Crowdfunding and Venture Capital Substitutes or Complements

Crowdfunding and Venture Capital: Substitutes or
Complements?
Author(s): Mario D'Ambrosio and Gianfranco Gianfrate
Source: The Journal of Private Equity , WINTER 2016, Vol. 20,
No. 1 (WINTER 2016), pp.
7-20
Published by: Euromoney Institutional Investor PLC
Stable URL: https://www.jstor.org/stable/44396812
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Crowdfunding and Venture
Capital: Substitutes or
Complements?
Mario D'Ambrosio and Gianfranco Gianfrate
Mario D'Ambrosio
is a former analyst at H.I.G.
Capital in Milan, Italy.
[email protected]
Gianfranco
Gianfrate
is a Giorgio Ruffolo
Fellow in Sustainability
Science at Harvard
University in Cambridge,
MA.
gianfranco_gianfrate @ hks
.harvard.edu
Despite to scale of crowdfunding encourage action the growing
by the it as and U.S. importance a the source Congress large- of
of crowdfunding and the large-

scale action by the U.S. Congress
to encourage it as a source of
capital for new ventures, the phenomenon
remains relatively unexplored. Specifi-
cally, the nature of the interactions between
crowdfunding and other traditional forms of
entrepreneurial financing - venture capital,
especially - has received scant attention. Is
crowdfunding an alternative or comple-
mentary source of funding with respect to
traditional venture capital and angel invest-
ments? Will venture capital be swept away
by crowdfunding?
The question of whether crowdfunding
is or will become a meaningful alternative
to angel finance and venture capital still
needs to be explored: There is uncertainty
about whether crowdfunding efforts rein-
force or contradict existing theories on how
ventures raise capital and achieve success
(Mollick [2013]). Moreover, if it is accepted
that the success of traditionally-funded new
ventures is often highly constrained by geog-
raphy (Chen et al. [2009]), then the role of
geography in crowdfunding represents a
noteworthy subject. Some researchers and
academics have noted that crowdfunding has
the potential to mitigate many of the dis-
tance effects found in traditional fundraising
efforts. Some evidence has been found that
crowdfunding relaxes geographic constraints

among funders (Agrawal, Catalini, and
Goldfarb [2011]), but the effect of geography
on project founders is less clear. Other authors
(Mollick [2013]) document the geographical
concentration of crowdfunding but neglect a
fundamental aspect: whether crowdfunding
is concentrated in the same main centers as
venture capital activity or in different areas.
The research question we attempt to
answer is whether crowdfunding is a comple-
ment to or rather a substitute for traditional
venture capital investments. For instance,
research findings may suggest that new
ventures receiving capital through crowd-
funding typically withstand the market
without asking for further rounds of venture
capital financing, classifying this new source
of funding as a substitute of venture capital;
or that crowdfunding typically asks for and
enhances further rounds of investments from
venture capitalists, classifying it as a comple-
ment to the venture capital model. Therefore,
this article suggests that crowdfunding is a
substitute for venture capital for entrepreneurs
at very beginning of their entrepreneurial
activity and that it needs and triggers further
rounds of venture capital financing after-
ward, classifying itself as a complement to
venture capital in after seed stages.

The second question addresses the geo-
graphical determinánts of entrepreneurial
financing: We argue that if it holds true
that crowdfunding represents a substitute
Winter 2016 The Journal of Private Equity 7
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for venture capital in the seed stage and a complement
afterward, we do not expect significant differences in
their geographical patterns. In other words, we expect
crowdfunding to have the same geographical drivers as
venture capital investments and to be concentrated in
the same main areas. Therefore, while crowdfunding
relaxes geographic constraints among funders, making
it easier to provide capital from any location through the
Internet, it does not mitigate the effects of geography
on project founders.
Since crowdfunding is based on online platforms
that enable interactions with friends and relatives, some
scholars (e.g., Schwienbacher and Larralde [2010])
have described crowdfunding as an alternative way to
finance projects for small, entrepreneurial ventures -
neglecting the potential implications of traditional fund-
raising models. However, in recent years, crowdfunding
has proved to be a means to raise funds not only for

small projects but also for high-growth start-ups typi-
cally financed by venture capital and angel investors.
Therefore, a strong need has emerged to understand
the degree to which crowdfunding will ultimately sub-
stitute for other forms of more formal venture funding
(Mollick [2013]).
DATA AND METHODS
In our analysis, we use data extracted from
Kickstarter - the leading crowdfunding platform
globally - to proxy for crowdfunding investment
amounts and geographical dispersion. We specifically
gathered data related only to those projects supporting
business ideas and eventually linked to the creation of
new ventures. Specifically, we include only projects
related to the following categories: games, food, fashion,
product design, and technology. Moreover, given the
need of this study to make a comparison with venture
capital financing, only successful projects were taken
into consideration.1 Following this first screening, we
further limited the projects to those looking for $5,000
or more in capital, in order to further restrict our data to
initiatives looking for more substantial funding and thus
aimed at supporting long-lasting enterprises.2 For each
project, data were gathered providing information about
entrepreneurs and their plans; location of the founder
(and thus of the potential new venture) in terms of city
and state; amount pledged by investors, percentage of
funding, and implicitly, initial fundraising goal;3 and
end date of the funding window. Exhibit 1 provides a
summary of this data by category.

