Can Crowdfunding Improve an Entrepreneur’s Shot at Funding from VC’s and Angel Investors?
The short answer is yes.
Entrepreneurs that raise over $125,000 from successful crowdfunding campaigns have more than a 50% probability of obtaining external capital, and up to 70% for campaigns over $250,000.*
What about the long answer? It’s not that simple. The purpose behind the study was to investigate the relationship between crowdfunding performance and several post-campaign benefits that entrepreneurs value; most notably, access to additional external financing for their venture.[fusion_text]Can undertaking a crowdfunding campaign affect future financing? The search for the answer is at the heart of a new study: The Effect of Crowdfunding Performance and Outside Capital, conducted by researchers Venkat Kuppuswammy and Kathy Roth. Both researchers wanted to find out if crowdfunding can affect whether or not venture capitalists and angel investors shy away from ventures that have sourced financing from the crowd. So let’s get right to it.
A Summary for Skimmers
The report itself is 32 pages long, and while it may not be beach reading, I recommend you put it on your list. For now, I’ve provided a summary for anyone who’s in a hurry and wants the main highlights.
Based on the crowdfunding projects in the sample, 284 data sets in total of which 192 samples were of successful projects and 92 were unsuccessful projects, the study found that crowdfunding serves as concrete “proof of concept” for entrepreneurs seeking additional financing. For traditional sources of external capital such as banks, VC’s, and angel investors, successful crowdfunding campaigns show that the market has validated an idea, product, or prototype, reducing its investment risk.
The study looked beyond external financing, concluding that successful crowdfunding rounds bring a variety of valuable non-financial benefits such as test groups (which can provide incredible feedback), publicity, a customer base, and ease of finding employees—these are all elements that early stage companies spend a lot of funding dollars to create. But there’s a caveat: these benefits are more likely to kick in when the target raise is under $100,000.
And there’s more. While a successful crowdfunding campaign can increase the the likelihood of external financing, it’s important to note that the effect is concave. Let’s throw some numbers in the mix to illustrate this. The probability of obtaining external financing when the target raise is $5,000 is 19 percent, versus 71.6 percent when $300,000 is the goal. But the maximum “boost” of a successful campaign on future financing starts to decrease once crowdfunders reach the $75,000 mark. This means that successful crowdfunding is pretty powerful for smaller ventures.
No doubt more research on the subject will be forthcoming. But for now, entrepreneurs and small businesses have some powerful evidence that crowdfunding can help, rather than hurt, their chances of additional funding in the future.