Crowdfunding in capital formation: an empirical investigation

Abstract

This thesis includes two essays studying a new type of entrepreneurial financing institution. Recently a new type of institution has emerged, crowd funders. These entities: 1) channel capital to create intellectual property; 2) gather information on project and entrepreneur quality; and 3) gauge demand information directly from individuals to improve the efficiency of capital allocation.

Traditional financial institutions are notoriously secretive about applicant loans or business proposals, creating research challenges in tracking post-funding performance, especially for start-ups. In the second essay, I analyze all Kickstarter applicants, both funded and rejected, along with the real outcomes of a feature movie project. I show some of the first definitive evidence on the effectiveness of crowdfunding for new ventures. I find that successful crowdfunding increases the likelihood of receiving later-stage funding by 50%. Moreover, crowdfunded movies generate higher revenue and better quality measures when compared to rejected crowdfunding projects that nevertheless obtain funding elsewhere. Early involvement of experienced backers and movie backers appear key to overall funding.

In the second essay, we use data from crowd funder Kickstarter, which allows new insights on capital formation and the role of entrepreneurial reputation formation in the venture funding process. This funding method includes all cases where entrepreneurs try yet fail to raise funds, a feature heretofore unavailable to researchers. Although it is not a causal statement, we further quantify that entrepreneurs who have acquired positive reputation through previously successful funding history are 16% more likely to get funded and 50% more likely to get funded if entrepreneurs received all positive comments from previously funded projects on Kickstarter. However entrepreneurs who have acquired a negative reputation through previously failed funding projects are 13% less likely to get funded.

This thesis investigates the role of the crowdfunding in financing early stage entrepreneurial ventures and provides empirical evidence of the size of the effect of an individual's reputational capital in a financial transaction.