To tackle the second research question of this article
and examine geographical clustering of crowdfunding,
investments have been grouped at the Combined Sta-
tistical Area (CSA) and Metropolitan and Micropolitan
Statistical Area (MSA) level for each year. The U.S.
Census Bureau provides a list of Core Based Statistical
Aras (CSBAs), MSAs, and CSAs, as of February 2013.
Therefore, the location of each project in the dataset
was assigned at the CSA level and, in cases where a city
is not located in a CSA,4 it was assigned to the appro-
priate MSA.5 This allows us to study the geographical
clustering of crowdfunding at the CSA and MSA levels.
In 2013, 105 CSAs and 59 MSAs not located in a CSA
had significant crowdfunding activity.
For venture capital financing activity, data were
drawn from Thomson One Investment Banking. In
this study, venture capital activity is divided into four
main investment stages: (1) seed, that is, the first stage
of venture capital financing, aimed at raising relatively
modest amounts of capital to finance the early devel-
opment of a new product or service; (2) early stage,
for companies that are able to begin operations but are
not yet at the stage of commercial manufacturing and
sales; (3) expansion, in which financing is provided for
Exhibit 1
Summary Statistics
(1) (2) (3) (4) (5) (6)
AU Fashion Food Games Product Design Technology
Projects (n°) 5.954 976 242 1.958 1.602 1176

Goal ($ min) 165.8 15.1 4.0 60.9 38.7 47.1 }
Pledged ($ min) 512.9 33.8 6.6 186.3 136.4 149.8
Funded
8 Crowdfunding and Venture Capital: Substitutes or
Complements? Winter 2016
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major expansion such as the purchase of physical plants,
product improvement, and marketing; (4) later stage,
which refers to capital provided after commercial manu-
facturing and sales to companies that boast stable growth
and before any initial public offering. In 2013, venture
capital activities were distributed across 81 CSAs and
38 MSAs not located in a CSA.
From the point of view of the empirical analysis,
we measure crowdfunding and venture capital invest-
ments as follows:
• CF. The natural log of the total capital raised
through crowdfunding to finance all the successful
projects on Kickstarter in a given month;
• VC_SEED. The natural log of the total amount
of funding provided as seed capital from venture
capitalists in a given month; and

• VC_AFTERSEED. The natural log of the total
amount of funding provided by venture capitalists
in a given month, excluding the capital raised as
seed financing. In other words, it makes reference
to only the three investment stages after seed: early
stage, expansion, and later stage.
Therefore, monthly observations of crowdfunding
and venture capital investments (with a distinction, for
the latter, between seed and after seed stages) are used
to explore the relationship between the two fundraising
models.
Empirically, we built a vector autoregressive model,
in which each variable is regressed on one or more lags
of every other variable. As discussed in the next sec-
tion, a VAR model is particularly useful in describing
the relationship between crowdfunding and venture
capital in after seed stages, because it helps us understand
how an increase in crowdfunding investing today can
eventually enhance after seed venture capital activities
at a future time - providing some evidence for the idea
that crowdfunding is a potential substitute for the ven-
ture capital model in seed financing, and a complement
to venture capital in the following stages. The port-
manteau test and the lag length criteria (streamlining
the Box-Jenkins approach6) were used to decide the
optimal length of our VAR model, even though at the
end we limited our analysis to one lag because, for our
purposes, we only want to get some insights about the
impact of crowdfunding on venture capital and not to
build the best predicting model. Finally, to summarize
the relationships built into our VAR model, we used
Granger causality tests (GCT) and impulse response

functions (IRF).
RESULTS
Which Relationship between Crowdfunding
and Venture Capital?
A first insight into the implications of the crowd-
funding model on traditional venture capital activity
is provided by a graphical analysis. Exhibits 2, 3, and
4 depict monthly crowdfunding and venture capital
Exhibit 2
Monthly Crowdfunding Investments in the U.S.
4"l
-6 1 1 1 1 1 1 1 1 1 ■ 1 1 1 1 ■ ■ i ■ ■ i ■ ■ 1 1 ■ i ■ 1 1 ■■ 1
1 1 1 1 1 1 ■■ ļ ■ ■ 1 1 » 1 1 1 1 1 1 1 ■ 1 1 ■■ i » ■ 1 1 » i » i
limivi limivi nmivi nniivi nmivi nmiv
2009 2010 2011 2012 2013 2014
Exhibit 3
Monthly Venture Capital Investments in Seed
Financing in the U.S.
ÖT
1 -
0-
-1 1 1 » ■ I ■ ■ I ■ 1 1 ■ ■ 1 1 ■ I ■ 1 1 1 1 1 1 ■ I ■ » I ■ ■ I

» ■ 1 1 ■ I » 1 1 II 1 1 1 1 . ■ I ■ 1 1 ■ ■ 1 1 » I » » I ■ » I ■ »
ii m iv i n iii iv i ii in iv i ii ni iv i ninivi nmiv
2009 2010 2011 2012 2013 2014
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Exhibit 4
Monthly Venture Capital Investments in After Seed
Stages in the U.S.
g 5
6.5-
6.0-
5.5 i ■ 1 1 ■ » i ' » i ■ ■ i ■ ■ i ■ 1 1 ■ ■ i " i ■ ■ i ' * i ■ 1 1
■ ■ i " i ■ ■ i " i ■ ' i ■ ■ i * ■ i ■■ i ■ ■ i " i "
ii in rv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii m iv
2009 2010 2011 2012 2013 2014
investments in the United States, for the period June
2009 to December 2014.

