,
by following an inductive research approach, the assumptions to be tested are made by the author
himself due to the lack of existing research about using AI in Equity Crowdfunding.
Secondary Data
A literature review was carried out to assess the existing research of secondary data to
generate an overall view of current research, thus, also being the sources of the identified
research gaps (Saunders et al., 2012). When collecting peer-reviewed articles, «JSTOR», «SAGE
Journals», «Emerald Insight» and «Science Direct» were the most used databases. To find
relevant articles and journals of the research area, the main keywords used were
«Crowdfunding», «Artificial Investments», «Equity Crowdfunding», «Crowdfunding Investor»
and «Collective Intelligence». Articles with a high number of citations were chosen over those

25
with less, in order to increase the credibility of the data. Furthermore, recent articles were chosen
above older articles to the greatest extent, in order to reduce the risk of outdated data.
Since the phenomenon of applying AI to enhance Equity Crowdfunding is limitedly
researched, articles on Equity Crowdfunding with the use of AI and general Crowdfunding were
used to complement the secondary data on investor motivation. Furthermore, due to the limited
research in the subject area, the peer-reviewed articles have been complemented with a number
of conference papers, theses, industry reports and websites to provide sufficient data for the
research.
2.2. Case study
To investigate the role of the combination of AI and collective intelligence in Equity
Crowdfunding, a multiple case study was conducted. Although propositions are partly derived
from existing literature, the study is more focused on building an emerging theory than testing an
existing one. Moreover, there is no articles with the research question, which is somehow related
to the use of AI in the valuation process in Equity Crowdfunding platforms. Replication logic
and cross-case comparisons are central when building theory from cases as each case serves as
an experiment that contrasts and replicates the others. As case studies remain close to the data,
they can be both honest and objective (Eisenhardt 1989). Limited sample size is perhaps the
most common criticism for case studies, but this is often misguided. Even a single case can make
a powerful example (Siggelkow 2007). Moreover, multiple cases clarify whether a finding is
idiosyncratic or can be consistently replicated (Eisenhardt and Graebner 2007). Theoretical
sampling is used to select cases, which means that cases are chosen for theoretical instead of
statistical reasons (Eisenhardt 1989). Acquiring a representative sample is not the goal of case
selection. In theoretical sampling, the cases are selected because they are suitable for revealing
the concepts of interest and their relationships. This is similar to laboratory experiments, which
are not selected randomly from all possible experiments, but because of the high likelihood that
the particular experiments chosen will provide theoretical insights (Eisenhardt and Graebner
2007). Valid reasons for selecting cases for a multiple case study include replication, extension
of theory, contrary replication, and elimination of alternative explanations (Eisenhardt and
Graebner 2007). Therefore, in this paper, we analyzed one company that uses AI in the ROI
calculation process, and three standard Equity Crowdfunding platforms. This ratio was accepted,
proceeding from the fact that we found only four companies using AI, and 40 standard platforms.
Consequently, a comparison of 25% and 8% of the markets, respectively, is acceptable. The
cases were selected based on their theoretical relevance and replication logic. The following
criteria were used when selecting the cases:

26
1. One of the cases should use the combination of AI and collective intelligence as a part
of their valuation process. Other three cases should use typical valuation process made by a
professional team of a platform.
2. Case sites and interviews with representatives should be of high quality. The findings
of the study should not be affected by poor implementation of Equity Crowdfunding efforts.
3. Three case sites (typical Equity Crowdfunding) should use similar approaches and
processes for startups’ valuation to support the replication logic in analysis.
4. A priority was put on cases that do not require special skills from the participants.
5. Previous research has already suggested the possibility of collective intelligence on a
particular site.
As the pool of potential companies that use AI in their valuation process, we chose one
company («Crowdsmart») and made the interview with Tom Kehler (co-founder and CTO of the
company). For typical Crowdfunding platforms, it is rather large: we found 40 companies that fit
our criteria: well-described startups valuation process, the presence of historical results and it
should operate in Europe or the USA. We sent to all companies and their representatives offer to
be interviewed, and only three of them («Companisto», «Republic» and «Seedrs») agreed to.
Ethnography generally uses three data sources: participant observation, interviews and
documents. In netnography, the focus is mostly on documents copied from the web during
participation and notes made by the researcher regarding his observations. Selecting which data
to collect is an important analytical decision and already a part of data reduction for the analysis
(Miles and Huberman 1994). As large amounts of data are available on the web even in small-
scale forums, dealing with information overload is an important concern (Kozinets 2002).
According to Yin in his «Case Study Research», for case studies, five components of a research
design are especially important:
1) A study questions;
2) Its propositions, if any;
3) Its unit(s) of analysis;
4) The logic linking the data to the propositions; and
5) The criteria for interpreting the findings.
Study questions. Yin suggests that the form of the questions – in terms of «who», «what»,
«where», «how», and «why» – provides an important clue regarding the most relevant research
strategy to be used. The case study is most likely to be appropriate for «how» and «why»
questions. In this work, research questions for case study:

27
1) How does the combination of AI (machine learning) and collective intelligence
positively affects percentage of successful returns (failure to exit and to get funding in the next
stages) compared to the typical Equity Crowdfunding process (valuation by a platform’s team)?
2) How does the combination of AI (machine learning) and collective intelligence
positively influence the speed of investing (time for making investment decisions, investment
process, and return on investment) compared to the typical Equity Crowdfunding process
(valuation by a platform’s team)? How?
Study propositions. As for the second component, each proposition directs attention to
something that should be examined within the scope of study. We assume that the combination
of AI (machine learning) and collective intelligence is superior to the typical Equity
Crowdfunding process in terms of time and the percentage of successful campaigns.
Units of analysis. This third component is related to the fundamental problem of defining
what the «case» is – a problem that has plagued many investigators at the outset of case studies.
In this paper, a unit of analysis is an Equity Crowdfunding platform and its valuation process. As
it was mentioned before, for the study, we analyzed one company that uses AI in the ROI
calculation process, and three standard Equity platforms. This ratio was accepted, proceeding
from the fact that we found only four companies using AI, and 40 standard platforms.
Linking data to propositions and criteria for interpreting the findings. «Pattern matching»,
described by Donald Campbell (1975), is the suitable approach, whereby several pieces of
information from the same case may be related to some theoretical proposition. In this paper,
during the interviews, representatives of four companies were asked to answer questions, while
answers to them allow us to prove or disprove our propositions. Moreover, we used not only
structured interviews, but also observations (company’s sites, documents) and archival records.
To sum up, Yin (2008) lists three principles to be followed in data collection for case
studies: using multiple sources of data, creating a case study database, and maintaining a chain of
evidence. Appendix 3 provides the interview guideline. Appendixes 4, 5, 6 and 7 offer case study
protocol used to guide the data collection.
2.3. Survey design
Surveys are recognized to be the most appropriate primary data method when using
standardized questions to study all respondents in the same way (Saunders et al., 2012; Robson,
2002). The chosen survey approach is a self-administered quantitative online survey, which is
the most commonly used method in business and economics research, and is furthermore
suitable for investigating patterns of different variables (Saunders et al., 2012). The tool used for
the online survey was «Lime Survey», the official partner of Vienna University of Economics
and Business.
28
The survey was made as clearly worded as possible in order to avoid misinterpretation,
and thereby receiving more credible answers (Saunders et al., 2012). The length of a survey
plays a vital role in the respondent’s willingness to complete it, therefore, only the most
important elements of the research was implemented in the survey, in order to keep it short and
concise (Saunders et al., 2012).
The survey was offered to the respondents in English. The survey was pilot-tested by ten
respondents of the sample before being sent to all experts and investors to make sure that the
survey questions were understood correctly. This was done to avoid potential misinterpretations
and thereby increase the data reliability (Saunders et al., 2012; Fink, 2003). The data for the
survey was extracted from an online survey conducted in the summer of 2018. Key parameters
are shown in Table 2 below.
Table 2. The survey’s information
Parameter Descriptor
unit Person
collection time 25.05.2018-20.08.2018
number of questions Ten
Source: Author’s compilation of primary data
The questionnaire was constructed using the site «Lime Survey». The URL to the form
was distributed during 25.05.2018-20.08.2018. The questionnaire was distributed only in English
language. The questions are divided into three themes (Table 3) to capture the individual
investor’s familiarity of Equity Crowdfunding, history of investments, their choice in favor of
making possible investments in one startup of two.

29
Table 3. Questionnaire divided into themes

Theme Number of Q Question

1 Please, write your location (a country you live in)?


demographics
2 What is your education?
Are you aware of Equity Crowdfunding platform as
3
a means of getting a financial return?
Familiarity with Equity Have you actually invested via Equity
4
Crowdfunding Crowdfunding platforms?
What proportion of your savings have you invested
5
via Equity Crowdfunding platforms?
6 Please choose in which startup you could invest?

If you chose to invest in the option A (typical


7 Equity Crowdfunding valuation), please provide
the reasons
The choice of investments in
favor of Equity Crowdfunding If you chose to invest in the option B (valuation
platforms with the use of AI or 8 using Artificial intelligence), please provide the
without and explaining the reasons
reasons
Do you have any other arguments in favor of your
9 choice? Please, specify them below
10. Please, provide any feedback regarding this
10 survey, Equity Crowdfunding and Artificial
Intelligence:
Source: Author’s compilation of primary data
After the demographic and familiarity questions, the respondents were are asked to
choose one startup, which possible ROI was calculated differently. For the first case, ROI (15%)
was calculated by an Equity Crowdfunding team through typical process of due diligence
(analyzing documents from the startup team and then modeling future cash flow based on its
own assumptions). For the second case, ROI (15%) was calculated by a specific for this project
valuation team of experts. They provided ratings for the startup team, and then made some
conversations with them and among themselves. In the end, from all the input of the valuation
team and the responses from the startup team, the machine-learning algorithm calculates a score
of how likely it is for this startup to succeed. Consequently, participants of the survey were asked
to choose a valuation method: the traditional or the one using AI. Further, depending on their
selection, the participants were asked to justify it, ranking the reasons or offering their own
reasons. The constant reasons were put on a scale «Strongly disagree – Disagree – Neither
disagree nor agree – Agree – Strongly agree». By using this scale, it forces investors to make an
active standpoint on each question, since every reason can be ranked (Saunders et al., 2012).
Moreover, the survey participants can complete their own ideas to justify their choice. The
statements were standardized and developed from previous studies on investor motivation in
30
general Crowdfunding and Equity Crowdfunding (Alex Pearson, John Johdet and Mikael
Näselius, 2016; Taru Kosonen, 2016; Eva Toppari, 2017).
For the first case, there were the following reasons:
 I believe that professionals have enough expertize to calculate ROI;
 I got used to it (have successful investments);
 I do not understand the process B (valuation process using AI);
 I need more historical data in the process B (e.g. percentage of successful returns).
Respectively, for the second case (valuation process using AI) – the following reasons:
 I believe that a specific group (investors with industry or geographical expertise) for a
particular project outperform the permanent group of the platform’s employees;
 I think that AI is a new trend now and I believe in it;
 I have positive experience;
 I want to try something new;
 I know the problems of a typical valuation process in Equity Crowdfunding
(polarization effect, confirmation bias, social influence).
The full survey design can be found in the Appendix 8.
Population & Sampling
There are two main methods when collecting the sample of a population, namely
probability and non-probability sampling. In this study, a probability sampling method was
selected in order to collect data from the population. This sampling technique allows the authors
to make statistical conclusions and generalizations of the population (Saunders et al., 2012;
Easterby-Smith, Thorpe & Jackson, 2015; Buglear, 2012). Compared to non-probability
sampling, this sampling method also reduces bias by not involving personal judgement in the
selection of the sample (Saunders et al., 2012; Easterby-Smith et al., 2015). Furthermore, as
opposed to non-probability, probability sampling is widely recognized to produce more accurate
and credible findings (Saunders et al., 2012).
The first stage was to decide on the sampling frame, also called population. Since the
study aims to investigate whether predicting success of a company in a Crowdfunding platform,
which uses AI, has better results compared to the process in a traditional Crowdfunding platform
without the use of AI, the population was selected from:
1) experts of the market who participate in various professional events (e.g.
«Entrepreneurship Avenue 2018»);
2) investors already experienced investments via Equity Crowdfunding platforms. In
order to send the link to the survey, different «Angel lists» were used, which indicated the

