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Study Claims Crowdfund Investors Focus on Same Qualities as Venture Capitalists

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A recent study, Swept Away by the Crowd? Crowdfunding, Venture Capital, and the Selection of Entrepreneurs, claims that investors on popular crowdfunding websites focus on many of the same qualities and indicia of potential success as venture capitalists.

According to an analysis published by the CrowdFund Intermediary Regulatory Advocates (cfira.org) this study "casts doubt [on the claims of critics] that crowdfund donors are an unsophisticated lot".

The study, led by Wharton School of Business Professor Ethan R. Mollick, reviewed 2,101 crowdfunded projects on Kickstarter. The study reviewed the history of success of a project, the influence of endorsements on a crowdfund project, the level of preparation demonstrated by an entrepreneur, quality, social networks, geographic outcomes and gender. The study concluded that crowdfunders act much like venture capitalists in making predictions on the success of a project, focusing on factors like the quality of the product, the resume of the team members and the likelihood of success.

According to Professor Mollick, "the signals of quality that are used by VCs to assess the viability of new ventures are also used by crowdfunders. This bolsters the validity of these signals as indicators of start-up potential, but also suggests that crowdfunding has the ability to distinguish quality potential projects from less promising ones."

This is an important conclusion Critics of the crowdfunding provisions of the 2012 JOBS Act claim that it is likely to increase levels of fraud, by permitting business promoters to pitch investment opportunities directly to non-accredited investors. If, as Professor Mollick's study suggests, crowdfund investors consider the same signals of quality as professional venture capitalists, the potential for fraud seems overblown.

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Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

 

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The Manhattan Insitute's Center for Legal Policy.