Can crowdfunding help you raise outside capital from conventional sources? There are certainly examples. After being turned down by venture capitalists, the inventors of the Pebble Watch went on to smash records on Kickstarter, raising $10 million in a 2013 campaign. Then the VCs came calling, investing $15 million in the smart watch venture. And Oculus Rift, the virtual reality headgear maker (shown above), was acquired by Facebook for $2 billion after its successful Kickstarter campaign.
But aside from those famous outliers, does crowdfunding increase an entrepreneur’s chance of snagging venture capital or angel investments? According to a new study, the answer is yes—by as much as 70 percent.
A successful crowdfunding campaign also generates an increased probability of business partnerships, greater publicity, a stronger customer base and an easier time attracting employees, the research found.
Entitled Research on the Current State of Crowdfunding: The Effect of Crowdfunding Performance and Outside Capital and published recently by the Small Business Administration’s Office of Advocacy, the study suggests that successful crowdfunding campaigns of all kinds can act as a “proof of concept” for early stage investors.
The study “illustrates how America’s entrepreneurs can utilize successful crowdfunding campaigns to prove their worthiness to future investors and thus open the door to future capital injections,” said SBA chief economist Christine Kymn.
The researchers, Venkat Kuppuswammy and Kathy Roth, set out to explore the relationship between crowdfunding performance and several post-campaign benefits, most notably access to additional external financing for their venture.
Entrepreneurs that raise over $125,000 from successful crowdfunding campaigns have more than a 50% probability of obtaining external capital, and up to 70% for campaigns over $250,000
Since investment crowdfunding is so new—Title III of the JOBS Act just went into effect in May—they turned to Kickstarter, a seven-year old rewards-based crowdfunding platform. On Kickstarter, people can solicit financial contributions for creative projects, such as music or art, in return for non-financial rewards, such as a product or t-shirt. The site also attracts a large number of technology and hardware projects.
To conduct the study, the researchers selected Kickstarter projects that were most similar to those of traditional venture-backed firms: projects involving technology, design and games with funding goals of at least $5,000 and had committed to future delivering of products to customers. They received responses from 284 successful and unsuccessful projects that ran campaigns between 2009 and 2012.
Their findings should give a boost to ambitious entrepreneurs. Among the highlights:
- Successful crowdfunding campaigns positively influence entrepreneurs’ ability to attract additional capital, likely by providing proof of concept to potential external investors.
- Entrepreneurs that raise over $125,000 from successful crowdfunding campaigns have more than a 50% probability of obtaining external capital, and up to 70% for campaigns over $250,000. (However, the marginal effect, meaning the increased rate of benefit per additional dollar raised, decreases after a projects hits $75,000, suggesting that once the project has been validated by the crowd, the additional dollars have less impact – see chart below).
- Gender did not seem to play a role in the likelihood of receiving follow-on funding
- A successful crowdfunding performance can also generate non-financial benefits, including increased business partnerships, greater publicity, a stronger customer base, and an easier time finding employees.
- For projects that raised less than $100,000, the greatest effects were on building a customer base and generating publicity for the new product. Projects that raised more than $100,000 saw the greatest benefit in securing business partnerships.
These researchers say their results may paint a conservative picture of post-crowdfunding campaign benefits, and theorize that the benefits are likely to be much greater with investment-based crowdfunding, such as Title III of the JOBS Act.
The findings support earlier studies and anecdotal data. A 2014 study by CB Insights looked at more than 400 hardware projects on Indiegogo and Kickstarter that raised over $100,000. About 10 percent went on to get additional funding from venture capitalists.
And some businesses that have conducted investment crowdfunding campaigns have attracted traditional funding. For example, after a successful crowdfunding campaign on Indiegogo and another on the Georgia-based intrastate crowdfunding site SparkMarket, Bohemian Guitars attracted angel investors, was accepted into the 500 Startups accelerator and raised money from accredited investors.
And in Michigan, Tecumseh Brewing was able to get a $200,000 bank loan after raising $175,000 from local investors under the state’s MILE law.
“Crowdfunding may improve market efficiency if it allows some entrepreneurs, who otherwise would have been denied funding, to demonstrate their value in the market,” write the authors. And that could lead to increased innovation. “Therefore,” the conclude, “policies that encourage and embrace entrepreneurial crowdfunding are a logical direction to move toward as policy leaders develop strategies to improve both national and international economic conditions.”
Feature photo: Sergey Galyonkin, Flickr