Can crowdfunding democratize access to capital?

The answer—as given by a panel sponsored by the MIT Innovation Initiative at the MIT Sloan School of Management and the Martin Trust Center for MIT Entrepreneurship—is “yes.” But the panel articulated there’s much more to crowdfunding—it is also democratizing investment opportunities for investors of all kinds. 

The roundtable discussion, which took place on May 19, 2014 on the MIT campus, began with opening remarks from Professor Fiona Murray, Associate Dean for Innovation and Faculty Director for the Martin Trust Center for MIT Entrepreneurship. The standing-room-only crowd was then introduced to research and comments on the "simple economics of crowdfunding" by MIT Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management Christian Catalini, who also served as event moderator. Catalini started studying crowdfunding in 2007 and shared some interesting statistics about crowdfunding. For example:

  • It often serves as a substitute for taking on credit card debt

  • There are three basic types of crowdfunding: donation-based, reward-based, and equity-based

  • There is a strong presence of the arts and small businesses on reward-based crowdfunding platforms such as Kickstarter

  • Socially connected people drive early investing

  • And, perhaps most interestingly, 80% of funding comes from people more than 3,000 miles away from the startup’s/fund seeker's physical location


Many aspects of crowdfunding were discussed, but the three big takeaways were:

  • Crowdfunding democratizes access to capital

  • It also democratizes access to new ideas

  • Yes, the regulations are lagging and there are risks to investing


Democratizing access to capital and ideas


One could easily view crowdfunding as a big win for entrepreneurs and a huge risk for investors. But as Jeff Fagnan of Atlas Venture pointed out, “Crowdfunding is terrific for the Venture Capital community.” According to Professor Ajay Agrawal of the University of Toronto, “The angel level of finance is traditionally very local and liquid.” The various [crowdfunding] platforms make it more impactful for both investors and founders.”

Panelist Elliot Schneier of Fundable.com argues that crowdfunding is “almost necessary” driven by the lowered costs of prototyping and the growing number of entrepreneurs with great ideas, but less access to traditional capital.

Regulations are lagging and risks are inherent


The New York Times recently covered the delays in the SEC’s proposed rules for equity crowdfunding; the panelists discussed this topic extensively. The consensus was that we are in the early days of crowdfunding and the regulations will be evolving.

Crowdfunding, just like any level of investment, has inherent risks. Thos Niles of Dragon Innovation highlighted that 75% of hardware projects on Kickstarter fail to deliver on time or at all; interestingly though, that statistic seems to be close to the same number of failed/late projects backed by more traditional investment communities.

The biggest risk, however, appears to be in the payment processing aspect of crowdfunding. When a startup fails and its investors demand money back, who will take on that burden? Or, will the entrepreneurs be responsible for paying the money back? Or, will the investors simply lose that money? Right now, it’s unclear what will happen. Hence, the payment processors see a great deal of risk in crowdfunding.

The level of knowledge of the panelists and the numerous aspects of the topic meant that this one-hour discussion could have gone on for the entire day. What was clear, though, is we are still in the beginning of the crowdfunding evolution and it’s proving to be good for both founders and investors.

Fiona Murray is the Associate Dean for Innovation at the MIT Sloan School of Management, Alvin J. Siteman (1948) Professor of Entrepreneurship, and the Faculty Director of the Martin Trust Center for MIT Entrepreneurship. She is also the Co-Director of MIT’s Initiative for Innovation and teaches in the Entrepreneurship Development Program and the MIT Regional Entrepreneurship Acceleration Program

Christian Catalini is an Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management. He teaches in the Entrepreneurship Development Program.

Additional panelists included Alex Mittal of FundersClub, Jean Hammond of LearnLaunchX, Sam Guzik of Guzik & Associates, and Jay Finch of the U.S. Treasury.

Comments (1)

Anonymous

Posted: 1 month and 19 days ago

[...] The synopsis of a recent crowdfunding panel discussion at MIT’s Sloan School of Management revealed some interesting facts about crowdfunding.  Visit the Sloan blog for more information. [...]

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