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various contacts (e-mail, profile in the site «Linkedin») of European and American professional
investors.
3) graduates of the program «Strategy, innovation and managerial control» from Vienna
University of Economics and Business. It is important to note, that the structure of the survey
does not allow people who do not know what Equity Crowdfunding is, to pass the survey to the
end.
It should be noted that in order to track the number of respondents from a particular
group, the survey was distributed at different times:
1) for experts – from 25.05.2018 till 25.06.2018;
2) for graduates – from 26.06.2017 till 15.07.2018;
3) for investors – from 16.07.2018 till 20.08.2018.
The next stage in the sampling process was to decide on a suitable sampling size and
sampling technique. Since the population is appropriately measurable in size and available to
reach, it was decided to target the entire sampling frame instead of selecting a specific sampling
size. Thereby minimizing bias and increasing the chance of getting in contact with all active
investors in the limited time frame (Buglear, 2012). Since the investors could not be directly
accessed, the process of collecting the sample was divided into two stages.
Firstly, to give the whole population an equal chance to participate in the survey, all
experts, investors and graduates (at different times) that together formed the sampling frame was
contacted through a standardized email (or through the site «Linkedin») with a request to
participate in the survey (Saunders et al., 2012).
Three groups with a total of 3172 possible participants in the research, which was
considered a representative size of the sampling frame for general interpretation of the entire
population (Saunders et al., 2012). Considering the time limitations, the author was satisfied with
the obtained sampling size. The second step of collecting the sample was sending out the survey,
to all 3172 people. This was done either through email or a message in the site «Linkedin».
Of the 3172 people that got the opportunity to answer the survey, there were 426
respondents, resulting in an active response rate of 13.43 % (Table 4). According to Saunders et
al. (2012), a response rate of at least 11% is recommended for online surveys in order to be
considered reliable. Therefore, with a response rate of 13.43%, an acceptable response rate and
reliable data is achieve.

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Table 4. Survey Overview
Factors/Groups Experts Investors Graduates
Sample Size (e-mails sent) 252 420 2500
Respondents 75 189 162
Total Response Rate 13.43%
Source: Author’s compilation of primary data

To achieve valid results for the survey there needs to be an adequate response rate among
the sample group. To improve the response rate a survey should be short, uncomplicated and sent
to the right audience. Only the essential questions should be included to maintain respondent`s
motivation to answer. Questions should be kept short and the language simple to improve the
response rate. The longer it takes to finish a survey the lower the response rate, because
respondents choose to not participate at all or tend to drop out in the middle of the survey.
Therefore, a higher number of questions lead to a higher drop-out rate. Therefore, the survey
time is affected by number of questions and the time it takes to answer a question. When
constructing the survey these factors were considered. The question amount was limited to ten
main questions to keep the response time under four minutes. In order to increase the response
rate, the survey was efficiently formed in order to make it quick and easy to complete, taking
approximately 2-4 minutes according to the test-pilots (Saunders et al., 2012). Moreover, some
questions were multiple-choice to speed up the answering process and respondents were given
the option to continue without answering every question.
2.4. Variables and measures
By asking the respondents to rank statements on the «Strongly disagree to Strongly
agree» scale, it helps generate scale data that explains what are the reasons in trusting in different
methods of startups’ valuation via Equity Crowdfunding. In order to analyze these answers we
chose the number scale from 1 to 5.
The data from «Lime Survey» was exported to «Microsoft Excel», and then imported to
«IBM SPSS 21 Statistics» that was the chosen data processing and analyzing program. After
importing the data, a number of statistical analysis were performed in order to test the
assumptions and thereby answer the research questions of the paper (Bryman & Bell, 2011).
First, frequency analysis was performed in order to see how the different demographic
characteristics were represented in the collected data (Bryman & Cramer, 2011).
Second, descriptive statistics were used to analyze the data. We described in which
countries respondents live and their level of education. We also defined the percentage of the
total respondents number who know what an Equity Crowdfunding platform is (only this data
was used for further tests). Moreover, the investors answered different reasoning statements,
33
where each factor was represented can be ranked by the scale. Since the investors ranked the
importance of each statement, an average mean could be calculated for the eight motivational
factors (Bryman & Cramer, 2011). Hence, the mean values indicate how important each factor
were to the investors.
Third, a chi-square test was used to find if there was a significant difference between the
percentages of two factors for testing the first assumption.
Fourth, a t-test for one sample was used to find if there was a significant difference
between the means of two factors (Saunders et al., 2012) in order to test the second assumption.
Fifths, an independent t-test was used to check whether there is difference in choosing the
startup (A or B) for investing between: respondents who have invested via Equity Crowdfunding
platforms and respondents who have not invested. The independent-samples t-test compares the
means between two unrelated groups on the same continuous, dependent variable. Moreover, this
test is needed when there are only two categorical, independent groups (in our case, people who
have invested and not). Before starting the test, we checked the following assumptions:
1) A dependent variable should be measured on a continuous scale (i.e., it is measured at
the interval or ratio level);
2) There should be independence of observations, which means that there is no
relationship between the observations in each group or between the groups themselves;
3) There should be no significant outliers;
4) A dependent variable should be approximately normally distributed for each group of
the independent variable. We tested for normality using the Shapiro-Wilk test of normality;
5) There needs to be homogeneity of variances. We tested this assumption in using
Levene’s test for homogeneity of variances.
Research ethics
Research ethics has been considered throughout the entire research process when
conducting this study. First, by using a probability sampling and basing the findings solely on
statistical data, this reduces the risk of bias and misleading results. There are however, a number
of possible sampling errors, but these have been fully presented in section 3.11 «Limitations», to
make the reader understand that the findings are subject to limitations. Moreover, to reduce the
risk of producing inaccurate results, the findings are required to be based on a high significance
level in the data analysis (Saunders et al., 2012).
Ethical implications have also been considered in the collection of primary data. The
survey had a clear description of what the purpose of the research was and how the data would
be treated. For instance, the participation information was promised to be held confidential, and

34
would only be used for research purposes. Furthermore, the survey was voluntary to answer and
the respondents were fully anonymous.
Summary of chapter 2
This chapter presents the reasoning behind the choice of study subject, sampling
procedure and the methodology of building and verifying the survey.
The research method is the triangulation method. Rather than examining what drives
investors to invest via Equity Crowdfunding, which is descriptive type of research, research
purpose is more explanatory since it aims to understand how and why investors want to invest
and what the reasons are to do so (Saunders et al., 2012). Within this work, methodological and
sequential triangulation was applied.
For case study, 41 companies were suitable for the research aims. They should operate, as
Equity Crowdfunding platforms, in Europe or in the USA and have the valuation process.
The population for the survey was selected from:
1) experts of the market who participate in various professional events;
2) investors already experienced investments via Equity Crowdfunding platforms. In
order to send the link to the survey, different «Angel lists».
3) graduates of the program «Strategy, innovation and managerial control» from Vienna
University of Economics and Business.
It should be noted that in order to track the number of respondents from a particular
group, the survey was distributed at different times. The variable that indicates the choice
between startups is binary in nature and performs both as independent and dependent variable in
different stages of the research. Finally, the last block of variables measures the reasoning behind
the choice of different valuation processes using Likert scale and acts as independent variable.
For case study, 41 companies were suitable for the research aims. They should operate, as
Equity Crowdfunding platforms, in Europe or in the USA and have the valuation process.
For survey, the link for survey was sending to 3172 people of three different groups
(experts, investors, graduates). This was done through either email or a message in the site
«Linkedin». Of the 3172 people that got the opportunity to answer the survey, there were 426
respondents, resulting in an active response rate of 13.43%. Also important to note, that in order
to avoid the presence of unqualified answers in the survey there was the question: «Are you
aware of equity Crowdfinding platform as a means of getting a financial return?». If a person
answers «No», then the survey for her or him is finished. To sum up, we used only 197 answers
of people who finished the survey and who knew what Equity Crowdfunding is.

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Chapter 3. RESULTS AND DISCUSSION
In this chapter, the four cases are described in detail. Case descriptions are an important
analytical tool in qualitative analysis (Miles and Huberman 1994). They condense, filter, and
summaries the large amounts of disparate raw data into a coherent and more accessible format.
The case descriptions form a basis for further quantitative analyses. The information collected
from the descriptions is later reorganized relevant to the use of AI and collective intelligence in
the valuation process. As qualitative analysis is mostly carried out with words, special attention
is paid to keeping the language of case descriptions as close to the original as possible.
Descriptions of user experience are based on experiences of the researcher and descriptions of
other users (for example forum messages) included in the collected data.
3.1. Case study
3.1.1 «Crowdsmart»
The first example of the case study is a company, which uses AI and collective
intelligence in the startups’ valuation process. «CrowdSmart» is the leading platform, where
experienced investors identify and fund startups. «Crowdsmart» defines itself as follows: «We
are radically transforming Seed investing. The CrowdSmart community identifies the world’s
top startups using advanced predictive technologies powered by our community’s collective
intelligence for radically improved investment results (Crowdsmart.io, 2018)».
Their proprietary collective intelligence and machine learning technologies enables
startups to better determine market needs and accelerate traction. They built «CrowdSmart» on
their team's experience founding over 20 startups and raising capital from Angel investors to
IPO. Their solution is a scalable AI-powered investment platform to provide startups and
investors a data-driven path to greater success.
General information of the company is presented in Table 5.
Table 5. Crowdsmart’s information
Parameter Descriptor
Headquarters Regions San Francisco, USA
Founded Date Q1 2015
Founders Fred Campbell, CEO, IC & BoD;
Dr. Tom Kehler, CSO, IC & BoD
Number of Employees 15
Investment Stage Seed
Website www.crowdsmart.io
Contact Email tom@crowdsmart.io
Source: the company’s site; interview
According to Tom Kehler (a person with whom we had the interview, CTO and owner of
the company) «CrowdSmart, Inc». is transforming Seed investing to radically improve outcomes

36
for investors and startups with the data-driven investment platform. Based upon three years of
data, the ROI predictions are more than 90% correlated to subsequent startup market results and
high-scoring startups are four times more likely to raise follow-on financing at increased
valuations than industry averages for Seed investors.
The process of «Crowdsmart’s» valuation
The foundation of «CrowdSmart’s» approach is Bayesian learning. The idea of Bayesian
learning is to compute the posterior probability distribution of the target features of a new
example conditioned on its input features and all of the training examples. It can be described by
an example: an expert hears about a new startup in an area, that he or she has some knowledge.
A friend asks him or her about the chance of possible success of making a return in the future.
Given the expert knows, he or she might be able to come up with an estimate (probability) of
success. The expert might ask a few more questions, get some data and then update an estimate.
That is Bayesian learning: constantly evaluating evidence and updating beliefs. As data is
collected from evaluators, investors and customers, the system collects and organizes that data to
produce updated estimates.
While the foundation is Bayesian, there are a number of components in the system that
use classification, neural nets, and natural language processing to integrate investors’ valuation
data into a prediction platform. The valuation process is presented in Figure 9.

