Does Crowdfunding Democratize Access to Capital? A Geographical Analysis

Abstract

The ability of crowdfunding to “democratize” finance has attracted much interest among entrepreneurs and funders. Entrepreneurs initiating crowdfunded projects, located anywhere, are able to access sources of credit from around the world. As such, entrepreneurs who face less attractive credit environment may choose to engage more in crowdfunding. In this paper, we examine how geography affects the formation of crowdfunded projects. We obtain data on housing prices that are closely related to the cost of accessing traditional sources of financing, especially bank financing, and match the data to the novel data set obtained from a leading crowdfunding market from 2009 to 2013. Adopting a first-difference approach to address unobserved area-specific effects and using housing supply elasticity as an instrument for housing price change, we find that a higher decrease in housing prices leads to a greater increase in the creation of crowdfunded projects. Moreover, the effect varies across projects. It is stronger for larger projects, while it is indifferent between successful and unsuccessful projects. In addition, the effect of housing prices on crowdfunded projects is more significant for low socioeconomic status areas. The increase in crowdfunded projects in the low status areas is entirely driven by a significant increase in unsuccessful projects, whereas the effect of housing prices on successful crowdfunded projects is significant only in high socioeconomic status areas. Overall, the results show that web-enabled crowdfunding could be a viable option for entrepreneurs having difficulty accessing traditional offline channels of credit, thereby democratizing access to finance.