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Comparison between venture funding and crowdfunding

05.13.2013
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The move away from obtaining finance from mainstream sources has been a constant one over the past decade.  We’ve seen the microfinance industry blossom nicely in providing funding to people in need around the world, whilst Zopa has driven the peer to peer lending movement.

At the forefront of it all has undoubtedly been the crowdfunding industry.  Kickstarter et al have allowed the public to plough millions into interesting projects and ventures.  Are these amateur investors as good at picking successful projects as professional venture capitalists though?

That’s the question that was asked in a new paper written by Wharton’s Ethan Mollick and he believes that crowdfunding sites have done as good a job at picking ‘winners’ as the VC industry.

“They are looking for similar signs of quality,” Mollick notes. “There are things that increase the chance of being [crowd]funded if your backers don’t know whether you’re going to be successful yet.” These factors include: “Does the project creator have experience in the field? Do they have a prototype? Do they have an endorsement from a prominent organization or individual? Those factors increase the chance a company is going to be successful, and they’re things a venture capitalist looks for as a signal of success. They seem to be the things crowedfunders look for, too.”

Mollick’s latest work builds on a previous paper that looked at how the crowd chose the ventures to invest in.  It found that most funded projects made a good stab at fulfilling their obligations, so in other words, the funding community was pretty good at picking strong projects.

An interesting trend to emerge from Mollick’s research is that most investments were not concerned with gender or location, which is most unlike the VC industry.

It’s certainly an interesting look into a burgeoning industry.  Whilst Kickstarter remains at the vanguard, other sites such as Seedr have emerged recently to offer an alternative approach to securing funding from the crowd.

“Something’s happening: There’s a lot of money flowing, there’s policy and there’s promise. It’s the culmination of a bunch of things we care about,” Mollick notes. “Trends like this have been coming together for a long time now. Is it more democratic? Yes. But quality seems to matter, and that’s important and interesting. There are still a whole bunch of interesting questions that we don’t have answers to.”