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Study: Crowdfunders Act Surprisingly Similar to VCs

Crowdfunding critics take note: A recent study by Wharton professor Ethan Mollick proves that crowdfunders are better than you might think at finding quality entrepreneurs--and even seem to act with less bias than venture capitalists.
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The typical crowdfunding-project backer is more sophisticated than you might think. 

In a recent study, Wharton professor Ethan Mollick analyzed 2,101 Kickstarter projects--all of which were based in the United States, were seeking more than $5,000 in funding, and fell within particular start-up verticals including hardware, software, video games, and product design. He had a simple question: Compared to a skilled venture capitalist, how good is the crowd at assessing the quality of entrepreneurs?

There's been plenty of research about how venture capitalists seek out investments; but in this study, Mollick's goal was to understand how and why typical backers make their decisions--and determine whether those decisions were in line with how a VC might make a decision. The results were surprising--and encouraging for proponents of crowdfunding. 

"Although the amateurs and the experts differ in many key ways, they are ultimately assessing whether early stage entrepreneurial ventures have the ability to succeed at their goals by looking for signals of quality," writes Mollick. The findings suggest "that the signals of quality that are used by VCs to assess the viability of new ventures are also used by crowdfunders." 

Obviously, venture capital and crowdfunding have completely different models for raising capital. First, there are relatively few VC firms, compared to millions of potential crowdfunders. Second, VCs are in the middle of start-up networks, while the average crowdfunder might live 1,000 miles from the nearest start-up. And third, the most obvious difference (at least for now) is that VCs get equity--the typical crowdfunder does not. But Mollick's study is an important advance in the study of crowdfunding, because it lends credibility to the argument that crowdfunding has the potential to find--and fund--the next generation of high-growth start-ups. 

In the study, Mollick lays out his fives hypoethesis that show that crowdfunded-backed and venture-backed start-ups are actually not all that different. They are:

Hypothesis 1: Entrepreneurs who demonstrate a history of successful projects are more likely to be crowdfunded. 

Verdict: True. 

Looking at the backgrounds of crowdfunding-project creators, Mollick found that "explicit past evidence of success is predictive of successful funding...I examined whether projects that listed relevant past projects or employers by name are more likely to be selected than those that don't clearly indicate a relevant background."

Hypothesis 2: Entrepreneurs who demonstrate third-party endorsements are more likely to be crowdfunded.

Verdict: True.

"Endorsements were explicit hyperlinks or quotes from outside organizations or new media providing support or legitimacy to projects," Mollick writes. "Most commonly, this was a quote from a journalist or prominent blog...outside endorsements significantly increase the chance of selection in crowdfunding."

Hypothesis 3: Entrepreneurs who demonstrate preparedness are more likely to be crowdfunded.

Verdict: Sort of. 

To examine this hypothesis, Mollick looked at two measures: whether or not there was a prototype listed, and whether there was a video that existed. While having a prototype and video helped entrepreneurs raised funds, it was tough to prove causality: "A key question about these findings is whether signals are important given other potential sources of information on entrepreneurs, such as social networks," Mollick writes. 

Hypothesis 4: Selected projects are less geographically concentrated in crowdfunding than in venture capital.

Verdict: True.

VC-funded typically happens in start-up clusers--the average distance between a start-up and its venture backer, for instance, is 70 miles. One of the benefits of crowdfunding is that it's potentially immune to the "cluster" effect. Mollick writes that "crowdfunding does seem less concentrated than VC funding, though the difference is not great in magnitude."

Hypothesis 5: Gender is less predictive of selection in crowdfunding than in venture capital.

Verdict: True.

One of the key insights of Mollick's study is this: The number of successfully-funded Kickstarter projects founded by women was fifteen times higher than among those backed by VCs tracked by VentureSource. "Further," Mollick writes, "gender was not predictive of selection under any specification...These findings offer strong support for [Hypothesis 5], that crowdfunding has less gender bias than VC selection."




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