Research on the Current State of Crowdfunding
Venkat Kuppuswammy and Kathy Roth, May 2016
Research on crowdfunding has traditionally focused on startups during a crowdfunding campaign, leaving fairly little information on what happens to them afterward. This dearth of information is important as policymakers aim to understand the effectiveness of this alternative financing mechanism and entrepreneurs want to know how it can best help small businesses. This report uses data on entrepreneurs who launched crowdfunding campaigns to fund their startups to determine how crowdfunding affects startups after their campaigns are completed. In particular, this report examines the relationship between crowdfunding and the ability to raise external capital to sustain a business as it develops.
Crowdfunding is sometimes viewed in the academic literature as a “proof-of-concept,” or way to show investors that a business idea is feasible and marketable. In other words, investors will inject more capital into early-stage startups if there is evidence that the startup’s products and services have a strong market. Crowdfunding demonstrates this proof-of-concept as investors believe that if individuals invest in a startup before it provides goods or services, then more people will buy a startup’s products when they hit the market. The purpose of this study is to investigate the relationship between crowdfunding campaign performance and several post-campaign benefits that seed-stage startups value, most notably, access to additional external capital. More specifically, this study aims to determine whether crowdfunding campaign success translates into greater access to capital through more conventional sources of venture funding. To address this broader concept more directly, the report examines the following three research questions
1. What is the nature of the relationship between crowdfunding success and attracting additional capital?
Generally, the report finds that successful crowdfunding campaigns positively influence the ability to attract additional capital, likely by providing proof of concept to potential external investors. However this relationship is more nuanced. More precisely, crowdfunding as proof of concept benefits entrepreneurs with smaller campaigns ($75,000 or less). For larger campaigns of greater than $75,000, additional funds do not appear to offer the same degree of proof-of-concept benefits in attracting additional capital. Figures 1 and 2 illustrate this relationship between crowdfunding campaign performance (in increments of $1,000) and the raw probability of raising external capital contributions.
2. Which project attributes moderate the relationship between crowdfunding success and attracting additional capital?
The report analyzes models and attempts to identify whether the effect of crowdfunding performance on the probability of external financing depends on several characteristics of the project, the entrepreneur, or both. These include the objective of the crowdfunding campaign, the gender of the entrepreneur, and whether the entrepreneur made prior attempts to obtain external capital. Only the project objective and prior attempts to secure outside capital were found to influence the effect of crowdfunding campaign success on external financing at a statistically significant level.
3. What other non-financial outcomes are positively affected by crowdfunding success?
This report finds that stronger crowdfunding campaign performance increases the probability of business partnerships, greater publicity, a stronger customer base, and ease of finding employees. Also, crowdfunding campaign performance has the strongest effects on building a customer base and generating publicity for the new product (compared to the other benefits), but only when the amount raised was less than $100,000.