Figure 9. The valuation process in Crowdsmart


Source: Author’s compilation of primary data
In order to make the valuation group for a particular startup, «Crowdsmart’s» specialists
assemble a team of 25-30 evaluators and that group is taking through the structured evaluating
process that collects quantitative and qualitative data. An evaluator will be firstly asked: «Are

37
you interested in a particular startup?». If the answer is «Yes», then the system provides four
additional questions to an expert (figure 9) with the scale from one to ten (max) to fill in. Then
an expert writes his or her reasons for the score. Finally, the system opens a sample other
people’s reasons for their scores. After that, an expert can change his or her previous thoughts.
The value of that is that they able to see what their first impression was and then how the group
learns together to make a right decision.
Finally, in the end of that process there are about 200-300 quantitative data points and
around 10000-20000 words that describe the reasoning behind the decision (in order to make the
system work there should be min 100-150 quantitative data points, 8000-10000 words). Then the
company uses natural language processing technology as well as machine learning technology to
proceed into a model that uses logistic regression to produce a probability on ROI. At the end of
the day, classifier uses a machine-learning model to forecast probability. The system then
classifies startups into two categories: invest or pass. An example chart that is generated looks at
how a startup is categorized based on the scoring is the figure 10. The following image compares
the variables Team Assessment and Likely to Invest

Figure 10. Possible results of the valuation process in Crowdsmart


Source: the company’s site
The «blue zone» is the invest zone. A company may score well on this one dimension but
when all dimensions are considered it could have an ROI probability in the non-invest zone, e.g.
49%.
In addition, to quantitative ratings the system analyzes the reasons behind the scores. For
instance, in the case of a high scoring company (e.g. probability of an ROI = 90%) the reasons
why the startup received high scores can be 47 top ranking ideas were classified as «large market
opportunity» and 31 were classified as «strong team». Some risk factors were: 18 reasons
classified as «questions about go to market strategy» producing the following result. Both

38
investors’ input scores, reasons for their score, and their interactions with other members’ ideas
all go into forming a predictive model for the potential outcome of an investment.
According to Tom Kehler, the combination of AI and collective intelligence is proven to
work. Groups of well-educated engaged forecasters can substantially outperform the best experts
in the accuracy of their predictions. As part of the evaluator community investors are part of a
group that will outperform the market in predicting ROI for startups. The evaluator is part of a
community that is changing the success rate of new ventures and fuel economic development.
Concisely, «CrowdSmart» is the use collective intelligence and AI techniques to make ROI
predictions based on evaluator team inputs. The knowledge model gains intelligence and
accuracy with each investment. Evaluators are part of a community collaborating with an
evolving AI for investing, both growing in performance over time.
Existing investment results of «Crowdsmart’s»
From the interview, I received the following information:
1) All 16 (they have in the platform) companies have got the necessary amount of money,
i.e. successfully finished their campaigns;
2) From 2015 till nowadays there is no failures yet: all companies received next funding
rounds (exits) or continue to operate successfully;
3) Moreover, the conversion rate is around 15%, i.e. two companies of all 16 have got the
funds in the next stages. T.Kehler claims that this rate is five times market average.
Finally, I found out that the «Crowdsmart’s» team spends 7 days to find the right experts;
then the process of valuation lasts for 14 days. Lastly, specialists use 45 (max) days to close a
deal (prepare legal agreements; make a change in shareholders’ agreement etc.).
3.1.2 «Companisto»
The second example of the case study is a traditional Equity Crowdfunding platform
«Companisto». «Companisto» is an international Equity-based Crowdfunding website. The
lawyers David Rhotert and Tamo Zwinge founded it in June 2012, in Berlin. Investments are
between 100 and 500,000 Euros per investor with no limit on how much funding a startup can
raise. «Companisto» allows investors to invest in startups. In return, they become shareholders
and are entitled to a share of any profits, as well as potentially benefiting from an exit. The
company has over 85 000 investors from 92 countries.
«Companisto» defines itself as follows: «Companisto is a community of likeminded
individuals with a pioneering mindset whose goal is to pave the way for innovation and
entrepreneurship through investment and dedication and, when successful in these pursuits, earn
a return on their investment. (Companisto.com, 2018)». General information of the company is
presented in Table 6.
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Table 6. Companisto’s information
Parameter Descriptor
Headquarters Regions European Union (EU), Germany, Berlin
Founded Date Jun 1, 2012
Founders David Rhotert, Tamo Zwinge
Number of Employees 35
Investment Stage Seed
Website www.companisto.com
Contact Email service@companisto.com
Source: the company’s site; interview

The process of «Companisto’s» valuation


Everyone can become an investor in «Companisto» by sending them an e-mail. Each
month, up to one hundred start-ups and growth companies apply for an Уquity Crowdfunding
campaign on «Companisto». The business analysts filter these applications, and only roughly 1
% of applicants get the chance to launch a «Companisto» campaign (Table 7).
Table 7. The valuation process in Companisto
Percentage of total
Step Description of the process
applications
Companies apply for an Equity Crowdfunding
Application 100%
campaign on Companisto
25% (from the Companisto pre-screens companies and requests
Request for documents
previous step) additional documents from interesting ones
10% (from the The company meets with a team of founders to get to
Personal screening
previous step) know people behind a company
5% (from the Companisto negotiates with companies on attractive
Contract negotiations
previous step) investment terms
Equity Crowdfunding 1% (from the The company is accepted for an Equity Crowdfunding
campaign previous step) campaign
Source: the company’s site; interview
According to Samed Sökmen (investment manager at «Companisto»), the valuation
process can be divided by four stages:
1) A member of the Companisto’s team received all documents (possible
financial/historical data) from a startup’s team. However, all typical valuation methods (like
DCF) are not working for startups’ valuation at the Seed stage;
2) Then the specialists build a projection/estimation using their own assumptions about
the particular market. They usually try to use multiples – somehow compare with similar startups
and their initial valuation. Moreover, they also look at the presence of patents; because it is very
important KPI for the platform (it is a sign that a startup has already had technology);
3) After they talk to experts in the particular industry since they actually have many
experts in the network.

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4) Finally, «Companisto’s» team make a talk with the startup’s team about their
expectations of the company’s value, making an offer to them. Sometimes a startup team
disagrees with the offer or they have already had offer from different platforms or funds, so, the
specialists should revalue them.
To sum up, the company valuation is used to calculate the respective participation rate of
each investor and is conducted by the start-up itself. Prior to the Equity Crowdfunding campaign,
«Companisto» and the start-up negotiate the lowest company valuation at which the start-up is
willing to participate in a Crowdfunding campaign. The company valuation is based on the start-
up's expected business development and on its expected earnings. The company valuation is not
related to the start-up's existing assets. Consequently, it is based purely on the start-up's market
opportunities and involves a high level of discretion. The company valuation does not reflect the
start-up's profitability or a secure investment in any way. Moreover, for every startup the
valuation process is made by the same people – the «Companisto’s» team (six investment
managers).
Existing investment results of «Companisto’s»
From the interview, I received the following information:
1) Around 90% of all companies in the platform have got the necessary amount of
money, i.e. successfully finished their campaigns;
2) From 2012 till nowadays there is 30% failures rate: these companies became bankrupt;
3) Moreover, the conversion rate is 3.8%, i.e. three companies of all 80 have got the
funds in the next stages.
Finally, I found out that the «Companisto’s» team spends 30 days for the valuation
process. Then specialists use 90 (max) days to close a deal (prepare legal agreements; make a
change in shareholders’ agreement etc.).
3.1.3 «Republic»
The third example of the case study is a traditional Equity Crowdfunding platform
«Republic». «Republic» is an investment platform where everyone can invest as little as $10 in
innovative startups and ICOs curated by its team.
«Republic» defines itself as follows: «Republic is the #1 platform for crowd investing.
Our team has extensive experience in investing, online fundraising, business, law, engineering
and community building. We have been founders and investors, builders and operators»
(Republic.co, 2018). General information of the company is presented in Table 8.

41
Table 8. Republic’s information
Parameter Descriptor
Headquarters Regions Greater New York Area, East Coast,
Northeastern US
Founded Date Jul 2016
Founders Kendrick Nguyen, Paul Menchov
Number of Employees 33
Investment Stage Seed
Website republic.co
Contact Email team@republic.co
Source: the company’s site; interview

The process of «Republic’s» valuation


According to Peter Green (co-founder and head of product), the valuation process
consists of three steps: initial screening, due diligence and final decision. The first step is based
on identifying strong positive signals using the «FPTM» model: Founders — Product —
Traction — Mission:
1) Founders. The «Republic’s» team analyzes founders. Moreover, among the things they
look for: dedication, diversity, location, charisma, experience, vision, track record, network,
competence, long-term partner, ability to execute;
2) Product. The specialists try to answer to the questions: «Is the idea (the problem and
solution) compelling? What are the execution, quality, attention to detail, and technology like?».
3) Traction. «Republic’s» workers try to identify whether there has been measurable
progress, growth, and social proof (i.e. user engagement, stakeholder engagement)?
4) Mission. Finally, they analyzed the main mission of a startup: «How is this startup
going to make the world better?»
The second step is due diligence: after they determine the startup is a good fit following
the initial review, they kick off the formal due diligence process: the specialists look at the
startup’s business in-depth and, if necessary, tap into their own networks to help evaluate the
following 8 factors (in no particular order) in Table 9.

