A Proposal for a Standard With Innovation Management System

Hanno Kortleben and Bernhard Vollmar
of the work to their interests. Although, there is no way to renegotiate the business terms, since these
are governed by standard contracts, but the entrepreneurs could see the crowdinvestors as financiers
of their salary for some years (hidden intention) and secure themselves an advantage.
To solve the problems described, the parties can actively contribute (Akerlof, 1970). The entrepreneurs
can reduce the investors´ lack of information by handing in detailed and verifiable business
plans, and having more open communication and regular contemporary reports (signalling). The investors
have a duty to actively screen the business plans of potential investments (screening) and
may subsequently exercise their control rights as shareholders. In particular, the personal interaction
between investor and financier is of great importance as it helps to build trust and thus affects the
long term development of the company in a positive way (Dyer, 2000).In relationship two the opposite
situation is represented, with the investor as agent and the company as principal. Prior to the contract,
the start-up company has little information about the investor and cannot be completely sure that the
investor has enough money to actually invest the required amount. However, it should be mentioned
that the sums of the individual investors are relatively low and that a single failure should therefore be
manageable. An investor could possibly use the platform to gather information about competitors or
new business ideas, which could be very enlightening for a competitor, due to his entitlement to quarterly
and annual reports. The start-up company is in a bind here. It would need to unlock data for interested
investors, since it is dependent on their capital, thought he reasons for the interest would not
be traceable. The solvency of the crowdinvestors could be assured by immediately transfering the
appropriate amount into an escrow account after a bid. If the bidder is successful, the company would
be paid from this account. Otherwise, the security deposit would be refunded. The espionage of a
start-up through a crowdinvestor (hidden intention) may be less well protectable. Personal data can
be obtained through the registration process, however, while an obligation to confidentiality exists,
these hurdles can be bypassed relatively easy by logging in a friend who then passes on information
(straw-man problem).This problem could not be solved by an authentication with an ID card or passport.
Contractual confidentiality obligation and the tracking of non-compliance are possible measures
to prevent wrongdoing, even though they are difficult to apply in practice. In addition to rapid implementation,
technological and procedural knowledge are therefore the most effective protection for
businesses against imitation.
Relationship three describes a relationship between an investor (principal) and a crowdinvesting platform
(agent). The problem at hand is that an investor can only invest in companies that have been
pre-selected by the staff of the platform. Therefore, a problem of adverse selection arises in that an
investor will have to choose the best platform, i.e. with the most experienced and qualified staff, which
pre-selects the most promising start-up companies. While investors can and should check start-ups
and their management capabilities themselves, the quality of the own judgement depends on their
professional skills. Inexperienced investors must rely largely on the pre-selection of crowdinvesting
platforms or seek outside help. The uncertainty about the skills of crowdinvesting platform employees
can be countered if the qualifications of the platform staff are communicated openly (signalling). Furthermore,
by specializing in a particular industry, investors can be sure about the areas their future
investments are active in and the platform staff will gain expertise in a particular industry.
Relationship four indicates similar issues to those in relationship two. For the crowdinvesting platform,
the financial ability of the investor is not obvious in advance, because neither bank statements nor
credit information need to be attached to the application. Solutions that work for relationship two could
be applied analogously. The already mentioned straw-man problem (hidden action) might pose a risk
to the crowdinvesting platform´s reputation. Without adequate protection for intellectual property, entrepreneurs
would surely not be willing to disclose their business plans. They possibly do so ifthe prototype
has nearly been perfected and inflowing capital would be used for marketing and growth rather
than for product development. The principal-agent relationship between the crowdinvesting platform
and start-up company is presented in relationship five. The crowdinvesting platform depends on applications,
so that their business model can work. At the same time, an adverse selection problem
arises, because the completeness and quality of the information provided by the start-up company is
not guaranteed. The representatives of the crowdinvesting platform must take into account that startups
might have embellished their forecasts. Theoretically, at worst, and especially in high-tech industries
for the layman difficult to verify, a technology or business model could be a fake. On the other
hand, a potential moral hazard problem of hidden information could exist between the crowdinvesting
platform (principal) and the start-up (agent).Although it is in the interest of the start-up company to
address as many investors as possible, for the crowdinvesting platform it is not obvious if entrepre-
407