The graphs suggest that, from the inception of the
crowdfunding model, amounts of seed capital provided
by venture capitalists have been decreasing, while the
capital provided in further rounds of financing has been
slightly increasing. Of course, this may be owing in
part to the recent financial crisis, which has rendered
it more difficult for entrepreneurs seeking seed capital
to obtain financing. But, as suggested by other authors
(e.g., Agrawal, Catalini, and Goldfarb [2011]), we argue
that crowdfunding plays an important role and that the
shortage of capital engendered by the current global
crisis is just one of the factors behind the success of
the crowdfunding model. Therefore, to examine the
role of crowdfunding as a potential substitute for rather
a complement to venture capital investments, we start
our analysis by regressing VC_SEED and VC_AFTER-
SEED on CF. The results of this ordinary least squares
(OLS) regression are shown in Exhibits 5 and 6.
We find the existence of a negative relationship
between VC_SEED and CF, and a positive relation-
ship between VC_AFTERSEED and CF. The results
suggest that relevant changes in crowdfunding invest-
ments somehow impact venture capital, negatively
affecting seed financing and positively enhancing after
seed investments.
In Exhibits 7 and 8, we report the cross-correlo-
grams of our variables. Even in this case, the estimated
coefficients are statistically significant, providing further
Exhibit 5
OLS Regression: Seed Stage

Dependent Variable: VCSEED
Method: Least Squares
Sample: 2009M06 2014M12
Included Observations: 67
Variable Coefficient Std. Error t-Statistic Prob.
C 3.9092*** 0.08841 44.2142 0.0000
CF -0.1390*** 0.03166 -4.3922 0.0000
/^-squared 0.228873 Mean dependent var. 3.866050
Adjusted R-squared 0.217009 S.D. dependent var. 0.812808
S.E. of regression 0.719227 Akaike info criterion 2.208117
Sum squared resid 33.62370 Schwarz criterion 2.273929
Log likelihood -71.97193 Hannan-Quinn criter. 2.234159
F-statistic 19.29221 Durbin-Watson stat. 1.361622
Prob (F-statistic) 0.000042
Note: ***Indicates statistical significance at the 1% level.
Exhibit 6
OLS Regression: After Seed Stages
Dependent Variable: VC_AFTERSEED
Method: Least Squares
Sample: 2009M06 2014M12
Variable Coefficient Std. Error t-Statistic Prob.
C 7.3746*** 0.03799 194.099 0.0000

CF 0.0706*** 0.01360 5.19530 0.0000
^-squared 0.293411 Mean dependent var. 7.39650
Adjusted R-squared 0.282540 S.D. dependent var. 0.36488
S.E. of regression 0.309066 Akaike info criterion 0.51887
Sum squared resid 6.208900 Schwarz criterion 0.58468
Log likelihood -15.38214 Hannan-Quinn criter. 0.54491
F-statistic 26.99118 Durbin-Watson stat. 1.29062
Prob (F-statistic) 0.000002
Note: ***Indicates statistical significance at the 1% level.
confirmation of the evidence that emerged from the
regression analysis. Cross-correlations in Exhibit 7 show
that venture capital investments in seed stages are nega-
tively correlated with crowdfunding activity. But the
most interesting result lies in Exhibit 8, which suggests
that an increase in crowdfunding investments today
predicts a rise in venture capital financing in after seed
rounds. This finding supports the idea that crowdfunding
potentially substitutes venture capital as a means to
��194.34.78.248 on Sat, 19 Jun 2021
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Exhibit 7

Cross-Correlograms: Seed Stage
Sample: 2009M06 2014M12
Correlations are asymptotically consistent approximations
Notes: The figure reports cross- correlograms for monthly
crowdfunding and venture capital investments in the United
States, for the period from June 2009
to September 2014. They capture the lead- lag relationships
between crowdfunding and venture capital proceeds up to 24
months back /ahead. CF is the
natural logarithm of the monthly level of crowdfunding
proceeds from Kickstarter. VC_SEED is the natural logarithm
of the monthly level of financing
provided by venture capital firms as seed capital. Bars outside
the interval indicate statistical significance at the 5% level.
raise seed capital and therefore enhances venture capital
investments in further rounds of financing.
Exhibits 9 and 10 use a bivariate vector autore-
gressive model to represent the dynamic process that
simultaneously describes crowdfunding and venture
capital activity. Again, it is worth noticing that, for
the purposes of this study, we are only interested in
how crowdfunding predicts venture capital, and not in
building the best VAR model that leaves zero autocorre-
lation in the residuals. For this reason, we limit our anal-
ysis to one lag, but results would not change if we added
more lags in the model to capture some further autocor-

relation left in the residuals. The second column of both
models reports an important finding of this study. The
coefficient on CF (-1), which is statistically significant,
indicates that a rise in crowdfunding investments pre-
dicts lower venture capital investments in seed financing
and, at the same time, higher venture capital investments
in after seed stages. The Granger causality test in Exhibits
11 and 12 confirms that crowdfunding is a significant
predictor of venture capital activity. This is further evi -
dence that supports Hypothesis 1 of this work.
��194.34.78.248 on Sat, 19 Jun 2021
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Exhibit 8
Cross-Correlograms: After Seed Stages
Sample: 2009M06 2014M12
Correlations are asymptotically consistent approximations
Notes: The figure reports cross- correlograms for monthly
crowdfunding and venture capital investments in the United
States, for the period from June 2009
to September 2014. They capture the lead- lag relationships