42
Table 9. The valuation process (due diligence) in Republic
Factors Questions
Business model How does the startup make or intend to make money? How much can it make?
Social impact How big is their impact and how will they fulfill their mission?
How large or disruptive can this business be? What is their unfair advantage over
Market
the competitors?
How is technology used to solve the problem? How unique and difficult to
Technology
replicate is it?
Besides founders, does the team have the right people in the appropriate roles,
Team
experienced advisors, driven employees?
Is the information presented in the pitch factual? We verify key contracts and
Fact checking
important agreements.
Are the funding goals reasonable for the startup’s runway? Is the valuation cap
Terms
appropriate at the startup’s current stage?
Does the startup meet the legal criteria for Equity Crowdfunding? We do a
Eligibility financial and legal review and run background checks on founders and officers.
As well, all companies must be US based.
Source: the company’s site; interview
Finally, due diligence extends to the end of the onboarding process. Than they make the
final decision to launch the campaign, per all the checks being met. Only then, the startup goes
live on «Republic» for investors’ consideration. Moreover, even after the campaign goes live, the
«Republic’s» team continues to fact check and monitor the campaign to ensure investors are
educated and protected.
To sum up, the company valuation is based on the platform’s team due diligence and
assumptions about a startup’s market.
Existing investment results of «Republic’s»
From the interview, I received the following information:
1) Around 95% of all companies have got the necessary amount of money, i.e.
successfully finished their campaigns;
2) Because the company exists only for 2 years, there is still no history of performance
data.
Finally, I found out that the Republic’s team spends 14 days for the valuation process.
Then specialists use 60 (max) days to close a deal (prepare legal agreements; make a change in
shareholders’ agreement etc.).
3.1.4 «Seedrs»
The final fourth example of the case study is a traditional Equity Crowdfunding platform
«Seedrs». «Seedrs» is an investment platform where everyone can invest as little as $10.
«Seedrs» defines itself as follows: « Seedrs allows all types of investors invest in
businesses they believe in and share in their success and allow all types of growth-focused
businesses raise capital and business community in the process. The company do all of this
43
through a simple, highly professional, online process that protects and empowers investors while
helping businesses grow and generate returns» (Seedrs.co, 2018). General information of the
company is presented in Table 10.
Table 10. Seedrs’s information
Parameter Descriptor
Headquarters Regions Greater New York Area, East Coast,
Northeastern US
Founded Date Jul 2016
Founders Kendrick Nguyen, Paul Menchov
Number of Employees 33
Investment Stage Seed
Website Seedrs.co
Contact Email team@Seedrs.co
Source: the company’s site; interview

The process of «Seedrs’» valuation


The process of becoming an investor is slightly different from the traditional one in terms
of «who» can become an investor and «how». For example, in «Companisto» platform a person
can become an investor by simply sending an e-mail. In «Seedrs» platform, the person needs to
go through a verification process to become an investor: upload documents (passport photo,
registration). Moreover, the platform is the first platform that is regulated by the FCA (the
Financial Conduct Authority is the conduct regulator for 58,000 financial services firms and
financial markets in the UK and the prudential regulator for over 18,000 of those firms).
Therefore, the platform has a number of limitations – for example, people must pass a test to
understand the big risks associated with investing via Equity Crowdfunding platforms.
Moreover, the specialists should group investors: institutional investors (Venture capitalists);
family offices; professional investors (business angels); and not-professional investors (ordinary
people that have went through the verification process).
According to Antony Tikhonov (Business Development Manager), a startup team has a
decisive word in the process of its valuation in Equity Crowdfunding platform. In contrast, in
professional venture capital funds, specialists usually do a deep due diligence, which allows
them to decide what the value of a startup is. In this case, «Seedrs’» specialists do only legal due
diligence (for instance, check whether someone from a startup team has had illegal actions).
Therefore, the startup is estimated by the entrepreneur himself or herself based on previous
founding rounds or similar transactions. As a result, valuation process here is negotiation.
To sum up, the company valuation is based on the startup’s team opinion and
assumptions about the market.

44
Existing investment results of «Seedrs’»
From the interview, I received the following information:
1) Around 80% of all companies in the platform have got the necessary amount of
money, i.e. successfully finished their campaigns;
2) From 2012 till nowadays there is 20% failures rate: these companies became bankrupt;
3) Moreover, the conversion rate is 0.6%, i.e. three companies of all 625 have got the
funds in the next stages.
Finally, I found out that the «Seedrs’s» team spends 45 days for the valuation process.
Then specialists use 120 (max) days to close a deal (prepare legal agreements; make a change in
shareholders’ agreement etc.).
Cross-case analysis
The case study was supposed to disprove or prove the first two research questions of this
paper:
1) RQ1: The combination of AI (machine learning) and collective intelligence positively
affects percentage of successful returns (failure to exit and to get funding in the next stages)
compared to the typical Equity Crowdfunding process (valuation by a platform’s team).
2) RQ2: The combination of AI (machine learning) and collective intelligence positively
influences the speed of investing (time for making investment decisions, investment process, and
return of investment) compared to the typical Equity Crowdfunding process (valuation by a
platform’s team).
In order to check these assumptions, we summarize all the necessary facts in the
comparison table.
Table 12. Case study results
Factor/Company Crowdsmart Companisto Republic Seedrs
General Info
Country the USA Germany the USA England
Established in 2015 2012 2016 2012
Number of employees 15 35 33 90
Projects has done 16 80 46 625
Do not Do not Do not
Industry focus Do not have
have have have
Historical performance
% of finishing a campaing 100% 90% 95% 80%
% of failures 0% 30% N/A 20%
Conversion rate (to get next
fundings) 15% 3.8% N/A 0.6%
The time (in days)
Valuation process 7 (to build a team) + 14 30 14 45
Close a deal 30-45 60 - 90 60 120
Total 66 (max) 120 (max) 74 (max) 165 (max)
45
Source: Author’s compilation of primary data
Based on the comparison, we can conclude that:
1) The combination of AI (machine learning) and collective intelligence positively affects
percentage of successful returns compared to the typical Equity Crowdfunding process. For
instance, conversion rate for «Crowdsmart» is 6.8 times more than the average among the three
companies. Moreover, there is still not failures, which confirms the high accuracy of the system's
forecasts.
2) The combination of AI (machine learning) and collective intelligence positively
influences the speed of investing compared to the typical Equity Crowdfunding process. The
valuation process with the use of AI lasts for 30% less than without (21 days against 29 days
average from three other companies). Moreover, the total process (from the start to close a deal)
of the new option is twice less than for typical one (66 days against 119 days average from three
other companies).
3.2. The survey
In this part of the chapter, the results of the survey are described in detail. We provide the
descriptive statistics and conduct three different tests to check three assumptions.
Descriptive statistics
Before starting the analysis of the data, we are going to look at the sample and provide
descriptive statistics.
As it was stated before, of 3172 people that got the opportunity to answer the survey,
there were 426 respondents, resulting in an active response rate of 13.43%. Moreover, from 426
respondents only 351 people finished the survey, making the completion rate equals 82.4%.
The first question in the survey is related to the location of the respondent: «Please, write
your location (a country you live in)?». The answers were as follows (Figure 11)

Figure 11. Geographical distribution of the respondents


Source: Author’s compilation of primary data

46
The number of respondents from Austria was 191, from Russia - 80, Germany - 27 and so
on. This distribution was based on the fact that most of the experts and university graduates are
Austrians. However, it should be noted that the number of respondents’ countries was 26, which
positively affects the reliability of the survey.
Further we asked respondents what kind of education they have: «What is your
education?». The answers were as follows (figure 12).

Figure 12. Respondents’ educational level


Source: Author’s compilation of primary data
From the figure, it follows that the main percentage of respondents (42%) have master’s
or doctorate degree, then 35% - are undergraduate and 23% have finished high school.
It should be noted that in order to improve the results of the survey (any survey results are
biased by unqualified answers), the respondents were asked to answer the question: «Are you
aware of Equity Crowdfunding platform as a means of getting a financial return? . The answer is
presented in Figure 13.

Figure 13. Familiarity with Equity Crowdfunding


Source: Author’s compilation of primary data
For those who answered «No» (154 respondents), the survey was automatically
completed. Accordingly, for further analysis we will use the answers of only 197 respondents
who know what Equity Crowdfunding is.
From descriptive analysis, we can conclude that the final number of respondents (197) is
sufficient to necessary tests in order to check three assumptions. Moreover, the large number of
different countries and the biggest percentage of respondents with higher education make the
survey results more reliable and accurate. Finally, we avoid any unqualified answers by not
including answers of 154 respondents.
47
Assumption 1
The first assumption we are going to check is following:
«There is significant difference in investors’ motivation to finance entrepreneurial
companies, ROI of which has been solely evaluated by the Equity Crowdfunding platform team,
in comparison to finance startups, ROI of which has been calculated by the combination of AI
(machine learning) and collective (human) intelligence of a group of 10 to 30 investors»
In other words, we need to check the difference between the percentages of choosing
startup A or startup B. From the survey, we got the following distribution of answers (Table 13).
Table 13. Please choose in which startup you would invest in «A» or «B»
Frequency Percent Valid Percent Cumulative Percent
Startup A 37 18,8 18,8 18,8
Valid Startup B 160 81,2 81,2 100,0
Total 197 100,0 100,0
Source: Author’s compilation of primary data
From the table above, we see that 81.2% of all respondent chose the startup B. In order to
check significance of these results we conduct non-parametric test, Chi-Square Test to test two
groups of one level (Table 14). Technically, we will get the two by one contingency table and
then we will check that the percentages are going to be equal (50%).
Table 14. Chi-Square Test
Observed N Expected N Residual
Startup A 37 98,5 -61,5
Startup B 160 98,5 61,5
Total 197
Please choose in which startup you would invest in "A" or "B"
Chi-Square 76,797a
df 1
Asymp. Sig. ,000
a. 0 cells (0,0%) have expected frequencies less than 5. The minimum expected cell frequency is 98,5.
Source: Author’s compilation of primary data
Chi-Square test equal 76.8 and p-level is less than 0.01 are equally testing the hypothesis
our percentages are equal to 50% in both groups. Therefore, we can conclude that they are not
equal and Startup B was chosen more often, and the difference is significant.

Assumption 2
The second assumption we are going to check is following:
«People who have invested the bigger proportion of their saving in Equity Crowdfunding
platforms prefer the evaluation process based on the combination of AI (machine learning) and
collective (human) intelligence of a group of 10 to 30 investors».

48
In other words, we need to check whether there is difference in choosing the startup (A or
B) for investing between:
1) respondents who have invested via Equity Crowdfunding platforms;
2) respondents who have not invested via Equity Crowdfunding platforms.
To do so we will use the independent-samples t-test because we have two categorical,
independent groups (have invested and not). Before starting the test, we need to check the
necessary assumptions.
1) The dependent value (the choice between startup A or B) is measured on a continuous
scale.
2) The independent variable (have invested or not) consists of two categorical,
independent groups.
3) The data has the independence of observations: there is no relationship between the
observations in each group or between the groups themselves. The study design is constructed in
the way that any different participants are in each group with no participant being in more than
one group.
4) There are no significant outliers since we have only two values in two groups;
5) The dependent variable is not approximately normally distributed for each group of the
independent variable (Table 15, Figure 14).
Table 15. Tests of normality
Have you actually invested via Kolmogorov-
Shapiro-Wilk
Equity Crowdfunding Smirnovb
platforms? Statistic df Sig. Statistic df Sig.
Please choose in which
No
startup you would invest ,474 157 ,000 ,526 157 ,000
Yes
in "A" or "B"
Source: Author’s compilation of primary data

We can see from the above table that for the «No» and «Yes» answers the dependent
variable, «startup A or B», was not normally distributed because the sig. value of the Shapiro-
Wilk Test is not below 0.05, the data deviate from a normal distribution.

