Does Crowdfunding Democratize Access to Capital? Review of Early Evidence [video]

By Richard Swart, PhD – CrowdFunding Beat Guest ContributorResearch Director, Crowdfunding Capital Advisors, Director of Crowdfunding Research, UC Berkeley Monday, October 13, 2014

Having watched the evolution of the crowdfunding industry these past few years, I have heard a constant refrain that crowdfunding democratizes access to capital.  This is usually accepted as a fact. However, the academic community has been taking a hard look at the evidence, and the results are definitely mixed.


Democratization of access means different things to different speakers. Here are some of the assumptions and claims:

 (1) Crowdfunding will work for women and minority business owners and entrepreneurs at least as well as it does for men

(2) Geography is not a major constraint – people can mobilize their social networks and raise money from anywhere

(3) Crowdfunding will disrupt traditional funding channels – meaning that the VCs in Palo Alto and the finance firms in NYC will not continue to have as much power

 This article draws from presentations by Prof. Christian Catalani of MIT, Prof. Keongtae Kim of the City University of Hong Kong, and our own research at UC Berkeley.  Most of the sessions were videotaped and are available here at CrowdFund Beat.  The papers will soon be available at the this URL, but as of this writing some are still being loaded:

Professor Kim’s paper looked at access to capital through traditional sources and whether difficulty in accessing capital positively affects the use of crowdfunding by entrepreneurs. Not surprisingly, he found a statistically significant relationship between limited access and the use of crowdfunding.

 The next question was whether the benefits of crowdfunding applied equally. He found that essentially  “the rich get richer” –  that there is more benefit from crowdfunding for entrepreneurs in high income areas.  This is consistent with research that show limited awareness of crowdfunding in rural regions and a concentration of success in tech capitals such as Silicon Valley, New York, Boston, Seattle, Austin and Boulder. So, the benefits may have more to do with location – meaning that crowdfunding appears to be more successful, with larger raises, when the company is based in an existing hub of activity.  This only applies for crowdfunding for a business or technology. There is no location effect for philanthropic crowdfunding.

 Prof Catalini presented data that shows that regions with more college students or unemployed college graduates in their 20s have more crowdfunding activity. Meaning that this is literally more of a young man’s game – given the disparity in project funding towards men.

A fascinating table, which I copy here from his presentation: “Students, Slack Time and Entrepreneurial Experimentation: Evidence from Crowdfunding” presented at the Second Annual Academic Symposium on Crowdfunding Research at UC Berkeley, shows the continued dominance of Silicon Valley in early equity investments into crowdfunding.  Professor Catalini looked at the first $26 Million invested into equity crowdfunding companies.


Silicon Valley Startup Non-Silicon Valley Startup
Silicon Valley Investors 58.2% 48.5%
Non-Silicon Valley Investors 41.8% 51.5%


Of the 2,602 online investments, he found 1,311 of the investors are from Silicon Valley.  Of the 127 companies, 67.8% were from Silicon Valley. This points out the significant concentration of investors in Silicon Valley and their continued influence.  This is unsurprising considering that Silicon Valley controls over 80% of all venture capital in the United States.  The more relevant question has to do with the over-representation of firms from the valley.  One must question the power of social connections in funding – even in equity crowdfunding. The broadest implication here is that crowdfunding seems to follow existing agglomerations of capital and is likely a substitute for other types of capital.

Prof. Catalini then points out that people who are socially connected to the entrepreneur use a different set of considerations and data than non-socially connected individuals in deciding whether to invest. Non-socially connected individuals primarily base decisions off accumulated capital – meaning they follow the lead of early investors.  Prof. Catalini concludes that the power of existing social networks constrains the promise of crowdfunding – a truly global marketplace for new ideas and ventures. Thus, friends and family continue to play a significant role in equity crowdfunding – which is different from the early data that shows that less than 30% of successful entrepreneurs who successfully used perks crowdfunding reported that friends and family played a significant role in their funding success.

Research conducted at Berkeley shows a relationship between location and funding when attempting to fund a project based on existing industries – meaning video games, software, tech, etc.  We found that projects are more likely to be funded in cities where there is an existing cluster around that technology.  For example, that video games are more successfully funded in Los Angeles than in San Francisco. This implies that social ties to influential people in an industry lead to more crowdfunding success, even in competitive cities.

Is this data surprising? Not really. While those of us inside the industry believe crowdfunding is transformative and creating disruption, in reality it is in the early technology adopter stage described by Geoffrey Moore in Crossing the Chasm and other books.  Crowdfunding is still novel for most people, and was first adopted in major urban areas with technology industries and creative industries. It is slowly spreading out to the heartland – whether than is the mid-west in the US or frontier nations around the world.  Most backers are college educated males in their 30s. Most project initiators are in their 20s or early 30s.

One encouraging piece of data is that according to Dr Alica Robb of the Kauffman Foundation, women are more likely than men to achieve their crowdfunding goals, but often set lower goals.

Crowdfunding has yet to disrupt existing concentrations of capital and firms. However, as it progresses to a more mainstream mechanism we expect to see broader adoption and success. There are of course very capable entrepreneurs everywhere and examples of highly successful projects throughout the world, but the majority of funding and success is still tied to urban centers.

Entrepreneurs need to focus on building a robust social network with high influence individuals located in the dominant cities or regions for the underlying technology or industry. Having thousands of connections is less important than having connections and being able to mobilize support from leaders in a field.
Richard SwartDr. Richard Swart directs the research program in Entrepreneurial and Social Finance at UC Berkeley. He also is a partner and directs research for Crowdfund Capital Advisors, the world’s leading advisory firm in Crowdfunding and Alternative Finance. He is an acknowledged thought leader on crowdfunding and works closely with Jason Best and Sherwood Neiss, the Principals at Crowdfund Capital Advisors on projects. They recently recently released the World Bank White Paper on crowdfunding as well as the first major study of the impact of Crowdfunding on companies.

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