between crowdfunding and venture capital proceeds up to 24
months back/ahead. CF is the
proceeds from Kickstarter. VC_AFTERSEED is the natural
logarithm of monthly amounts of
capital provided by venture capital firms in stages other than
seed financing. Bars outside the interval indicate statistical
significance at the 5% level.
Finally, a key point about the first research ques-
tion of this study is how an isolated shock to crowd-
funding activity affects our forecasts of venture capital
investments. In Exhibits 13 and 14, we report the
impulse response functions associated with our vari-
ables. By looking at the responses of VC_SEED and
VC_AFTERSEED to CF, we find that an unanticipated
increase in crowdfunding investments leads to negative
forecast revisions for seed amounts provided by venture
capitalists and raises the expectations about the capital
financed by venture capital firms in the early stage,
expansion, and later stages.
The Geographical Patterns
Many authors have documented the geographical
clustering of venture capital investments (e.g., Chen et al.
[2009]; Kantor [2013]; Mollick [2013]). In particular, by
analyzing data from 2010 to the first half of 2011, Kantor
[2013] noticed that only five regions accounted for
roughly 76% of total venture capital investments, with
39% of total venture capital funding invested in Silicon
Valley. Similarly, based on a dataset from 1975 to 2005,
Chen et al. [2009] pointed out that approximately 50%
of venture capital investments are made in companies

0 0.5417 0.5417
1 0.4748 0.5011
2 0.4862 0.4349
3 0.5051 0.4170
4 0.4259 0.3860
5 0.4010 0.3205
6 0.3620 0.3542
7 0.2942 0.3573
8 0.2679 0.2996
9 0.2367 0.3024
10 0.2020 0.2922
11 0.1673 0.2726
12 0.1658 0.3120
13 0.1280 0.3049
14 0.0931 0.2543
15 0.0885 0.2366
16 0.0481 0.2191

17 0.0028 0.1382
18 0.0063 0.1099
19 -0.0128 0.1525
20 -0.0304 0.0993
21 -0.0525 0.1469
22 -0.0453 0.1628
23 -0.0556 0.1638
24 -0.0700 0.1421
25 -0.0625 0.1470
26 -0.0759 0.1380
27 -0.0851 0.1336
28 -0.0833 0.1278
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Exhibit 9
Vector Autoregressive Model: Seed Stage

Vector Autoregression Estimates
Sample: 2009M06 2014M12
Standard errors in ( ) & t-statistics in [ ]
CF VCJSEED
CF (-1) 0.9348*** -0.0734***
(0.03560) (0.03553)
[26.2610] [-2.06459]
VCJSEED (-1) -0.0648 0.3203***
(0.12156) (0.12133)
[-0.53279] [2.63978]
C 0.3958 2.6264***
(0.48213) (0.48121)
[0.82095] [5.45787]
^-squared 0.935969 0.2556120
Adj. ^-squared 0.933936 0.2319810
Sum sq. resids 30.98901 30.869740
S.E. equation 0.701348 0.6999970
F-statistic 460.4471 10.816640
Log likelihood -68.7012 -68.57396
Akaike AIC 2.172764 2.1689080
Schwarz SC 2.272294 2.2684380
Mean dependent 0.395803 3.8440850
S.D. dependent 2.728670 0.7987490
Determinant resid 0.232705

covariance (dof adj.)
Determinant resid 0.2 1 203 1
covariance
Log likelihood -1 36. 1 1 6
Akaike information criterion 4.306547
Schwarz criterion 4.505607
Notes: The figure presents the output of a one-lag vector
autoregressive
model estimated using Eviews. The sample consists of 64
monthly obser-
vations for venture capital and crowdfunding investments in the
United
States, between June 2009 and December 20Î4. CF is the
natural
logarithm of the monthly level of crowdfunding proceeds from
Kickstarter.
VC_SEED is the natural logarithm of the monthly level of
financing
provided by venture capital firms as seed capital. C represents
the intercept
of our model.
***Indicates statistical significance at the Î % level.
located in three main CS As: San Jose- San Francisco
(CA), Boston (MA), and New York (NY).
Exhibits 15 and 16 present a distribution of the
geography of venture capital and crowdfunding invest-
ments from our dataset. More specifically, we show

the top ten CS As by amount invested, grouping the
remaining CSAs in the category Other. Approximately
Exhibit 10
Vector Autoregressive Model: After Seed Stages
Vector Autoregression Estimates
Sample: 2009M06 2014M12
Standard errors in ( ) & t-statistics in [ ]
CF (-1) 0.9729*** 0.0431***
(0.03663) (0.01587)
[26.5615] [2.71837]
VC_AFTERSEED (-1) -0.4018 0.3247***
(0.27853) (0.12067)
[-1.44277] 2.69143
C 3.1077 4.9901***
(2.05662) (0.89098)
[1.51111] [5.60069]
R-squared 0.937737 0.338573
Adj. /¿-squared 0.935761 0.317575
Sum sq. resids 30.13302 5.655446
S.E. equation 0.691594 0.299615
F-statistic 474.4219 16.12429
Log likelihood -67.7768 -12.5678
Akaike AIC 2.144753 0.471750
Schwarz SC 2.244283 0.571280

