As part of our profiles of TIM people, let us introduce Michael Mödl of the Max Plack Institute for Innovation and Competition which is in Munich. So, Michael, you recently won a TIM award at the 2019 conference…

What are your research interests right now?

Broadly speaking I like to understand how new technological and societal developments affect innovation management and entrepreneurial activities. In my current research, I investigate how emerging crowd-based forms of funding interact with traditional venture capital to catalyze innovation and growth. I have been looking at different dimensions of this topic, for instance, how crowd-based means of funding have expanded the entrepreneurial finance landscape; how a prior crowdfunding affects the decision making of subsequent venture capitalists and business angels when selecting new ventures; or how potential governance concerns shape the institutional compatibility between equity crowdfunding and venture capital. The relationship between new and established financing forms is quite an interesting issue in my view because, on the one hand, crowdfunding and ICOs have been suggested to overcome professional investors’ biases and to democratize access to capital and thus the diffusion of (radical) innovation. On the other, crowd-based funding in itself might be subject to bias for critical scale-up funding from professional investors.

What do you think is your most exciting contribution to academia?

Personally, I am excited about challenging conventional wisdom and I strive to add new perspectives. A project I found particularly interesting has added a more nuanced view to the common thread that if a venture is able to attract hundreds of supporters in a crowdfunding campaign this ought to be a positive sign of market acceptance for prospective investors and thus increase their willingness to invest. However, my research shows that quality considerations prevail and that a prior crowdfunding rather serves as a negative signal of a failed Litmus test for attracting a professional investor and accordingly ceteris paribus reduces the likelihood of follow-up funding. Yet, while “the crowd” is generally seen as a negative signal, it can nonetheless generate certain positive signals to which professional venture investors react in their decision making. In addition, to me, it is also exciting when research findings can impact the world beyond academia. In this respect, I was thrilled to hear that a start-up accelerator informs their teams about my findings in order for them not to choose funding sources naively.

At the 2019 Conference you won an award from TIM. Tell us about the paper and why you think its findings are important.

The paper is about the rise of crowd-based forms of financing and the concomitantly increasingly diverse innovation funding landscape. In particular, I investigate whether venture investors perceive a seed-financing hierarchy by capital-seekers and whether this equity pecking order is affected by firm quality. Thus far, classical concepts of corporate finance hierarchies have distinguished between the traditional triad profits, debt and external equity, and have stopped by treating the latter as homogeneous. Accounting for heterogeneous types of external equity and drawing on a choice experimental research design I find evidence that investors believe that “lemons” (low-quality firms) have a higher relative likelihood than “peaches” (high-quality firms) of turning to crowdfunding as a first means of external equity funding rather than turning to traditional sources, suggesting a perceived negative selection bias toward crowd-based financing. I think the findings are important as they extend the boundaries of widely applied concepts of financing hierarchies such as the pecking order perspective. From a practical point of view, finding proper funding is a major obstacle for the creation of new ventures. My findings thus yield important implications for entrepreneurs and managers of innovative firms, who should be wary that their initial choice of equity funding might be seen as a signal of inherent quality by prospective resource partners.

Tell us something personal about yourself.

My favorite way to relax is doing sports. In summer I swing the racket on the tennis court and on sunny winter days you can find me skiing the Alps. I am also passionate about soccer and a supporter of 1. FC Nuremberg. The club is still Germany’s second most successful team in terms of number of national championships, but hasn’t won a single of these titles during my lifetime. Working in the city of nowadays’ serial champion it takes some effort to hail the underdogs… 😉

Thanks Michael!

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