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Crowfunding has been a game-changer for startups because it gives nontraditional entrepreneurs access to different sources of capital. In her research, Wharton management professor Valentina Assenova focuses on this relatively new phenomenon and how it is influencing startup activity. She recently spoke to Knowledge@Wharton about her research and how crowdfunding is democratizing access to capital in diverse areas of the U.S.
An edited transcript of the conversation follows.
Knowledge@Wharton: You look at the emergence of entrepreneurial activity, microfinance and crowdfunding. Could you talk about the different areas you study?
Valentina Assenova: I’m very interested in how startups attain capital and the factors that enable them to survive and grow over time. I’ve looked at that in a variety of different contexts. Some of the contexts that I’m very drawn to are emerging markets, where there are many different impediments to entrepreneurial growth and success than there are in the United States. I’ve also looked at markets that are emerging within the United States, such as crowdfunding, which have revolutionized the way that enterprises attain capital and the ways in which they’re able to succeed.
Within sub-Saharan Africa, I’ve been very interested in a couple of different streams of research. One of them is looking at the benefits that formalization has on the ability of micro-enterprises to succeed and grow their firms over time. In one of my recent papers, I’ve examined the growth trajectories of over 12,000 firms across 1,800 countries in sub-Saharan Africa, along with my co-author, Olav Sorenson at the Yale School of Management. We find that the ways in which entrepreneurs perceive their local contexts, in particular the trust that they have in their local governments, is very strongly predictive of their willingness to register their businesses right at funding, to attract outside capital such as equity financing and debt financing, and to attract employees for the startups. Formalization is very important, but there are many impediments to formalizing firms across contexts.
Within the United States, I have been more focused on examining entrepreneurial finance, both venture capital networks and the role of limited partners in those networks for allocating capital to different firms and different investment opportunities. I’m also focused on the growth of crowdfunding and the way it has affected the ability for entrepreneurs to raise capital across the United States, particularly for technology-based ventures.
Knowledge@Wharton: You looked at whether crowdfunding expands the types of enterprises that are getting funded. Can you talk about some of the key takeaways from that research?
Assenova: Just to give a little background, crowdfunding represents a new form of finance for entrepreneurial ventures in the United States. Typically, entrepreneurs have had several different opportunities or options for obtaining financing, one of them being venture capital. Venture capital in the United States is very highly concentrated within a few different geographies, in particular right around the Cambridge area as well as Silicon Valley. Many entrepreneurs have found themselves moving to Silicon Valley and trying to network with venture capitalists in order to succeed. Of course, the types of entrepreneurs who are successful at that have tended to be a particular subset of people. We know from prior research that they’ve tended to be white men with Stanford MBAs and graduate degrees. They’re not representative of many of the other kinds of entrepreneurs who are coming up with innovative ideas around the United States. In [“Expanding innovation finance via crowdfunding”], my co-authors and I examine what effect crowdfunding — in particular, raising capital through Kickstarter for technology-based campaigns — has had on entrepreneurs’ subsequent ability to attract venture capital in those very same areas.
“Venture capital in the United States is very highly concentrated within a few different geographies, in particular right around the Cambridge area as well as Silicon Valley.”
In this paper, we find a very strong relationship between the growth of crowdfunding between 2009 and 2014, and the growth of follow-on venture capital investment activity in those very geographies around the United States that have not traditionally attracted a lot of capital. All of that is to say that crowdfunding appears to be democratizing access to capital among a larger pool of innovators who are coming up with innovative ideas around the U.S. We’re seeing that this trend is very strongly positive and has been increasing over time.
Knowledge@Wharton: What does this mean for entrepreneurs who want to get a project funded, or for someone who wants to fund entrepreneurship?
Assenova: If you are an entrepreneur, this is great news because it means that you don’t have to move to Silicon Valley. You don’t have to have a graduate degree from Stanford in order to succeed. If you have a great idea, going on a platform like Kickstarter can give you great visibility — not just among the crowd and the backers who can identify and screen these potential ideas, but your success on one of these platforms can subsequently attract venture capitalists to your area and to your types of projects and ideas. What it means practically is that crowdfunding might be a very first step for the crowd to selecting fantastic ideas that have a lot of high growth potential.
Knowledge@Wharton: What’s next for your research?
“Crowdfunding appears to be democratizing access to capital among a larger pool of innovators … around the U.S.”
Assenova: I am currently looking at dynamics of crowdfunding among minority and women entrepreneurs. These are groups that have traditionally not been as successful as white educated men from upper-class or middle-class backgrounds. Really focusing on these atypical entrepreneurs, I am trying to understand what factors enable the very successful women and minorities to overcome many of the biases and impediments to obtaining capital for a startup.
