Agrawal, A., Catalini C., & Goldfarb, A. “Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions” Special Issue: Innovation Economics II 24 (2), 253-274.
Q&A with Professor Avi Goldfarb
While online crowdfunding has reduced many of the distance-related issues, local and distant investors exhibit different approaches with funding. Corresponding author Avi Goldfarb explains these patterns, as well as the opportunities and limitations that come with online markets.
1. How do local and distant funders approach a crowdfunding project differently?
Local investors often invest early, shortly after a project is posted. Distant investors are much more likely to arrive late, as the project gets close to its goal. Thus, local investors tend to provide support early, and distant investors tend to follow later.
- How does crowdfunding on Sellaband affect distance-sensitive costs? Why does it not eliminate them all?
Crowdfunding appears to eliminate most distance-sensitive costs around raising money, including those related to trust and quality screening. Crowdfunding, however, is still heavily dependent on friends, family and other people in the fundraiser’s offline social network. Because your friends and family tend to live near you, local investments look different from distant investments.
- What unique challenges does crowdfunding pose for both geographically-isolated artists and funders?
Many crowdfunding platforms are designed to draw attention to projects that have already raised money. It is difficult to get the first 10-20% of a campaign’s goal. Geographically isolated artists may not have the online connections that support them early on and allow them to get noticed on the platform.
- What does your research indicate about the steps toward successful crowdfunding?
Crowdfunding relies on both online and offline communication. While the platform is online, many of the activities that lead to early success likely occur offline.
- What implications does crowdfunding have on the recorded music industry? How can your crowdfunding research be applied to other industries?
The recorded music industry has experienced significant revenue declines in the past 10 years. At the same time, the cost of producing music has also fallen substantially. Crowdfunding may give artists a new option to raise funds that are less reliant on the major labels.
More broadly, crowdfunding may provide new artists and entrepreneurs a market for their most valuable assets: their ideas, vision, and future intellectual property. This may allow them to leverage their local social capital to raise money from a larger pool of distant strangers.