Figure 14. Normal Q-Q plot

49
Source: Author’s compilation of primary data
However, the independent t-test only requiring approximately normal data because it is
quite «robust» to violations of normality. Moreover, the t-test is invalid for small samples from
non-normal distributions, but it is valid for large samples from non-normal distributions. As we
have 197 respondents, we continue to use the t-test.
6) There is homogeneity of variances. From the results of Levene's Test (Table 16) we
can conclude the independent variable does not violate the homogeneity of variance since «Sig»
value is greater than 0.05.
When the necessary assumptions are met, SPSS Statistics generates two main tables of
output for the independent t-test: the group statistics table and the results of independent samples
t-test.
The first table provides useful descriptive statistics for the two groups that we compared,
including the mean and standard deviation (Table 16).
Table 16. The group statistics table
Have you actually invested via Std. Std. Error
N Mean
Equity Crowdfunding platforms? Deviation Mean
Please choose in which Yes 40 2,0000 ,00000 ,00000
startup you would invest in
No 157 1,7643 ,42577 ,03398
"A" or "B"
Source: Author’s compilation of primary data
From the table we see that all people who have already invested via Equity
Crowdfunding chose startup B (mean equals 2). However, people who have not invested via
Equity Crowdfunding partly chose startup B (around 81.2% from all respondents).
The second table (Table 17) provides the actual results from the independent t-test.
Table 17. Independent samples t-test
Sig. (2- Mean Std. Error
t df
tailed) Difference Difference
Equal variances
Please choose in which 3,49 195 ,001 ,23567 ,06745
assumed
startup you would invest
Equal variances
in "A" or "B" 6,935 156,000 ,000 ,23567 ,03398
not assumed
Source: Author’s compilation of primary data
From the table it can be seen that the group means are statistically significantly different
because the value in the "Sig. (2-tailed)" row is less than 0.05. To sum up, the second assumption
is confirmed: the people, who previously have invested through the Equity Crowdfunding
platforms, are more likely to choose Startup B, rather than people who have not previously
invested.
Assumption 3
The third assumption we are going to check is following:
50
«One of the main problems of showing the valuation process based on the combination of
AI (machine learning) and collective (human) intelligence of a group of 10 to 30 investors from
investors’ point of view is the lack of history data (% of successful returns)»
If a person chose startup A, we then asked him or her to rank the following reasons on the
scale: Strongly disagree – Disagree – Neither disagree nor agree – Agree – Strongly agree (from
1 to 5):
1) I believe that professionals have enough expertize to calculate ROI;
2) I got used to it (have successful investments);
3) I do not understand the process B (valuation using Artificial intelligence);
4) I need more historical data in the description of the process B (e.g. percentage of
successful returns).
In other words, we need to check the difference between each mean and the number 5
(the max we can get). In order to so, we will use one sample T-test. Before starting the test, we
need to check the necessary assumptions.
1) The dependent value (the ranks for the reasons) is measured on a continuous scale.
2) The data are independent (nor correlated/related), which means that there is no
relationship among four observations.
3) There are no significant outliers since we have only four values;
4) The dependent variable is not approximately normally distributed for each group of the
independent variable. However, the one-sample t-test only requiring approximately normal data
because it is quite «robust» to violations of normality. Moreover, the t-test is valid for large
samples from non-normal distributions. As we have 197 respondents, we continue to use the
one-sample t-test.
When the necessary assumptions are met, SPSS Statistics generates two main tables of
output for the one-sample t-test: the one-sample statistics table and the results of the one-sample
t-test.
The first table (Table 18) provides useful descriptive statistics for the four reasons we
compared, including the mean and standard deviation.

51
Table 18. One-Sample Statistics
Std. Std. Error
N Mean
Deviation Mean
Professionals have enough expertise to calculate
37 3,8649 ,85512 ,14058
ROI
I am used to invest via traditional Equity
37 2,4324 1,16763 ,19196
Crowdfunding
I do not understand the process "B" 37 3,2162 1,43634 ,23613
I need more historical data in the process "B" 37 4,9189 ,27672 ,04549
Source: Author’s compilation of primary data
From the table we see the fourth reason «I need more historical data in the process B» has
the highest mean value (4.9). In order to check the significance we compare it with the number
«5» using the one-sample T-test (Table 19).
Table 19. One-sample T-test
Test Value = 5
95% Confidence Interval
Sig. (2- Mean
T df of the Difference
tailed) Difference
Lower Upper
Professionals have enough
-8,075 36 ,000 -1,13514 -1,4202 -,8500
expertise to calculate ROI
I am used to invest via
-
traditional Equity 36 ,000 -2,56757 -2,9569 -2,1783
13,376
Crowdfunding
I do not understand the
-7,554 36 ,000 -1,78378 -2,2627 -1,3049
process "B"
I need more historical data
-1,782 36 ,083 -,08108 -,1733 ,0112
in the process "B"
Source: Author’s compilation of primary data
From the results of the one-sample T-test we can conclude that only the fourth reasons
are not significantly different to the number 5 (sig. 0.083 is greater than 0.05). To sum up, the
third assumption is confirmed: from investors’ point of view, the main problem of showing the
valuation process based on the combination of AI and collective intelligence is the lack of
history data (for instance, percentage of successful returns).
Summary of chapter 3
This chapter plays a key role in this master thesis as it contains the main findings
considering answers for the research questions and also factors that influence the investors’
preconceptions of the new valuation process in Equity Crowdfunding platforms obtained in the
result of statistical analysis of the data received via on-line survey and also through the
comparison four companies using the case study results. All this information served as the

52
foundation for the final framework of using the combination of AI and collective intelligence in
the process of evaluating companies at the Seed stage via Equity Crowdfunding.
The final version of the framework is based on the combination of expert communities,
AI and collective intelligence with the aim to predict the future success of an entrepreneurial
venture in the Seed stage. The framework consists of four main stages of the valuation process in
Equity Crowdfunding platforms:
1. Choosing evaluators («the right crowd»);
2. The valuation process;
3. Reviewing;
4. Making decision (or investing).
To emphasize the value of this work, we will compare the traditional and new approaches
at each stage, also introduce the AI involvement and note our add-ons.
The comparison of the two approaches, AI involvement and our findings at the first stage
«Choosing evaluators» are presented in Figure 15.

Figure 15. The first step – choosing evaluators


Source: Author’s compilation of primary and secondary data
At this stage, the research finding suggest that the new approach of the valuation should:
1. Add verification process (check documents of possible investors) (source: interview);
2. Encourage to participate experienced investors as they are more willing to invest in
startups, ROI of which was calculated by the combination of AI and collective intelligence
(source: survey);
3. Shows improved total time to close a deal (source: interview).
The second stage’s comparison is shown in Figure 16.

53
Figure 16. The second step – valuation process
Source: Author’s compilation of primary and secondary data
The main research findings at this stage are:
1. Evaluators should not see that a startup has already got the money in order to avoid
social bias (source: literature review);
2. Evaluators should not talk among each other to solve the problem of polarization effect
(source: literature review);
3. All evaluators get the same information about a startup, as confirmation bias will not
appear (source: literature review).
The third stage‘s comparison is presented in Figure 17.

Figure 17. The third step – reviewing


Source: Author’s compilation of primary and secondary data
Our add-ons is that the approach should make the discussion between a startup’s team
and evaluators open (source: interview).
The final stage’s comparison is shown in Figure 18.

54
Figure 18. The fourth step – making decision
Source: Author’s compilation of primary and secondary data
Finally, the research findings at this stage are:
1. A platform should add to its site the presence of successful historical results in order to
encourage investors (that were not included in the evaluators’ group) to participate in funding
(source: survey)
2. Specialists of platforms should check the total time of a deal (source: interview).
In the conclusion, the framework is unique because it is leveraging AI to detect the
statistically significant ranked comments behind any given score. These ranked comments are
«drivers» that produce a certain score. Qualitative «wisdom of crowd» becomes a quantitative
intelligence, which eventually grows. In this framework, the combination of AI and collective
intelligence can outperform individual expert intelligence at predicting the success of a new
products or services.

55
Conclusion
In this paper, we verified that the combination of expert communities and AI, which is
the core of a new approach to Equity Crowdfunding platforms’ valuation, could solve the
problems of typical Crowdfunding. We came to this conclusion, based on the answers to the
research questions posed and the confirmation of the three assumptions.
The aim of this thesis was to verify whether the combination of expert communities and
AI can solve the problems of traditional Equity Crowdfunding and to develop a framework for
applying AI to enhance Equity Crowdfunding. The objectives were achieved through the
triangulation method: literature review, qualitative research (case study) and quantitative
research (survey), analyzing the results and solving the problem.
The research questions were answered trough the literature review and case study. On a
specific sample of companies, we point out that the combination of AI and collective intelligence
positively affects percentage of successful returns compared to the typical Equity Crowdfunding
process. Additionally, this combination positively influences the speed of investing compared to
the typical Equity Crowdfunding process. For instance, the valuation process with the use of AI
lasts for 30% less than without.
Three assumptions were confirmed using the data from the survey. For the first one, we
confirmed that people would prefer the valuation process based on the combination of AI and
collective intelligence. For the second one, we explained that people who have already invested
via Equity Crowdfunding platforms are more familiar with the new approach. For the last one,
we approved the idea that the main problem of showing the valuation process based on the
combination of AI and collective intelligence from investors’ point of view is the lack of history
data (for instance, percentage of successful returns).
All of these research findings served as the basis for the new framework of the
application of AI, which can help to enhance the Equity Crowdfunding valuation process. The
framework is unique because it is leveraging AI to detect the statistically significant ranked
comments behind any given score. These ranked comments are «drivers» that produce a certain
score. Qualitative «wisdom of crowd» becomes a quantitative intelligence, which eventually
grows. In this framework, the combination of AI and collective intelligence can outperform
individual expert intelligence at predicting the success of a new products or services.
Moreover, on a specific sample of companies, it was noted that the combination of AI
and collective intelligence positively affects percentage of successful returns compared to the
typical Equity Crowdfunding process. Additionally, this combination positively influences the
speed of investing compared to the typical Equity Crowdfunding process. For instance, the
valuation process with the use of AI lasts for 30% less than without.
56
Additionally, it was statistically proven that there is significant difference in investors’
motivation to finance entrepreneurial companies, ROI of which has been solely evaluated by the
Equity Crowdfunding platform team, in comparison to finance startups, ROI of which has been
calculated by the combination of AI and collective intelligence of a group of 10 to 30 investors.
Moreover, people who have invested the bigger proportion of their saving in Equity
Crowdfunding platforms prefer the valuation process based on the combination of AI (machine
learning) and collective (human) intelligence of a group of 10 to 30 investors. Lastly, it was
demonstrated that one of the main problems of showing the new valuation process is the lack of
history data (for instance, percentage of successful returns).
Finally, all of these research findings served as the basis for the new framework of the
application of AI, which can help to enhance the Equity Crowdfunding valuation process.
Therefore, there plenty important question to be developed further, for example, whether we
should add steps in the process or how investors will perceive other information about the new
approach and so on.
Theoretical contributions
The results obtained by this research have theoretical importance for several reasons:
1) The research fills the gap in scientific literature;
2) Points out new directions for future research;
In the first chapter, we identified that Seed stage companies have many problems in
funding. We also point out that Equity Crowdfunding can be a tool that will help startups to
solve these problems. However, we also find out that the Equity Crowdfunding process of
valuation is conjugated with several problems (confirmation, polarization and social biases). The
combination of AI and collective intelligence can be the solution to above described biases.
Therefore, the research gap is the inconsistency of information available with increasingly
emerging interest from business environment. The findings of the paper give answers to research
questions and provide forthcoming investigators with insights for future research.
In the second and third chapters, we compared the traditional and new valuation
processes, and analyzed the investors’ perception for the new approach. These results allowed to
expand the knowledge base on Crowdfunding industry, as well as identified areas of intersection
of two topics AI and Crowdfunding. This paper reviews the evaluation process on an Equity
Crowdfunding platform in a new context.
Practical Implications
From the practical point of view, the research provides findings, which deal directly with
the Equity Crowdfunding process of valuation, investors’ perception and explains areas of
possible improvements for platforms that already used the combination of AI and collective
57
intelligence or are now deciding to do so. Traditional Equity Crowdfunding may enhance their
performance through implementation of AI practices. For them, we presented the steps that need
to be taken to improve the valuation process:
1. Increase conversion rate;
2. Decrease failure rate;
3. Decrease the time for the valuation and the total time of closing a deal.
We should note that all three representatives of traditional Equity Crowdfunding
platforms were interested in the results of this research and started projects of the use of AI in the
valuation process within their companies.
Moreover, for the platforms that already used AI we suggest that it can be useful to
understand how investors perceive information about the use of AI. For instance, we encourage
them to note in their site that this system can improve the results and decrease the total time of
making investing decision. Additionally, we should note that the company «Crowdsmart»
followed our advices and changed its site according to the results of this paper.
Limitations and future research
Several limitations should be acknowledged. The limitations considered are in several
areas, which will be discussed below. The understanding the boundaries of research results
allows both future researchers and practitioners to use research findings in their work.
There is exploratory nature of the first part of the study (case study). The results obtained
from the comparison of four companies cannot be fully extrapolated. Future researchers can use
the increased number of the companies that uses AI in the valuation process and monitor the
functioning of these platforms for longer period.
The study is focused on the application of AI and collective intelligence in the Equity
Crowdfunding platforms and investors’ perceptions of the process. Major of respondents is based
in Austria and Russia, which cannot be scaled for a wider range of nationalities. To verify equal
information on the application of AI in Equity Crowdfunding worldwide, it is necessary to
continue studying the problem.
Another limitation is that due to the unique nature of this industry (usually investors have
the opportunity to get their money back after 3-5 years) the results of the research can change
since all four companies recently opened (for example, in 2012 and 2015 years). To confirm or
refute the results of the work, it is necessary to monitor the functioning of these platforms during
the next few years, in which the exits of many investors are expected.
Finally, for companies using or planning to use AI in the valuation process, it is difficult
to assess the economic benefits of this system: the cost of creating and maintaining it.

