minorities crowdfunding

Crowdfunding

Minorities Lag in Crowdfunding, Study Says

Locavesting Staff | February 20, 2017

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Women and minority entrepreneurs have long been at a disadvantage when it comes to raising seed and growth capital for their ventures. That’s one reason why there was so much excitement about the JOBS Act. By cutting out the gatekeepers and allowing entrepreneurs to appeal directly to their communities and the general public, investment crowdfunding was a seen as a leveling force that would benefit these underserved entrepreneurs.

So how is it working out? It’s still early, but the results are mixed, at best. While women have made strides in raising money online, minority participation has been low. A new study attempts to shed light on the use of crowdfunding by disadvantaged groups and the factors that may be holding back their participation and success. It also offers some suggestions for remedies and future research.

“For crowdfunding to have significant social and economic impact, the industry and government must work together to ensure that underserved communities have the tools, knowledge and resources necessary to leverage crowdfunding,” says Richard Swart, 
Filene Research Fellow
 at the Center for Emerging Technology 
Institute for Money, Technology, and Financial Inclusion
 at the University of California, Irvine.

Women business owners, he notes, benefit from a rich network of mentors, focused accelerators and business development centers built over the last decade. “Sadly, these resources don’t exist at nearly the same level in minority business communities,” Swart says.

minorities crowdfundingThere are efforts to change that dynamic. Innovative programs like the Force for Good Fund/Accelerator in Oakland, CA and new investment vehicles such as a “friends & family” CD that provide seed funding for entrepreneurs of color are providing training and capital to underserved entrepreneurs, which may help build a pipeline for crowdfunding success.

The qualitative study, tentatively titled Research on Crowdfunding and Minority Entrepreneurship, was conducted by Swart and coauthors Nancy Curtis and Don Zacherl with research firm VICI Labs.

The results highlighted three significant gaps, says Swart:

(1) Despite an abundance of media about crowdfunding, very few minority business owners are aware of it as an option
(2) the few minority business owners engaged with it typically are college educated founders with technology firms, and
(3) there is essentially no information in languages other than English; and cultural and linguistic peers – which play a key role in dissemination information – are almost non-existent.

To date, investment crowdfunding platforms have not made a specific effort to exclude or draw out minorities or women, study participants noted. (Although some platforms are trying: Republic targets diverse teams, and women founders have been well represented on accredited investor-only site CircleUp).

The study, which has not yet been released publicly, identified a number of findings and associated recommendations:

No Evidence of Barriers
The study found no clear pattern of gender or minority barriers in crowdfunding, although it acknowledged that such barriers are difficult to detect. The apparent absence of gender and racial impediments underscores the high potential of crowdfunding for traditionally underserved entrepreneurial and small business communities.

To Improve Crowdfunding’s Potential, Learn From First-Movers
The US alternative funding community should learn from first movers in the UK and elsewhere in order to accelerate development—or risk remaining behind the power curve and disadvantaging US-based entrepreneurs.

Outreach & Education
Outreach and education aimed at entrepreneurs, particularly underrepresented groups, is critical to raise visibility of the potential of crowdfunding. This is true for all stakeholder groups, even those familiar with the process and evolution of this new form of financing. While crowdfunding can be an easier path for initial capital investment than traditional forms of funding, the pathway is largely unknown and untried, and can benefit significantly from more visibility and open pathways.

Reliable Information
The rapid growth and evolution of crowdfunding investment creates unique challenges in the entrepreneurial and small business financing environment. Study participants frequently expressed the desire for a rapidly updated and comprehensive crowdfunding portal or clearinghouse for information, access, and opportunity to serve as an authority’s source for reliable, credible information.

The authors acknowledge the limited scope of their study and call for more research. To that end, they provide a valuable service in summarizing the existing body of research.

Some of the previous research findings they highlight include the following:

– Minority business owners, like women, start their business with less capital, rely more strongly on internal resources, and are less likely to be successful in raising external capital both in the early stages of company formation and throughout the lifecycle of the business.

– A 2011 study highlights the critical role that community can play for early stage companies. In particular, it found that local investors are more likely than distant ones to invest in the very early stages of funding, and they are less swayed by what other investors are doing.

– Crowdfunding is expensive—and getting more so. On average, firms spent $1,800 on campaign preparation and dedicated more than 80 hours to a crowdfunding campaign, according to a 2013 analysis by Crowdfund Capital Advisors. Swart and his co-authors note the increasing use of professional marketers who require upfront fees as well as a percentage of the funds raised. “These costs can affect participation rates among underserved communities,” the authors write.

– A 2014 study found that Kickstarter projects started by women were more likely to succeed than those started by men, and that they had higher success rates notably product categories such as tech (65% to 30% success) and games (40% to 32% success). They researchers found that women launching crowdfunding campaigns can benefit from “a small portion of female backers” that disproportionately support women-led projects. However, it is unclear from the research as to whether this “homophily” benefits entrepreneurs of color.

– When deciding whether to launch a crowdfunding campaign, minority business owners may be influenced by previous exposure to startup methods, such as accelerators and business plan competitions, according to a 2012 study. “Thus, entrepreneurial training may be a gateway to crowdfunding success,” the authors write. There is a more developed ecosystem for women entrepreneurs, consisting of incubators, accelerators, women’s angel networks and an institutional focus on gender lens investing. Minority groups are further behind in the establishment of such networks.

The researchers conducted interviews and focus groups with participants from five target groups—advocates for the minority business community, crowdfunding thought leaders, alternative funders, crowdfunding platforms and minority entrepreneurs. The study will be discussed at a meeting on Feb 28 in Washington D.C.

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