RESEARCH / ENTREPRENEURSHIP · JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY · 2015
Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions
Summary
Crowdfunding removes some of the distance-sensitive costs of evaluating and funding projects, but not all of them. The paper shows how offline social ties — family and friends — seed early funding and shape the timing of investment decisions, with socially connected backers behaving very differently from the anonymous crowd.
In the paper, we explore the frictions crowdfunding removes in the matching process between entrepreneurs and investors, and uncover how the social connections between the entrepreneurs and their family and friends end up influencing overall fundraising dynamics on crowdfunding platforms. While crowdfunding removes some of the distance-sensitive costs associated with evaluating and funding projects, it does not remove all of them. In particular, information that travels through offline networks leads socially connected funders to form their consideration set in a different way. By contributing early, this group generates the signal of quality(accumulated capital) everyone else relies on to make their investment decisions. Therefore, while crowdfunding platforms may appear global in nature, because of search frictions, asymmetric information and path dependency they are heavily constrained by pre-existing social ties. **This substantially limits their ability to democratize access to capital. **The paper was awarded a NET Institute Grant.
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