Crowdfunding platforms that raise funds through donations on the Internet have opened a funding source to startups in areas suffering from a venture capital drought.
A new study by the University of California Berkeley shows that crowdfunding has spread startup financing beyond entrepreneurial bubbles created by venture capitalists, many of which are to be found in the United States. The study was published in a recent edition of the journal, Science.
Historically, funding for innovation has come from venture capitalists, which tend to fund entrepreneurs that often mirror the investors in terms of their educational, social and professional characteristics.
Venture capital funding also tends to be concentrated in a small number of regions such as Silicon Valley in California.
"Most venture capital gets invested in Silicon Valley and Boston, and thus shortchanges the rest of the country for entrepreneurial financing," said study senior author Lee Fleming, faculty director of the Coleman Fung Institute for Engineering Leadership at UC Berkeley.
"But crowdfunding has opened up funding to everyone else."
For the study, researchers analyzed data from 2009 to 2015 on successful Kickstarter campaigns and venture capital investments.
Researchers compared investments that could have reasonably been funded by either crowdfunding or venture capital because some Kickstarter campaigns are for projects that have no real possibility of being backed by venture capitalists, or because venture capitalists may invest in some kinds of companies that fall outside the scope of the Kickstarter platform (such as biotechnology).
Researchers identified 55,005 Kickstarter projects in categories similar to the industries in which venture capitalists invested, and 17,493 venture capital investments in industries engaged in activities similar to those of Kickstarter campaigns.
They then used this dataset to map Kickstarter projects and venture capital investments by county and by year.
Although the typical Kickstarter campaign involved a smaller amount of money, these campaigns covered a broader swath of the U.S. Several places with the largest number of successful Kickstarter campaigns such as Chicago, Los Angeles and Seattle haven't been magnets for venture capitalists' investments.
Venture capitalists' investments were highly concentrated. Just four counties located in the Boston area and Silicon Valley account for 50 percent of all matched venture capital investments.
Researchers calculated the relative intensity of Kickstarter versus venture capital dollars in each region to adjust for differences in population and other factors that might produce more investments in all types of innovative activity in some places.
They found that Kickstarter allocates a much larger share of its resources than venture capitalists to the interior of the U.S., away from coastal population centers and traditional technology hubs.
Even in the Boston area and Silicon Valley, Kickstarter investments were concentrated in different areas than venture capitalists' funding.
Kickstarter funding in the Bay Area of California, for example, goes disproportionately to Marin and Napa counties, whereas San Francisco and the Peninsula counties received more venture capitalists' funding.
The study found that crowdfunding in a region, and in particular successful technology campaigns, appeared to cause an increase in venture capital funding in the region. This occurs as venture capitalists look for promising new ideas and a successful campaign is a very good indicator of potential.
"This effect has gotten consistently stronger over the last six years," said Fleming.
"If this phenomenon continues, crowdfunding could begin to address regional inequality in entrepreneurial financing, through both direct crowdfunding investment and induced venture capital investment."