Mean dependent 0.395803 7.403812
S.D. dependent 2.728670 0.362690
Determinant resid 0.04 1 1 79
covariance (dof adj.)
Determinant resid 0.037521
covariance
Log likelihood -78.9654
Akaike information criterion 2.574708
Schwarz criterion 2.773768
Notes: The figure provides the output of a one-lag vector
autoregressive
model estimated using Eviews. The sample consists of 64
monthly obser-
United
States, between June 2009 and December 20Î4. CF is the
natural
Kickstarter.
VC_AFTERSEED is the natural logarithm of monthly amounts
of capital provided by venture capital firms in stages other than
seed
financing. C represents the intercept of our model.
***Indicates statistical significance at the 1 % level.
70% of venture capital investments between 2009 and
2014 in the United States are concentrated in the top

five regions, with roughly 40% invested in San Jose-San
Francisco-Oakland (CA) CSA. Moving beyond the first
five CSAs, 80% of the capital providejd by venture capi -
talists has been invested in the top ten CSAs, and San
Francisco, Boston, and New York represent the three
��194.34.78.248 on Sat, 19 Jun 2021
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Exhibit 11
Granger Causality Test: Seed Stage
VAR Granger Causality/Block Exogeneity Wald Tests
Sample: 2009M06 2014M12
Excluded Chi-sq df Prob.
Dependent Variable: CF
VCJSEED 0.2839 1 0.5942
All 0.2839 1 0.5942
Dependent Variable: VC_SEED
CF 4.2625 1 0.0390
All
Notes: The figures present the results of a Granger causality

test. We test
the null hypothesis that all lags of one variable in the VAR
model are not
statistically different from zero. The sample consists of 64
monthly obser-
United
States , between June 2009 and September 2014. CF is the
natural
Kickstarter.
VC_SEED is the natural logarithm of the monthly level of
financing
provided by venture capital firms as seed capital.
Exhibit 12
Granger Causality Test: After Seed Stage
VAR Granger Causality/Block Exogeneity Wald Tests
Sample: 2009M06 2014M12
Excluded Chi-sq df Prob.
Dependent Variable: CF
VC_AFTERSEED 2.0815 1 0.1491
All 2.0815 1 0.1491
Dependent Variable: V C_AFTERSEED
CF 7.3895 1 0.0066
All
Notes: The figures present the results of a Granger causality

test. We test
the null hypothesis that all lags of one variable in the VAR
model are
not statistically different from zero. The sample consists of 64
monthly
observations for venture capital and crowdfunding investments
in the
United States, between June 2009 and September 2014. CF is
the
proceeds from
Kickstarter. VC_AFTERSEED is the natural logarithm of
monthly
amounts of capital provided by venture capital firms in stages
other than
seed financing.
main centers. Only 20% of the investments are located in
other areas, that is, 98 CSAs and 72 MSAs are not located
in a CSA. These results clearly describe the geographical
clustering of venture capital.
Turning to crowdfunding, our findings based on
Kickstarter data are not that different. The first key evi -
dence arising from Exhibit 15 is that, among the top 10
CSAs by crowdfunding investments, 9 are exactly the
same as in the case of venture capital. This finding would
be already sufficient to state that crowdfunding activity
tends to be concentrated in the same main areas as ven-
ture capital. Of the $462 million invested in the United
States between 2009 and 2014 through Kickstarter,
approximately 55% is clustered in five main areas, with
the city of San Francisco with the highest ranking in

this case as well. The top 10 CSAs account for more
than 70% of total investments, while the remaining 30%
invested outside of the main centers is distributed across
103 CSAs and 88 MSAs not located in a CSA. San Fran-
cisco, Los Angeles, and New York represent the three
main cities. With respect to venture capital, these are
the main differences:
• Crowdfunding does seem to be slightly less con-
centrated than venture capital funding, although
the difference is not great in magnitude (70% of
investments clustered in the top ten CSAs, against
80% for venture capital). This result is consistent
with a previous analysis performed by Mollick
[2013], based on locational Gini coefficients.
• While New York and San Francisco are among the
top three centers for both fundraising models, Los
Angeles and Boston represent the second city in the
top three ranking for crowdfunding and venture
capital, respectively.
However, these differences are not large enough to
conclude that crowdfunding and venture capital follow
different geographical patterns and cluster in different
areas. Conversely, our findings show that crowdfunding
activity does not mitigate the geographical constraints
to traditional fundraising methods and tend to cluster
in the same main geographical areas as venture capital,
although to a lesser extent.
DISCUSSION AND CONCLUSIONS

Prior to the development of crowdfunding, ven-
ture capital firms acted as a key player in the institutional
environment of technology entrepreneurship, as even
alternative fundraising sources - such as angel investors -
often served as first step toward the Subsequent pursu-
ance of venture capitalists. However, in recent years, the
��194.34.78.248 on Sat, 19 Jun 2021
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Exhibit 13
Impulse Response Functions: Seed Stage
Notes: The charts depict the impulse response functions of our
variables. They capture the response of one variable to an
isolated shock to the other variable
over a 24-month time period. CF is the natural logarithm of the
monthly level of crowdfunding proceeds from Kickstarter.
VC_SEED is the natural
logarithm of the monthly level of financing provided by
venture capital firms as seed capital. The dashed lines give a
95% confidence interval.
rapid growth of crowdfunding as a means to raise capital
for new ventures has triggered important changes in the
institutional context of entrepreneurship.