58
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64
Appendices
Appendix 1. Received official responses from companies
How
№ Platform Site Response
sent?
Interviewed Tom
1 Crowdsmart https://www.crowdsmart.io/ By e-mail
Kehler, CTO
https://www.crowdcube.com/how Through Have not received the
2 Crowdcube
-to-invest the site answer
https://www.fundedbyme.com/en
3 FundedByMe By e-mail Not interested
/
Have not received the
4 Companisto https://www.companisto.com/en By e-mail
answer
Can not disclose
5 Invesdor https://www.invesdor.com/en By e-mail
information
Have not received the
6 Seeders https://www.Seedrs.com/ By e-mail
answer
Have not received the
7 Funderbeam https://www.funderbeam.com/ By e-mail
answer
8 MyMicroInvest https://www.spreds.com/en By e-mail Not interested
Through Have not received the
9 WiSEED, https://www.wiSeed.com/en
the site answer
Through
10 Startupxplore https://startupxplore.com/en Not interested
the site
Have not received the
11 SeedInvest https://www.Seedinvest.com/ By e-mail
answer
Correlation Have not received the
12 http://correlationvc.com/contact By e-mail
Ventures answer
Can not disclose
13 Wefunder https://wefunder.com/ By e-mail
information
Have not received the
14 Localstake https://localstake.com/ By e-mail
answer
Have not received the
15 AngelList https://angel.co/ By e-mail
answer
Through Have not received the
16 EquityNet https://www.equitynet.com/
the site answer
Have not received the
17 PeerReality https://peerrealty.com/ By e-mail
answer
18 CircleUp https://circleup.com/ By e-mail They are not interested
Have not received the
19 Crowdfunder https://www.crowdfunder.com/ By e-mail
answer
Have not received the
20 Fundable https://www.fundable.com/ By e-mail
answer
Have not received the
21 EarlyShares https://www.earlyshares.com/ By e-mail
answer
Through
22 StartEngine https://www.startengine.com/ Not interested
the site
Through Have not received the
23 MicroVentures https://microventures.com/
the site answer
They are interested.
24 Republic https://republic.co/ By e-mail Had a talk with Peter
Green, Co-founder
Have not received the
25 SyndicateRoom https://www.syndicateroom.com/ By e-mail
answer
26 Seedrs https://www.Seedrs.com/ By e-mail Have not received the
65
answer
Have not received the
27 AngelList https://angel.co/ By e-mail
answer
Private company - don't
Through
28 Indiegogo https://www.indiegogo.com/ disclose the specific
the site
information that I need
Through Have not received the
29 RocketHub http://www.rockethub.com/
the site answer
The Growth Have not received the
30 http://thegrowthgroup.com/ By e-mail
Group answer
The Grow VC Can not disclose
31 http://group.growvc.com/ By e-mail
group information
Have not received the
32 Incube Ventures https://www.incubevc.com/ By e-mail
answer
Can not disclose
33 OurCrowd https://www.ourcrowd.com/ By e-mail
information
Through Have not received the
34 Pozible https://pozible.com/
the site answer
35 Quirky https://quirky.com/ By e-mail Not interested
Have not received the
36 Enable Funding https://www.enablefunding.com/ By e-mail
answer
Can not disclose
37 Anaxago https://www.anaxago.com/ By e-mail
information
Have not received the
38 NextSeed https://www.nextSeed.com/ By e-mail
answer
Have not received the
39 FlashFunders https://www.flashfunders.com/ By e-mail
answer
40 Klondike Strike http://www.redcloudks.com/ By e-mail Not interested
Have not received the
41 Symbid https://www.symbid.com/ By e-mail
answer

66
Appendix 2. Received responses from companies’ representatives (via « Linkedin»)
№ Company Name, Surname Title Link Response
https://www.linke
EquityFundr
1 Crowdcube Mike Royston din.com/in/miker Not interested
aising
oyston/
https://www.linke
Software Have not received the
2 Crowdcube Matthew Boyle din.com/in/mattja
Engineer answer
mesboyle
https://www.linke
FundedByM Ksenia Business Can not disclosure
3 din.com/in/ksenia
e Stepanovitch Developer information
-stepanovitch
https://www.linke
FundedByM Front End Have not received the
4 Elena Savelyeva din.com/in/esavel
e Developer answer
yeva
https://www.link
Investment
5 Companisto Samed Sökmen edin.com/in/sam Had interview
Manager
ed-sokmen
https://www.linke
Alexander Process din.com/in/alexan
6 Companisto Not interested
Mroncz-Iamandi Manager der-mroncz-
iamandi
https://www.linke
Deal Flow Interested but do not
7 Invesdor Nea Raahenmaa din.com/in/nearaa
Manager have free time
henmaa
https://www.linke
Software Have not received the
8 Invesdor Antti Ursin din.com/in/anttiur
Developer answer
sin
https://www.linke
Investment Have not received the
9 Seeders Abhishek Rungta din.com/in/abhish
Manager answer
ekrungta/
https://www.linke
Angel
10 Seeders Ramy Boujawdeh din.com/in/ramyb Not interested
Investor
oujawdeh
https://www.linke
Financial Interested but do not
11 Funderbeam Bert Peterson din.com/in/bert-
Analyst have free time
peterson

67
Senior https://www.linke Have not received the
12 Funderbeam Riho Õll
Developer din.com/in/rihooll answer
https://www.linke
MyMicroInv Pipeline Can not disclosure
13 Thibaut de Brie din.com/in/thibaut
est Manager information
-de-briey
https://www.linke
MyMicroInv De Bellefroid Financial
14 din.com/in/de- Not interested
est Perrine Officer
bellefroid-perrine

Manager https://www.linke
Have not received the
15 WiSEED Louise Chopinet Business din.com/in/louise
answer
Development chopinet

https://www.linke Have not received the


16 WiSEED Céline Fiorido Analyst
din.com/in/fiorido answer

Dealflow
https://www.linke
Karel Escobar Manager & Interested but do not
17 Startupxplore din.com/in/karele
Sánchez Startup have free time
scobar
Relations

Investment https://www.linke
Manuel González
18 Startupxplore Analysis & din.com/in/manue Not interested
Abril
Operations l-gonz
https://www.linke
Can not disclosure
19 SeedInvest Lauren Fong Analyst din.com/in/fongla
information
uren
https://www.linke
Software Have not received the
20 SeedInvest Eric Woo din.com/in/ericcw
Engineer answer
oo
https://www.linke
Correlation Summer Have not received the
21 Drew Schmid din.com/in/drews
Ventures Analyst answer
chmid
https://www.linke
Correlation Vivek Singh Data Have not received the
22 din.com/in/vivek-
Ventures Solanki Scientist answer
singh-solanki
Business https://www.linke
23 Wefunder Kieran Ryan Development din.com/in/kieran Not interested
Analyst ryan2

68
https://www.linke
Software Have not received the
24 Wefunder Omar Shammas din.com/in/omars
Engineer answer
hammas
https://www.linke
Have not received the
25 Localstake Ryan Flynn Co-Founder din.com/in/ryan-
answer
flynn
https://www.linke
Have not received the
26 Localstake Brandon Smith Co-Founder din.com/in/brando
answer
n-smith
Venture https://www.linke
Have not received the
27 AngelList Philipp Moehring Hacker, din.com/in/moehr
answer
Europe ing
https://www.linke
28 AngelList Andy Chung Analyst din.com/in/andyc Not interested
hung
Chief https://www.linke
Lee (Leo) Have not received the
29 EquityNet Executive din.com/in/lee-
Kimball answer
Officer kimball
https://www.linke
Managing Can not disclosure
30 EquityNet Thomas Donahue din.com/in/thoma
Director information
s-donahue

Business https://www.linke
Have not received the
31 CircleUp Samara Flug Development din.com/in/samar
answer
Analyst aflug

https://www.linke
Senior data Interested but do not
32 CircleUp Anjali Samani din.com/in/anjalis
scientist have free time
amani
https://www.linke
Head of Interested but do not
33 Crowdfunder Owen Wallis din.com/in/owen
Product have free time
wallis
https://www.linke
Head of Have not received the
34 Crowdfunder Simon Walker din.com/in/siwalk
Campaigns answer
er01
Chief https://www.linke
Have not received the
35 Fundable Elliot Schneier Operating din.com/in/elliots
answer
Officer chneier
36 Fundable Martin Eden CEO https://www.linke Have not received the