In particular, I’m interested in several different factors. One of them is the motivations of the entrepreneurs themselves, whether these motivations are social or communal, and the ways in which that affects their drive and their ability to succeed. A second factor that I’m looking at is the role of their interpersonal networks, so the role of friendship networks, communal networks and kinship networks in these enterprises’ ability to raise follow-on funding for their startups to survive as for-profit or nonprofit organizations over time, and for their ability to be rated as very highly innovative by their backers.
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Anumakonda Jagadeesh
Excellent.
Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet. Crowdfunding is a form of crowdsourcing and of alternative finance. In 2015, it was estimated that worldwide over US$34 billion was raised this way.
Although similar concepts can also be executed through mail-order subscriptions, benefit events, and other methods, the term crowdfunding refers to Internet-mediated registries. This modern crowdfunding model is generally based on three types of actors: the project initiator who proposes the idea and/or project to be funded, individuals or groups who support the idea, and a moderating organization (the “platform”) that brings the parties together to launch the idea.
Crowdfunding has been used to fund a wide range of for-profit entrepreneurial ventures such as artistic and creative projects, medical expenses, travel, or community-oriented social entrepreneurship projects.
Crowdfunding has a long history with several roots. Books have been crowdfunded for centuries: authors and publishers would advertise book projects in praenumeration or subscription schemes. The book would be written and published if enough subscribers signaled their readiness to buy the book once it was out. The subscription business model is not exactly crowdfunding, since the actual flow of money only begins with the arrival of the product. The list of subscribers has, though, the power to create the necessary confidence among investors that is needed to risk the publication.
War bonds are theoretically a form of crowdfunding military conflicts. London’s mercantile community saved the Bank of England in the 1730s when customers demanded their pounds to be converted into gold – they supported the currency until confidence in the pound was restored, thus crowdfunded their own money. A clearer case of modern crowdfunding is Auguste Comte’s scheme to issue notes for the public support of his further work as a philosopher. The “Première Circulaire Annuelle adressée par l’auteur du Système de Philosophie Positive” was published on 14 March 1850, and several of these notes, blank and with sums have survived. The cooperative movement of the 19th and 20th centuries is a broader precursor. It generated collective groups, such as community or interest-based groups, pooling subscribed funds to develop new concepts, products, and means of distribution and production, particularly in rural areas of Western Europe and North America. In 1885, when government sources failed to provide funding to build a monumental base for the Statue of Liberty, a newspaper-led campaign attracted small donations from 160,000 donors.
Crowdfunding on the internet first gained popular and mainstream use in the arts and music communities. The first noteworthy instance of online crowdfunding in the music industry was in 1997, when fans underwrote an entire U.S. tour for the British rock band Marillion, raising US$60,000 in donations by means of a fan-based Internet campaign. They subsequently used this method to fund their studio albums. In the film industry, independent writer/director Mark Tapio Kines designed a website in 1997 for his then-unfinished first feature film Foreign Correspondents. By early 1999, he had raised more than US$125,000 on the Internet from at least 25 fans, providing him with the funds to complete his film.[14] In 2002, the “Free Blender” campaign was an early software crowdfunding precursor. The campaign aimed for open-sourcing the Blender 3D computer graphics software by collecting $100,000 from the community while offering additional benefits for donating members.
Crowdfunding started to gain mainstream traction with the launch of ArtistShare (2003). As the model matured, more crowdfunding sites started to appear on the web such as Kiva (2005), IndieGoGo (2008), Kickstarter(2009), GoFundMe (2010) and Microventures (2010).
The phenomenon of crowdfunding is older than the term “crowdfunding”. According to wordspy.com, the earliest recorded use of the word was in August 2006.
Applications
Crowdfunding is being explored as a potential funding mechanism for creative work such as blogging and journalism, music, independent film and for funding startup companies.
Food and agriculture
Several crowdfunding platforms have emerged that allow people to donate or invest in food- and agriculture-related opportunities. AgFunder is one global platform that gives both individual and institutional investors access to venture capital investments, both in agriculture technology and food technology companies. Cropital has developed a platform to allow investors to invest in small-holder farmers, and rewards-based platforms like Barnraiser allow users to support farmers and food startups.
The crowdfunding platform PieShell was launched in 2016 to focus exclusively on food and beverage campaigns.