Crowdfunding differs from venture capital in
many aspects. First of all, it allows millions of indi -
viduals of uncertain background to provide funding for
entrepreneurial projects and business ideas, while ven-
ture capital firms are typically run by a few people with
a strong expertise in a given business. Second, it oper-
ates through the Internet, while venture capital strongly
relies on a network of offices located in the main centers
in order to identify and support start-ups. Finally, unlike
venture capitalists, it is not necessarily rewarded with
equity participation or monitoring rights in the financed
company, but it does allow several forms of reward.
Nevertheless, since its inception in 2009, crowd-
funding has proved to be a reliable tool for entrepreneurs
to seek financing, and thus, it has become a meaningful
alternative to business angels and venture capital firms
as a source of finance for new ventures and high-
growth start-ups. There have been many cases of suc-
cessful startups financed, totally or partially, through
Kickstarter and other online platforms.
The reasons behind the success of this new fund-
raising model lie in the fact that crowdfunding boasts a
set of features that make it more attractive than venture
capital for seeking seed capital. First, it is relatively easy
for entrepreneurs to raise capital and for funders to pro-
vide money with crowdfunding: pounders just need to
provide a description of their project and can rely on
millions of potential investors (whereas, in the case of

��194.34.78.248 on Sat, 19 Jun 2021
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Exhibit 14
Impulse Response Functions: After Seed Stage
Notes: The charts depict the impulse response functions of our
variables. They capture the response of one variable to an
isolated shock to the other
variable over a 24-month time period. CF is the natural
Kickstarter. VC_AFTERSEED
is the natural logarithm of monthly amounts of capital provided
by venture capital firms in stages other than seed financing. The
dashed lines give a 95%
confidence interval.
venture capital, some more formal and structured reports
are required, such as a business plan, and founders can
rely only on a few venture capital firms located in the
area), and funders can easily pledge whatever amount
they want through their credit cards and from any
region of the world (although, on many platforms such
as Kickstarter, U.S. citizenship is required to finance
U.S. projects). Therefore, as argued by many scholars
(e.g., Agrawal, Catalini, and Goldfarb [2011]), crowd-
funding relaxes geographic constraints among funders
and increases the average distance between entrepre-

neurs and investors.
Second, by allowing entrepreneurs to reach net-
works of millions of individuals more easily, crowd-
funding can be used to test or demonstrate demand for
a given product, because it asks for financing directly of
those people that are potential consumers. Some authors
(e.g., Lambert and Schwienbacher [2010]; Mollick
[2013]) have described the crowdfunding model as
a means to test new products or even run marketing
campaigns and expand awareness of the initiative
through social media.
Third, crowdfunding can be used not only to get
public attention but also to receive feedback on a given
product/service from the crowd, in order to develop
the project based on the suggestions arising directly
from potential customers (Belleflamme, Lambert, and
Schwienbacher [2014]).
Fourth, crowdfunding protects start-ups against the
implications of venture capital selection. Indeed, when
venture capital firms do not invest in a new venture, it can
have far deeper consequences for start-ups than simply
��194.34.78.248 on Sat, 19 Jun 2021
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Exhibit 15
Geography of Venture Capital Investments
Number of Amount Invested Share of Total
CSA Deals ($mln) Amount Invested
San Jose-San Francisco, CA 5.248 47.136 0.43
Boston, MA 2.041 11.501 0.10
New York, NY 2.011 11.363 0.10
Los Angeles, CA 1.068 6.355 0.06
Washington, DC 783 3.808 0.03
Seattle, WA 533 2.671 0.02
Chicago, IL 368 2.257 0.02
Dallas, TX 238 2.032 0.02
Denver, CO 440 1.839 0.02
Atlanta, GA 282 1.492 0.01
Other 5.492 20.691 0.19
Total 18.504 111.145 1
Notes: The table describes the geographical clustering of
venture capital investments and ranks the top ten CSAs in terms
of total amount invested. It also
reports information about the number of venture capital deals.
The sample consists of 18,504 venture capital deals in the
United States, between June 2009
and September 2014, and accounts for approximately $111

billion of capital invested. Geographic locations are assigned at
the Combined Statistical Area
(CSA) level. In cases where a city is not located in a CSA, we
assign the deal to the appropriate Metropolitan Statistical Area
(MSA).
Of note: (1) the venture capital deal is intended to be the match
of the venture asking for financing with the bunch of venture
capital investors providing
capital in a given round of financing; (2) the amount invested
is defined as the total amount of money invested by venture
capital firms in the CSA, regard-
less of the stage of financing; (3) share of total amount
invested equals the percentage of total investme nts located in
the CSA; (4) Other includes 98 CSAs
and 12 MS As not located in a CSA.
Exhibit 16
Geography of Crowdfunding Projects
Number of Amount Pledged Share of Total
CSA Projects ($ min) Amount Pledged
San Jose-San Francisco, CA 852 94 0.20
Los Angeles, CA 796 66 0.14
New York, NY 1,011 45 0.10
Seattle, WA 280 30 0.07
Portland, OR 277 23 0.05
Boston, MA 397 22 0.05
Dallas, TX 177 15 0.03
Atlanta, GA 157 15 0.03
Chicago, IL 376 15 0.03

Washington, DC 261 15 0.03
Other 518 123 0.27
Total
Notes: The table describes the geographical clustering of
crowdfunding investments and ranks the top ten CSAs in terms
of total amount pledged. It also
reports information about the number of projects. The sample
consists of 5,102 crowdfunding projects (with fundraising goal
above $5,000) in the United
States, between June 2009 and September 2014, and accounts
for approximately $462 million of capital invested. Geographic
locations are assigned at
the Combined Statistical Area (CSA) level. In cases where a
city is not located in a CSA, we assign the deal to the
appropriate Metropolitan Statistical
Area (MSA). »
Of note: (1) the amount pledged is defined as the level of
crowdfunding proceeds raised in the CSA; (2) shąte of total
amount pledged equals the percentage
of total crowdfunding investments located in the CSA ; (3)
Other includes 103 CSAs and 88 MSAs not located in a CSA.
��194.34.78.248 on Sat, 19 Jun 2021
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depriving them of capital, because of the reputational
effects of venture capital endorsement (Mollick [2013]).

