Does Distance Matter in Online Entrepreneurial Finance? Evidence from Crowd-Funding in the Arts
Ajay Agrawal, Christian Catalini, Avi Goldfarb
The most striking feature of “crowd-funding” for early stage entrepreneurial projects is the broad geographic dispersion of investors. This stands in stark contrast to existing theories that predict entrepreneurs and investors will be co-located due to distance-sensitive costs. We examine a crowd-funding setting that connects artist-entrepreneurs to investors over the internet for financing early stage musical projects where the average distance between entrepreneur and investor is about 3,000 miles, suggesting a reduced role for spatial proximity. Still, distance does play a role. Local investors are more likely to invest in the very early stages of a single round of financing and are less responsive to decisions by other investors. We show this geography effect is driven by investors who likely have a personal connection with the entrepreneur (“family and friends”). Although the online market platform eliminates most distance-related economic frictions such as monitoring progress, providing input, and gathering information (e.g., local reputation, stage presence), it does not eliminate social-related frictions such as information more likely to be held by personally-connected individuals (e.g., entrepreneur’s tendency to persevere, recover from setbacks, succeed in other endeavors).
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Agrawal, Ajay, Catalini, Christian and Goldfarb, Avi, Does Distance Matter in Online Entrepreneurial Finance? Evidence from Crowd-Funding in the Arts (October 29, 2010). NET Institute Working Paper No. 10-08. Available at SSRN: http://ssrn.com/abstract=1692661