69
din.com/in/martin answer
eden
https://www.linke
Chantelle
37 EarlyShares Analyst din.com/in/chante Not interested
Marquez
lle-marquez
Chief https://www.linke
Have not received the
39 StartEngine John Shiple Technology din.com/in/johnsh
answer
Officer iple
https://www.linke
Business Have not received the
40 StartEngine Tyler Callaghan din.com/in/tylerca
Development answer
llaghan
https://www.linke
MicroVentur Venture Can not disclosure
41 Jacob Torres din.com/in/jacobc
es Analyst information
torres
https://www.linke
MicroVentur Venture Can not disclosure
42 Spencer Clark din.com/in/spence
es Analyst information
rclark65
https://www.linke
Have not received the
43 Republic Kyle McCormick Deal Team din.com/in/kyle-
answer
mccormick
Business https://www.linke
Interested but do not
44 Republic Matt Melbourne Development din.com/in/mattj
have free time
Lead melbourne
https://www.linke
SyndicateRo Cornelius Senior
45 din.com/in/criethd Not interested
om Riethdorf Analyst
orf
https://www.linke
SyndicateRo Katerina Sanchez- Investment din.com/in/katerin Have not received the
46
om Schilling Analyst a-sanchez- answer
schilling
Business https://www.link
Antony Interested. Had the
47 Seedrs Developmen edin.com/in/anto
Tikhonov interview
t nytikhonov
https://www.linke
Have not received the
48 Seedrs Magda Posluszny Associate din.com/in/magda
answer
posluszny

49 Indiegogo Joel Hughes Analyst https://www.linke Can not disclosure

70
din.com/in/hughe information
sjoel
https://www.linke
Software Have not received the
50 Indiegogo Tingshen Yan din.com/in/sunny
Engineer answer
yants
https://www.linke
Business
51 OurCrowd Jordan Odinsky din.com/in/jordan Not interested
Development
odinsky
https://www.linke
Investor Have not received the
52 OurCrowd Caleb Zipperstein din.com/in/calebz
Relations answer
ipperstein
Co-Founder
https://www.linke
and General Interested but do not
53 Pozible Matt Vitale din.com/in/matt-
Counsel at have free time
vitale
birchal
Cofounder at https://www.linke
Have not received the
54 Pozible Alan Crabbe Pozible & din.com/in/alan-
answer
Birchal crabbe
https://www.linke
Enable Investment Can not disclosure
55 Oliver Ciancio din.com/in/oliver-
Funding Manager information
ciancio
Head of https://www.linke
Enable Have not received the
56 Peter Boyce Issuer din.com/in/peterb
Funding answer
Optimisation oyce
Venture https://www.linke
Have not received the
57 Anaxago Elodie Barthe Capital din.com/in/elodie-
answer
Analyst barthe
https://www.linke
Key Account Have not received the
58 Anaxago Mehdi Rouich din.com/in/mehdi
Manager answer
rouich
https://www.linke
Rani Operations Have not received the
59 NextSeed din.com/in/ranira
Ramchandani Associate answer
mch
https://www.linke
Have not received the
60 NextSeed TaeMi Lee CFO din.com/in/taemi-
answer
lee
61 FlashFunders Brian Park President https://www.linke Have not received the

71
din.com/in/briana answer
park
https://www.linke
Have not received the
62 FlashFunders Brad Bennett CTO din.com/in/bradle
answer
yjucsc
https://www.linke
Robbin Board Have not received the
63 Symbid din.com/in/robbin
Hoogstraten Member answer
-hoogstraten
https://www.linke
Investor Have not received the
64 Symbid Marius Veenker din.com/in/marius
Relations answer
-veenker

Appendix 3. Interview guideline

72
Appendix 4. Interview with Tom Kehler, CTO of Crowdsmart

Author: Tom Kehler, to begin with, I want to say thank you that you agreed to help us. I
do appreciate it! So, let us start with general information. You are Tom Kehler, a founder and
Chief Scientist of Crowdsmart…
When it was established in?
Tom Kehler: 2015.
Author: Who are your main competitors, Equity Crowdfunding platforms using AI?
Tom Kehler: it is kind of hard to say. We are in an emerging area, but the main
competitors are organizations involved in helping startups to get funding. It is very broad. It
could be partners, investors groups, and traditional venture capital. However, primarily we are in
a new market definition, where there is no clear competitor. Probably alternatives ways of doing
early stage investments would be primarily competition. We are accredited investors online. So,
for someone to be accredited investor in the USA, he or she should have either 1 mln $ of
investable assets or income exceeding 250k $ per year. In that sense, we do not fit to
Crowdfunding movement; we are really much more in angel investments group, angel list, where
you need to be accredited investor to invest. Therefore, in that category, there have been some
organizations, that use some data. Companies like «Single Fire», which is the venture capital
firm; focuses on the information mostly about a team. There is also «Correlation ventures» that
uses some data to make investments decisions. But since it is early stage and companies using
machine learning and AI, probably a lot of competition is not visible yet. Where we are unique is
that we do not go out and find massive data. Rather we form valuations groups that consists of
domain experts and accredited investors; and have them to score a company. So, we collect the
data that we use to project ROI, to analyze investments.
Author: What is the number of employees?
Tom Kehler: we have 15 employees.
Author: Their job titles?
Tom Kehler: mostly, 7 are from technology side. So, we have AI specialists, senior AI
engineers, then we have full-step developers. We have CTO, a head of the product, a head of
investments, a head of partnerships and CEO.
Author: How many projects in overall «Crowdsmart» has done?
Tom Kehler: we have evaluated around 40-50 companies, we have made (or are about to
make) investments in 16 companies at this point. In the end of 2017, we have 13 companies in
the portfolio. We added this data and we are able to show that accuracy of picking companies
that will fund in the next stage is about 90%.

73
Author: Types of industries you have invested in?
Tom Kehler: Really depends on members in our community. We are 700 people with
variety of backgrounds. So, we have made investments in «Deep Technology like AI», «Medical
Devices», «Bio-tech» and «Media». It is pretty broad, we do not have a specific industry focus.
Our focus is determined by members in investor community.
Author: How to become an investor – what is the process?
Tom Kehler: it is a very good question. There are variety of different pathways to
participate as a investor/evaluator in «Crowdsmart». So:
a) You are an individual accredited investor. You then answered the following questions:
«What is your experience? Have you done prior investments in whatever category?».
b) You are a domain expert. So perhaps you are an engineer in AI and that can be useful
in some of our valuations. You are maybe an expert in variety of other engineering or technical
areas. Therefore, you do not need to be an investor.
c) You have an experience with the problem that a startup is attempting to solve. One of
our startups was making a medical device for asthma. You could be an individual that try
different products against asthma and you can evaluate the startup’s one.
Author: How does the system differentiate an investor with main expertise in a particular
industry or by geography?
Tom Kehler: when you sign to be a member, then you will receive an e-mail of potential
startups where you can be an evaluator. When you say «yes», you are asked: «What expertise do
you bring?». You fill that out. Then this information (in addition, to profile information) is used
to make the selection decision. Now we are still building data model for automatic selection of
evaluators.
Author: What does the process of valuation include?
Tom Kehler: we assemble a team of 25-30 evaluators and that group is taking through
the structured evaluating process that collects quantitative and qualitative data. You, as a
evaluator, will be asked: «Do you believe that this company has a compelling business
opportunity as defined by available market, competitors etc.?». Then you can score on the scale
from 1 to 10. Then we asked you: «What are your reasons for your score?» In addition, after we
have you look at sample other people’s reasons for their scores. After that, you can change your
reason. Finally, in the end of that process we will get about 200-300 quantitative data points and
also get around 10000-20000 words that describe the reasoning behind the decision (min 100-
150 quantitative data points, 8000-10000 words). We measure data requirements based on the
quality of the valuation team; we want a min 12-15 completion on each point of the valuation
before we have enough data.
74
Then we use natural language processing technology as well as machine learning
technology to proceed into a model that uses logistic regression to produce a probability on ROI.
At the end of the day, classifier uses a machine-learning model to forecast probability.
Evaluators do not see other reasons until you score. However, people can go back and can
reevaluate ones they have seen other people’s inputs. The value of that is that they able to see
what their first impression was and then how the group learns together to make a right decision.
Author: Maybe you have some pictures or articles to read to better understand the
process for a typical user?
Tom Kehler: I have sent you the screenshots of our presentations.

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The screenshot gives the high-level of the process (1). The second one shows how it
maps in the core technical capabilities. For example, 93% means the chance that this company
will be successful in the sense that they will raise efficient capital to execute their business
strategy. That was the initial prediction. The company raised follow one capital and they
continue to grow and develop as a business. Then 44% of the valuation team made the
investments.
So far, the feedback post valuation that this prediction is still operating in a success now.
We track after the valuation and then feed that back into the model as we learned and as the
company continue to grow.
Author: Why actually ROI?
Tom Kehler: Individuals (significant number of them) that are doing valuation are
investors. It is reasonable to treat that expectation value of why they gave the number as they
expecting to get ROI. Therefore, they get the personal money and then get return on investments.
That is why we have chosen ROI as the main metric.
Author: How many projects need to develop the model?
Tom Kehler: We have developed the model based on more than a 1000 companies’ data.
Each new projection is reflected against a training model, which is based on more than 1000
companies. About 1000 – it was a combination of gathering data from scoring information, from
variety of different situations. Typical thing of machine learning is that you use that to build out,
do randomization. It is actually a long process to construct the model (3-4 years). We do not
reveal details how exactly we did that.
Author: What is % of failure to exit and % of failure to get funding in the next stages?
Tom Kehler: No failures at all, 15% rate of conversion to follow up funding/rounds –
after the initial investments, these companies were able to take these initial investments and to
produce sufficient value to get follow on investment that would lead to grow. Therefore, it is
very strong predictor of success. Market data – we are about 5x times market average.
Companies that get series A style funding are much-much likely to see a profitable exit
then the companies that don’t. No company that runs out of the money and exits yet. All are
healthy, progressing. So, initial data is very promising. They are working for 27 months so far.
Author: Average time to evaluate a startup and calculate ROI?
Tom Kehler: 1 week to build valuation team and 2 weeks to evaluate a startup. Much
faster than typical evaluating process (as long as 90 days).
Author: Average time for making investment decision?
Tom Kehler: we bring investors and typical close 30-45 days – close a deal.
Author: Average time to get the money back?
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Tom Kehler: Unknown information – moreover, even in traditional Equity
Crowdfunding it is not.
Author: What were the costs to develop the system?
Tom Kehler: I do not have the number and I am not sure if I can share with you.
Author: And costs to maintain (VC)?
Tom Kehler: the same.

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Appendix 5. Interview with Peter Green, Co-founder and Head of Product in Republic
Author: Peter Green, to begin with, I want to say thank you that you agreed to help us. I
do appreciate it! You are Peter Green, were a Co-founder and Head of Product at Republiс.
When it was established in?
Peter Green: Republic was established in Jul 2016, New York.
Author: What are the main competitors of the company?
Peter Green: I think that CircleUp, Fundable and Wefunder are the main competitors.
Author: What is the number of employees?
Peter Green: We are now 33 people.
Author: Their job titles?
Peter Green: We have advisors; business and marketing managers; programmers and C-
level managers.
Author: How many projects in overall «Republic» has done?
Peter Green: We funded 46 companies – 95% of Republic campaigns have been
successfully funded.
Author: Types of industries you have invested in?
Peter Green: There is no a specific industry focus. In my opinion, we have invested in
more innovational (e.g. blockchain) startups.
Author: How to become an investor – what is the process?
Peter Green: The process is very easy. To become an investor you go to the site, see a
campaign and press «Invest» button. The minimum is 10 dollars. As soon as you invested, you
became an investor.
Author: What does the process of valuation include?
Peter Green: Please, look at our site.
Author: A specific questions based on your answer. Does Republic’s team make the
whole process of a startup valuation? Every project, every time?
Peter Green: Yes, business managers (around 7 people).
Author: What is the final metric of valuation process?
Peter Green: A company’s value and share of Equity an investor can get are two main
metrics of the valuation process.
Author: What is % of failure to exit and % of failure to get funding in the next stages?
Peter Green: it is too early to have this data, we've been operating for 2 years only.
Author: Average time to evaluate a startup and calculate its value?
Peter Green: It takes (for us – to evaluate a startup) not more than a few days if we only
dealt with one startup. Realistically it takes about 1-2 weeks. The length of campaign – 60 days.
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Finally, regarding the exits: no data here yet; it always takes years. We have not had «exits» in
the definition of the word that you mean.
Author: What were the costs to develop the system?
Peter Green: I am not sure if I can tell you.
Author: And costs to maintain (VC)?
Peter Green: the same.

