Crowdfunding is unlocking opportunities in regions and industries typically underserved by venture capital (VC) funding, according to a recent study. The report, titled “Unleashing Main Street Entrepreneurship: Crowdfunding, Venture Capital, and the Democratization of New Venture Investments,” used archival data to compare trends in crowdfunding with historic VC funding trends in the United States from 2006 to 2016.
The study revealed that crowdfunding often functions as a substitute for VC funding in some regions and as a complement in others, in three important ways.
- Crowdfunding had a more even geographical distribution than VC funding.
As many previous studies show, the amount VC funding is highly concentrated in specific regions within the US. The findings of the study are in line with this trend. Between 2006 and 2016, three states, California, Massachusetts, and New York, received roughly 60 percent of the total dollar share of VC funding across the country. The 29 states with the least amount of VC funding accounted for less than 5 percent.
In contrast, crowdfunding was more widely dispersed geographically.
- Crowdfunding was more heavily allocated in regions typically underserved by VCs.
The Midwest, Middle America, South, and Non-Mainland States — all of which received comparatively low VC funding — accounted for a significantly larger share of crowdfunding relative to VC funding.
In contrast, cities with the highest concentration of VC funding like Silicon Valley and Boston received a comparatively smaller share of crowdfunding than VC funding on a national basis.
- Crowdfunding was more heavily concentrated in industries that typically received the lowest amounts of VC funding.
Less than 3 percent of VC deals in the U.S. went to retail and traditional media, food and beverage, and leisure in the period studied. Yet these three industries were three of the top four industries that received the most crowdfunding investment.
On the other hand, industries like technology and healthcare, which received the highest amounts VC funding, only accounted for 2.42 percent of crowdfunding investment in this study.
Many states that have invested the most heavily in programs meant to incentivize VC funding are often in regions where crowdfunding shows the most promise. According to the authors, policymakers who seek to support entrepreneurship in these regions could see significant benefits in researching programs that incentivize crowdfunding instead.
Read the full study here.
Contributed by Maha AbdelAzim