Wharton's Valentina Assenova discusses her research on the impact of crowdfunding on entrepreneurial activity.

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 at 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 at 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 at 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 at 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 at 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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