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Appendix 6. Interview with Samed Sökmen, Investment Manager of Companisto
Author: Samed Sökmen, to begin with, I want to say thank you that you agreed to help us.
I do appreciate it! You are Samed Sökmen, were an Investment Manager at Companisto. When it
was established in?
Samed Sökmen: Companisto was established in 2012 in Berlin, Germany. Companisto
is the market leader in the Central Europe, in Germany. It can offer equity-based funding and
venture loan (debt instrument). We have also conducted the survey, where we found that
investors usually invest 10% of their available for investments assets, because this area is very
risky.
Author: What are the main competitors of the company?
Samed Sökmen: I think, that Seeders from UK is the main competitor; it is the
international leader/market leader of the whole world; it is also the biggest Equity Crowdfunding
platform in the world. But in Germany we also have other competitors like Seedmatch or
Kapilendo. I would say that these three companies are the main competitors of Companisto.
Author: What is the number of employees?
Samed Sökmen: I think we are now 35 people.
Author: Their job titles?
Samed Sökmen: We have portfolio/investment managers; programmers; designers and
C-level managers.
Author: How many projects in overall «Companisto» has done?
Samed Sökmen: I think that Companisto has had over 80 campaigns so far. In the
beginning, there was high speed of doing campaigns: maybe in the first year (2012) there were
only three campaigns; in the second – six; and then every month – one campaign; and after –
every 2 weeks – one campaign. The problem was in human capital. Now, however, we grew as
the team.
Author: Types of industries you have invested in?
Samed Sökmen: we do not have a specific industry focus. Actually, no one Equity
Crowdfunding platform has an investment focus. However, I think, we have invested in more
technological and innovation startups.
Author: How to become an investor – what is the process?
Samed Sökmen: The process is very easy. To become an investor you go to the site, see
a campaign and press «Invest» button. The minimum is 100 euro. As soon as you invested, you
became an investor.
Author: What does the process of valuation include?

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Samed Sökmen: First of all, a member of our team received all documents (possible
financial/historical data) from a startup’s team. However, all typical valuation methods (like
DCF) are not working for valuation for startups at the Seed stage. Secondly, we build a
projection/estimation using our own assumptions about the particular market. We usually try to
use multiples – somehow compare with similar startups and their initial valuation. We also look
at the presence of patents; because it is very important KPI for us (it is a sign that the startup has
already had technology). Thirdly, we talk to people in this industry, we actually have many
experts in our network. Finally, we have a talk with the startup’s team about their expectations of
the company’s value and we then make an offer to them. Sometimes a startup team disagrees
with our offer or they have already had offer from different platforms or funds, so, we should
revalue them.
Author: A specific questions based on your answer. Does Companisto’s team make the
whole process of a startup valuation? Every project, every time?
Samed Sökmen: Yes, investment managers (around 6 people).
Author: What is the final metric of valuation process?
Samed Sökmen: I think that the company value and share of Equity we can get are two
main metrics of the valuation process. A product/innovation is also an important metric.
Author: What is % of failure to exit and % of failure to get funding in the next stages?
Samed Sökmen: So far, less 10% were not successful at getting funds (because in our
platform every company should reach min 100 000 euro of investments). Around 20-30% of
startups have received sufficient amount of money but they failed. So, around 60% of startups
are still running.
We actually have three exits, moreover, one of them went to IPO (became public
company).
Author: Average time to evaluate a startup and calculate its value?
Samed Sökmen: I think, if we work with experts – average time is 1 month. However, if
we firstly should find experts – it can long for 2-3 months.
Author: Average time for making investment decision?
Samed Sökmen: usually we close a deal/campaign in 2-3 months. However, the process
for some startups can take very long time. Because we are not sure about a product, a market and
a team.
Author: Average time to get the money back?
Samed Sökmen: Actually, it’s very different. Usually investors do not get money back so
fast, and they do not want to do so – it can long for more than 5 years. Moreover, every startup’s
story is different, there is no average time.
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Author: What were the costs to develop the system?
Samed Sökmen: I am not sure if I can tell you.

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Appendix 7. Interview with Antony Tikhonov, Business Development Manager at Seedrs
Author: Antony Tikhonov, to begin with, I want to say thank you that you agreed to help
us. I do appreciate it! You are Antony Tikhonov, a Business Development Manager at Seedrs.
When it was established in?
Antony Tikhonov: Seedrs was established in 2012 in London, Germany.
Author: What are the main competitors of the company?
Antony Tikhonov: I think, in European market we have the main competitor –
Crowdcube. In DACH (Germany, Austria and Switzerland) – Companisto, Seedmatch.
Author: What is the number of employees?
Antony Tikhonov: I think we are now 90 people.
Author: Their job titles?
Antony Tikhonov: We have mainly development managers and engineers.
Author: How many projects in overall «Seedrs» has done?
Antony Tikhonov: We have had 625 campaigns so far. Our success rate (to get
necessary amount of money during the campaign) is 80%.
Author: Types of industries you have invested in?
Antony Tikhonov: we work mainly B2C business. In addition, I can identify Fintech
industry, as the main industry we have worked with. However, we invest in various businesses:
for example, Biotech, Foodpack, Restautant businesses etc.
Author: How to become an investor – what is the process?
Antony Tikhonov: Our process is slightly different from the traditional one in terms of
«who» can become an investor and «how». For example, in Crowdcube platform a person can
become an investor by simply sending an e-mail. In our platform, the person needs to go through
a verification process to become an investor: upload documents (passport photo, registration).
Author: How does the system differentiate an investor with main expertise in a particular
industry or by geography?
Antony Tikhonov: We are the first platform that is regulated by the FCA (the Financial
Conduct Authority is the conduct regulator for 58,000 financial services firms and financial
markets in the UK and the prudential regulator for over 18,000 of those firms). Therefore, our
platform has a number of limitations – for example, people must pass a test to understand the big
risks associated with investing via Equity Crowdfunding platforms. Moreover, we group
investors: institutional investors (Venture capitalists); family offices; professional investors
(business angels); and not-professional investors (ordinary people that have went through the
verification process).
Author: What does the process of valuation include?
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Antony Tikhonov: I think that a startup team has a decisive word in the process of its
valuation in Equity Crowdfunding platform. In contrast, in professional venture capital funds,
specialists usually do a deep due diligence, which allows them to decide what the value of a
startup is. In our case, we do legal due diligence (for instance, check whether someone from a
startup team has had illegal actions).
Therefore, I think that the startup is estimated by the entrepreneur himself or herself
based on previous founding rounds or similar transactions. As a result, valuation process is
negotiation.
Author: A specific questions based on your answer. Does Seedr’s team make the whole
process of a startup valuation? Every project, every time?
Antony Tikhonov: Yes, development managers (around 10 people).
Author: What is % of failure to exit and % of failure to get funding in the next stages?
Antony Tikhonov: We have one IPO. Moreover, around 80% of companies is still
operating (consequently, 20% - failed).
Moreover, we have the secondary market, where investors can sell their shares.
Therefore, the amount of all transactions in this market is 2-mln euro so far.
In addition, three companies were bought by other bigger companies. I think that in two-
three years the process of investors' exit (the sale of the shares to other investors or companies,
IPO) will increase.
Author: Average time to evaluate a startup and calculate its value?
Antony Tikhonov: I think the valuation process lasts 1-1.5 months. The whole process
(from valuation to final fundraising) – around 4 months. In addition, we spend 60 days to close a
deal (make the final legal due diligence; changes in shareholders’ agreement).
Author: What were the costs to develop the system?
Antony Tikhonov: Sorry, I can not share with you.
Author: And costs to maintain (VC)?
Antony Tikhonov: the same.

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Appendix 8. The survey «Applying AI to Equity Crowdfunding»
25.05.2018
Hello! My name is Daniil Nesinov.
As the part of the research for my Master's Thesis, I am conducting the study about
«Applying AI to enhance Equity Crowdfunding». I would appreciate a lot if you could fill out
my questionnaire. All responses are collected as anonymous. The questionnaire takes only 2
minutes to fill out. Thank you for your support!
1. Location (a country you live in)
Answer: manually written
2. Education
 No education
 Primary school
 Secondary education/high school
 Undergraduate (bachelor’s)
 Graduate degree (master’s and doctorate)
3. Are you aware of Equity Crowdfunding platform as a means of getting a financial
return?
 Yes
 No (if no – the survey is finished)
4. Have you actually invested in Equity Crowdfunding platforms?
 Yes
 No
5. (If the answer to the previous question is «Yes») What proportion of your savings have
you invested in Equity Crowdfunding platforms?
 Less than 5%
 Less than 10%
 Less than 25%
 More (or equal) than 25%
6. Please choose in which startup you could invest:
a. A startup that makes a new type of coffee. ROI (15%) was calculated by the Equity
Crowdfunding team through typical process of due diligence (analyzing documents from the
startup team and then modeling future cash flow based on its own assumptions).

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b. A startup that makes a new type of coffee. ROI (15%) was calculated by a specific for
this project valuation team of experts. They provided ratings for the startup team, and then made
some conversations with them. In the end, from all the input of the valuation team and the
responses from the startup team, the machine-learning algorithm calculates a score of how likely
it is for this startup to succeed.

7. If you chose to invest in the option A (typical Equity Crowdfunding valuation), please
provide the reasons (in the scale: Strongly disagree – Disagree – Neither disagree nor agree –
Agree – Strongly agree):
 I believe that professionals have enough expertize to calculate ROI
 I got used to it (have successful investments)
 I do not understand the process B (valuation using Artificial intelligence)
 I need more historical data in the process B (e.g. % of successful returns)
8. If you chose to invest in the option B (valuation using Artificial intelligence), please
provide the reasons (in the scale: Strongly disagree – Disagree – Neither disagree nor agree –
Agree – Strongly agree):
 I believe that a specific group (investors with industry or geographical expertise) for a
particular project outperform the permanent group of the platform’s employees
 I think that AI is a new trend now and I believe in it
 I have positive experience

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 I want to try something new
 I know the problems of a typical valuation in Equity Crowdfunding (polarization effect,
confirmation bias, social influence)
9. Do you have any other arguments in favor of your choice? Please, specify them below.
Answer: manually written
10. Please, provide any feedback regarding this survey, Equity Crowdfunding and
Artificial Intelligence:
Answer: manually written
Thank you for completing this questionnaire! I would like to thank you very much for
helping us. Your answers were transmitted, you may close the browser window or tab now.
Comment: the original language of the questionnaire was English.
Source: (Author’s study)

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