Philanthropy and civic projects
A variety of crowdfunding platforms have emerged to allow ordinary web users to support specific philanthropic projects without the need for large amounts of money.[25] GlobalGiving allows individuals to browse through a selection of small projects proposed by nonprofit organizations worldwide, donating funds to projects of their choice. Microcredit crowdfunding platforms such as Kiva (organization) facilitate crowdfunding of loans managed by microcredit organizations in developing countries. The US-based nonprofit Zidishaapplies a direct person-to-person lending model to microcredit lending for low-income small business owners in developing countries.
DonorsChoose.org, founded in 2000, allows public school teachers in the United States to request materials for their classrooms. Individuals can lend money to teacher-proposed projects, and the organization fulfills and delivers supplies to schools. There are also a number of own-branded university crowdfunding websites, which enable students and staff to create projects and receive funding from alumni of the university or the general public. Several dedicated civic crowdfunding platforms have emerged in the US and the UK, some of which have led to the first direct involvement of governments in crowdfunding. In the UK, Spacehive is used by the Mayor of London and Manchester City Council to co-fund civic projects created by citizens. Similarly, dedicated humanitarian crowdfundinginitiatives are emerging, involving humanitarian organizations, volunteers and supports in solving and modeling how to build innovative crowdfunding solutions for the humanitarian community. Likewise, international organizations like the Office for the Coordination of Humanitarian Affairs (OCHA) have been researching and publishing about the topic.
One crowdfunding project, iCancer, was used to support a Phase 1 trial of AdVince, an anti-cancer drug in 2016.
Real estate
Real estate crowdfunding is the online pooling of capital from investors to fund mortgages secured by real estate, such as “fix and flip” redevelopment of distressed or abandoned properties, equity for commercial and residential projects, acquisition of pools of distressed mortgages, home buyer downpayments and similar real estate related outlets. Investment, via specialised online platforms in the US, is generally completed under Title II of the JOBS Act and is limited to accredited investors. The platforms offer low minimum investments, often $100 – $10,000. There are over 75 real estate crowdfunding platforms in the United States. The growth of real estate crowdfunding is a global tendency. During 2014 and 2015, more than 150 platforms have been created throughout the world, such as in China, the Middle East, or France. In Europe, some compare this growing industry to that of e-commerce ten years ago.[
In Europe the requirements towards investors are not as high as in the United States, lowering the entry barrier into the real estate investments in general. Real estate crowdfunding can include various project types from commercial to residential developments, planning gain opportunities, build to hold (such as social housing) and many more. The report from Cambridge Centre for Alternative Finance addresses both real estate crowdfunding and peer 2 peer lending (property) in the UK.
Intellectual property exposure
Science
A number of platforms have also emerged that specialize in the crowdfunding of scientific projects, such as experiment.com, and The Open Source Science Project. In the scientific community, these new options for research funding are seen ambivalently. Advocates of crowdfunding for science emphasize that it allows early-career scientists to apply for their own projects early on, that it forces scientists to communicate clearly and comprehensively to a broader public, that it may alleviate problems of the established funding systems which are seen to fund conventional, mainstream projects, and that it gives the public a say in science funding. In turn, critics are worried about quality control on crowdfunding platforms. If non-scientists were allowed to make funding decisions, it would be more likely that “panda bear science” is funded, i.e. research with broad appeal but lacking scientific substance. Initial studies found that crowdfunding is used within science, mostly by young researchers to fund small parts of their projects, and with high success rates. At the same time, funding success seems to be strongly influenced by non-scientific factors like humor, visualizations, or the ease and security of payment.
Journalism
Traditionally, journalists are not involved in advertising and marketing. Crowdfunding means that journalists are attracting funders while trying to remain independent, which may pose a conflict. Therefore, being directly involved with financial aspects can calljournalistic integrity and journalistic objectivity into question. This is also due to the fact that journalists may feel some pressure or “a sense of responsibility” toward funders who support a particular project. Crowdfunding can also allow for a blurred line between professional and non-professional journalism because if enough interest is generated, anyone may have their work published.
International development
There is some hope that crowdfunding has potential as a tool open for use by groups of people traditionally more marginalized. The World Bank published a report titled “Crowdfunding’s potential for the Developing World” which states that “While crowdfunding is still largely a developed world phenomenon, with the support of governments and development organizations it could become a useful tool in the developing world as well. Substantial reservoirs of entrepreneurial talent, activity, and capital lay dormant in many emerging economies…Crowdfunding and crowdfund investing have several important roles to play in the developing world’s entrepreneurial and venture finance ecosystem.” (Wikipedia).
Dr.A.Jagadeeesh Nellore(AP),India.