Entrepreneurial Finance and the Flat-World Hypothesis: Evidence from Crowd-Funding Entrepreneurs in the Arts
AbstractWe examine the geography of early stage entrepreneurial finance in the context of an internet marketplace for funding new musical artist-entrepreneurs. A large body of research documents that investors in early-stage projects are disproportionately co-located with the entrepreneur. Theory predicts this will be particularly true of artist-entrepreneurs with preliminary-stage projects, difficult-to-contract-for effort, difficult-to-observe creativity, negligible tangible assets, and limited reputations. At the same time, however, observers of the spatial effects of the internet and related technologies report that many economic activities have become much less geographically dependent. At an aggregate level, the internet marketplace we examine does indeed demonstrate a spatial transformation of the entrepreneurial finance process: the average distance between investors and artist-entrepreneurs is 4,831 km. However, geography still matters; investors are disproportionately likely to be local and, conditional on investing, local investors invest more. This apparent role for proximity is strongest before entrepreneurs visibly accumulate capital. Within a single round of financing, local investors are more likely to engage earlier in the funding cycle. However, this difference in the timing of investment is almost entirely explained by a particular type of investor, whom we characterize as ``family, friends, and fans." We conjecture that these individuals, who are disproportionately co-located with the entrepreneur, have offline information about the entrepreneur and therefore derive less new information from observing the aggregate financing raised. We speculate that the path-dependent role of this offline network in conveying information to the online community limits the ``flat world'' potential of these communication technologies.
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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 10-08.
Length: 49 pages
Date of creation: Sep 2010
Date of revision: Sep 2010
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Web page: http://www.NETinst.org/
Entrepreneurial nance; crowd-funding; internet; family and friends; local bias; social networks;
Find related papers by JEL classification:
- R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
- Z1 - Other Special Topics - - Cultural Economics
- L17 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Open Source Products and Markets
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-09 (All new papers)
- NEP-ENT-2010-10-09 (Entrepreneurship)
- NEP-GEO-2010-10-09 (Economic Geography)
- NEP-PPM-2010-10-09 (Project, Program & Portfolio Management)
- NEP-SBM-2010-10-09 (Small Business Management)
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