The uneven geography of crowdfunding success

In recent years, crowdfunding has emerged as an increasingly common source of innovation finance for entrepreneurs that has allowed them to forgo traditional financiers like venture capitalists (Mollick 2014). Instead, entrepreneurs can engage consumers directly for financial support and consumers have thus become increasingly common enablers of product and service innovation in their own right (Belleflamme et al. 2014). The potential to engage consumers directly for innovation finance has subsequently been hailed to be changing “how, why, and which ideas are brought into existence” (Gerber & Hui 2013, p.1). For example, by reducing the geographical constraints of traditional funding (Agrawal et al. 2015)in addition to expanding access to entrepreneurial finance to a greater range of individuals and teams (Lehner & Nicholls 2014; Sorenson et al. 2016). It perhaps not surprising then that, an increasing number of people are excited by crowdfunding and especially its potential to democratize access to finance, especially as it breaks with the dominance of venture capitalist who typically select entrepreneurs who mirror themselves “in terms of their educational, social, and professional characteristics and end up concentrated in a small number of regions.” (Sorenson et al. 2016, p.1526). But the question is: Does crowdfunding break the geographic constraints observed within other funding domains or is it similarly discriminatory?

Does crowdfunding break with common discriminations in access to finance?

In seeking to answer this question, my colleagues and I sought to map success rates for 134,098 campaigns launched in the USA on the IndieGoGoplatform between 2009 and 2015 in order to observe whether spatial capital effects your chances of success (full reference see below). Spatial capital referring to your ability to draw capital from other social spaces due to geographic context. Our hypothesis was that if crowdfunding does overcome spatial inequalities seen with other forms of innovation finance perhaps this may be because it allows people to monetize resources ignored by for example traditional VC markets or change what can function as capital. These alternative form of resources or capital building on the Bourdieu’s model of capital. 

Figure 1.Predicted probabilities that campaigns are fully funded

As the figure above shows, two things are apparent from the data. First, only a few teams with high field-specific cultural, social, and economic capital have reasonable chances of success (only 10% of IndieGoGo campaigns are fully funded). Second, campaigns’ location shapes their fortunes. Areas that are more affluent, have higher levels of local association and cooperation, and have a younger population have a particular advantage. For our modeled campaigns, for example, 47% of pledged funds accrued to the top 5 commuting zones, Los Angeles (17.9%), New York City (17.5%), San Francisco (4.9%), Boston (3.6%), and Austin, Texas (3.1%). While these top cities differ from VC investments it is apparent spatial inequalities place significant limits on who can benefit from crowdfunding campaigns, suggesting crowdfunding may not democratize access to finance, as optimists hope.

Success at the crowdfunding platform is determined by “sociospatial conditions”

We found that while these observations are in part driven by agglomeration pressures this is not full story as simply being in the right location does not on its own substantially boost one’s odds of success. Rather, the right kind of capital – where the “right” capital is determined by local sociospatial conditions – interacts with agglomeration in generating opportunities. For example, success appears to become less likely in affluent areas as the non-white share of the population increases, but in diverse areas we see the opposite relationship, and a greater concentration of projects of the same type appears to support success in rural areas but leads to overcrowding and competition in youthful ones. Hence, not only does location shape the likelihood of success, but also when and which forms of capital are useful in that context.

Our findings show that even in the platform economy, success is often dependent on physical location, despite the very low transaction costs offered by the internet. Whilethis does not necessarily mean crowdfunding cannot be inclusive, it certainly means that it cannot be assumed to be so.

Blogpost bKristian Roed Nielsen (@RoedNielsen), Visiting Researcher at Misum and Post-Doc Researcher at Copenhagen Business School

Full article: Caleb Gallemore; Kristian Roed Nielsen; Kristjan Jespersen. 2019.The Uneven Geography of Crowdfunding Success: Spatial Capital on Indiegogo. Environment and Planning A (In press). p. 1 – 18. https://doi.org/10.1177/0308518X19843925

Further references:

Agrawal, A., Catalini, C. & Goldfarb, A., 2015. Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions. Journal of Economics & Management Strategy, 24(2), pp.253–274. Available at: http://dx.doi.org/10.1111/jems.12093.

Belleflamme, P., Lambert, T. & Schwienbacher, A., 2014. Crowdfunding: Tapping the right crowd. Journal of Business Venturing, 29(5), pp.585–609. Available at: http://www.sciencedirect.com/science/article/pii/S0883902613000694.

Gerber, E.M. & Hui, J., 2013. Crowdfunding : Motivations and Deterrents for Participation. ACM Transactions on Computer-Human Interaction, 20(6), pp.34–32.

Lehner, O.M. & Nicholls, A., 2014. Social finance and crowdfunding for social enterprises: A public-private case study providing legitimacy and leverage. Venture Capital, 16(3), pp.271–286. Available at: 10.1080/13691066.2014.925305.

Mollick, E., 2014. The dynamics of crowdfunding: An exploratory study. Journal of Business Venturing, 29(1), pp.1–16. Available at: http://www.sciencedirect.com/science/article/pii/S088390261300058X.

Sorenson, O. et al., 2016. Expand innovation finance via crowdfunding. Science, 354(6319), pp.1526 LP – 1528. Available at: http://science.sciencemag.org/content/354/6319/1526.abstract.

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