As suggested by Ferrary and Granovetter [2009], "by
selecting start-ups, venture capitalists implicitly prevent
the other agents in the institutional network of innova-
tion from collaborating with new ventures that do not
get VC funding," and it sometimes happens that poten-
tial valuable innovations do not reach customers simply
because they did not get venture capital financing to get
connected to the network.
Finally, unlike venture capital, entrepreneurs are
typically more likely to maintain full control over the
project with crowdfunding (Gerber, Hui, and Kuo
[2011]). Legitimately, it is not surprising that concerns
have been raised by critics about the fact that the quality
of entrepreneurial projects or the viability of new ven-
tures may not be as clear or influential to funders in
crowdfunding settings, compared with venture capital
firms that have strong expertise and business background
(Bogost [2012]). However, Mollick [2013] found that
signals of project quality typically used by venture
capitalist to select portfolio companies are also used by
crowdfunders, so that good projects get financed while
lower-quality projects receive few to no backers.
Overall, we argue that, in the entrepreneurial
finance environment, crowdfunding represents a mean-
ingful substitute for traditional venture capital activity
as a way to raise seed capital for entrepreneurs at the
very beginning of their entrepreneurial initiative. This
argument leads to the consistent belief that, over the
next years, crowdfunding might have a strong impact
on traditional fundraising models by further decreasing
the amount of money invested by venture capitalists
as seed capital. Therefore, as expected, the results of

our analysis are totally consistent with the idea that
crowdfunding is a worthwhile alternative to venture
capital in seed financing. Indeed, our findings (broadly
described in the previous section) clearly show the exis-
tence of a negative relationship between crowdfunding
and venture capital investments in seed stages, strongly
suggesting that a further expansion of the crowdfunding
model may negatively affect the provision of seed capital
by more traditional methods.
From this perspective, the results of our analysis
demonstrate that crowdfunding has the ability to scale
down the venture capital phenomenon, serving as a first
step toward further rounds of financing provided by
venture capital firms. The fact that crowdfunding might
further evolve as the main actor in the provision of seed
capital is a very interesting (and, in a way, even sur-
prising) finding because it sheds some light on another
important topic: the role of institutional changes in the
entrepreneurial environment.
Some authors (e.g., Mollick [2013]) have already
discussed the potential implications of the radical
changes brought by the crowdfunding phenomenon in
the institutional context of entrepreneurship. Of course,
we must be very careful in interpreting the results of our
study, since the shortage of capital engendered by the
financial crisis in recent years may have played a key role
in leading the growth of crowdfunding.
While crowdfunding appears as a challenger to
venture capital in the provision of seed capital, it is less so
for after seed stages. Conversely, and in line with previous

evidence (e.g., Mollick [2013]), successful crowdfunding
initiatives seem to provide a signal to venture capital
firms of potential good long-term investments, even-
tually leading to additional rounds of future financing.
This is because, while crowdfunding has some charac-
teristics that make it attractive to entrepreneurs seeking
seed capital, it is not as appropriate as venture capital
firms in supporting portfolio companies in after seed
stages, such as in further expansion initiatives.
More specifically, unlike crowdfunding, venture
capital boasts a few distinctive properties. As a matter
of fact, venture capitalists do not limit their activity to
the provision of funding. They have strong expertise
and deep business knowledge, and play an active role
granting portfolio firms monitoring, governance and
even reputational effects from venture capital endorse-
ment (Stuart, Hoang, and Hybels [1999]; Hsu [2004]).
Venture capital firms have experience in running a
company and thus participate in the active manage-
ment of the venture, providing managerial support in
sales, accounting, marketing, strategy, distribution, and
any other field (Schwienbacher and Larralde [2010]).
In other words, in the case of venture capital, portfolio
companies not only receive financing but also help pro-
fessionalizing and connecting to vital resources (Baum
and Silverman [2004]).
Moreover, the amount of funding provided by
venture capital firms can be much higher with respect
to crowdfunding. This is because, when seeking capital
through the Internet, entrepreneurs rely only on small
contributions from millions of individuals, and it is

very difficult to raise huge amounts of money. Just to
��194.34.78.248 on Sat, 19 Jun 2021
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provide some numbers, out of the 5,102 Kickstarter proj -
ects taken in consideration in our analysis, individual
projects that received more than $1 million represents
less than 10% (and this percentage is going to decrease
significantly if we add all those initiatives excluded to
make our dataset as consistent as possible with venture
capital investments).
Conversely, venture capital can grant portfolio
firms a greater amount of financing and also access to
additional resources, making introductions that help lead
to more business or funding down the road (Kantor
[2013]). From this perspective, it is reasonable to state
that venture capital is more appropriate than crowd-
funding in after seed stages, where the amount of capital
to be provided (for instance, to support the company in
major expansion through the purchase of new physical
plants) is typically larger than that required at the very
beginning of an entrepreneurial initiative.
For the reasons explained here, in our study, we
argue that crowdfunding mainly serves as a first step for

the provision of seed capital to start-ups, signaling new
ventures as potential good long-term investments and
enhancing venture capital investments in further rounds
of financing. In other words, we discuss crowdfunding
as a meaningful alternative to traditional fundraising
models for the provision of seed financing, while when it
comes to after seed stages, it acts as a complement (and not
a substitute anymore) to venture capital activity, because
in these stages, ventures need additional resources,
services, and competencies that only venture capitalists
can bring.
Again, as expected, the results of our analysis
strongly support our arguments. Indeed, the empirical
findings described earlier provide evidence about the
existence of a positive relationship between crowd-
funding and venture capital investments in after seed
stages, shedding light on how in the past crowdfunding
has led to additional capital provided by venture
capitalists in further rounds of financing. This sug-
gests that a further expansion of crowdfunding might
positively affect venture capital investments in after seed
financing. Crowdfunding has thus become an important
player in the institutional system of technology entre -
preneurship and represents a critical factor in affecting
the dynamics of traditional fundraising efforts.
Many authors have documented that venture
capital investments are highly concentrated in just few
areas, where both pools of successful entrepreneurs
and venture capital firms are located (e.g., Chen et al.

[2009]; Shane and Cable [2002]). The main reasons
behind this clustering lie in the benefits of spillover and
in the requirement of face-to-face interaction. Venture
capitalists provide not only capital but also management
and monitoring services, at a cost that is considerably
lower when firms are within a driving distance from the
venture capital office; for these reasons, entrepreneurs
may prefer direct access to portfolio firms.
In fact, the main consequence of the strong con-
centration of venture capital activity in just few areas
is that many start-ups located in less prevalent venture
capital areas go unfunded. For this reason, many wonder
whether crowdfunding mitigates the geographical con-
straints found in traditional fundraising models, giving
access to financing to all those start-ups not selected
by venture capital firms because not located in venture
capital geographical clusters.
We find that, in entrepreneurial financing, crowd-
funding investments are not only clustered in some
geographical areas (though they are slightly less con-
centrated than venture capital ones),7 but also clustered
in the same main cities as venture capital activity. There-
fore, the empirical findings of our analysis suggest that
crowdfunding has the same geographical determinants
as venture capital. Interestingly, crowdfunding gets more
concentrated in those areas with higher concentration
of venture capital firms, demonstrating that, from
the founders' perspective, it does not overcome the
geographical limit represented by the proximity of
venture capital offices to portfolio companies. Thus, we
argue that this novel fundraising method does not relax
geographical constraints to traditional venture capital
activity among entrepreneurs.

ENDNOTES
1^Writh successful projects, we reference those projects
that raised at least their initial target. Indeed, Kickstarter fol -
lows an all or nothing model, so money pledged is collected
only if the fundraising goal is reached.
2The suggestion to restrict the sample to crowdfunding
initiatives with a fundraising goal above $5,000 was first
given by Mollick [2013], in order to build a database that is
as comparable as possible with venture capital investments.
3For instance, if the pledged amount is $100,000 and
the percentage of funding 200%, the initial goal is $50,000.
Obviously, since we take into consideration only successful
��194.34.78.248 on Sat, 19 Jun 2021
12:29:22 UTC��
projects, the percentage of funding of each initiative in our
dataset will be at least 100%.
For instance, San Diego, CA.
Our use of CSA as the main unit of location is driven
by the narrower definition of MSAs. For instance, New York
City and Greenwich, CT, belong to the same CSA, but they
are located in different MSAs.

6In time series analysis, the Box-Jenkins approach is
a generalized method that applies to autoregressive moving
average models to find the best fit of a time series model to
past value of a time series.
7This result is consistent with a previous research car-
ried out by Mollick [2013], based on locational Gini coef-
ficients. Therefore our analysis adds further evidence to the
existing literature.
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Agrawal, A., C. Catalini, and A. Goldfarb. "The Geography
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3
(2004), pp. 411-436.
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Ferrary, M., and M. Granovetter. "The Role of Venture Cap-
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Gerber, E. M., J. S. Hui, and P.-Y. Kuo. "Why People Are
Motivated to Post and Fund Projects on Crowdfunding Plat-
forms." Working paper, Northwestern University, Creative
Action Lab, 2011.
Hsu, D. "What Do Entrepreneurs Pay for Venture Capital
Affiliation?" The Journal of Finance, Vol. 59, No. 4 (2004),
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Kantor, R. "Why Venture Capital Will Not Be Crowded Out
by Crowdfunding." Working paper, Chicago-Kent College
of Law-Illinois Institute of Technology, 2013.
Lambert, T., and A. Schwienbacher. "An Empirical Analysis
of Crowdfunding." March 2010: http://wenku.baidu.com/
view/2de46229b4daa58da0114ac8.
Mollick, E. "Swept Away by the Crowd? Crowdfunding,
Venture Capital and the Selection of Entrepreneurs." SSRN
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12:29:22 UTC��
Contentsp. 7p. 8p. 9p. 10p. 11p. 12p. 13p. 14p. 15p. 16p. 17p.
18p. 19p. 20Issue Table of ContentsThe Journal of Private
Equity, Vol. 20, No. 1 (WINTER 2016) pp. 1-83Front
MatterCrowdfunding and Venture Capital: Substitutes or
Complements? [pp. 7-20]The Smart Money: When a Private
Equity Minority Investment Can Be Better Than a Bank Loan
(and What about a Family Office?) [pp. 21-24]The Relative
Performances of Large Buyout Fund Groups [pp. 25-34]Three
Rookie Mistakes Experienced CEOs Make in Managing a
Private Equity—Backed Company [pp. 35-37]Evolution of
Private Equity Regulations in Emerging Markets: A Case of
India [pp. 38-44]Special SectionForced Liquidations, Fire Sales,
and the Cost of Illiquidity [pp. 45-57]DebtRank and the
Network of Leverage [pp. 58-71]The New Diversification: Open
Your Eyes to Alternatives [pp. 72-81]Market Snapshot [pp. 82-
83]Back Matter

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