HONG KONG, CHINA - Media OutReach- 30 July 2020 - Crowdfunding, which has seen its popularity skyrocket with the rise of high profile platforms the likesof Kickstarter, GoFundMe and IndieGoGo, has often been hailed as a "democratisingforce" in finance, allowing enterprising individuals to launch new andinnovative ventures while bypassing traditional sources of funding they wouldotherwise be unable to access. In a recent report, the global crowdfundingmarket was valued at US$10.2 billion in 2018 and was forecast to almost tripleby 2025. Clearly, crowdfunding has hit mainstream, but has it lived up to itspromise to give entrepreneurs of all stripes and sorts easier access tocapital?

According to anew research study conducted at The Chinese University of Hong Kong (CUHK),entitled Crowdfunding and the Democratization of Access to Capital --An Illusion? Evidence from Housing Prices, the answer is a qualified yes.

Conducted by Keongtae Kim, Assistant Professor in the Department of Decision Sciencesand Managerial Economics at CUHK Business School; and Prof. Il-Horn Hann at theUniversity of Maryland, the study analysed the track record of crowdfunding andfound evidence that pointed to its potential to level the fundraising playingfield for entrepreneurs. However, this result came crouched in an importantcaveat -- it found that people who lived in areas with lower levels of incomeand education were less able to take advantage of it to launch projects.

The study arrivedat this conclusion by focusing on one of the most important types of credit forentrepreneurs -- bank financing through housing collateral, looking at howaccessibility to these loans related to crowdfunding by entrepreneurs. Priorstudies had already shown that housing wealth can ease credit constraints forentrepreneurs, making it a primary factor in financing new ventures.

The researchersobtained data on housing prices and matched this with a data set fromcrowdfunding platform Kickstarter. They focused on local housing prices as aproxy for collateral-based credit availability for entrepreneurs in a localmarket. If entrepreneurs living in areas with declining housing prices have anincreasing degree of difficulty in raising sufficient capital, they may beinclined to use crowdfunding as an additional funding source.

The professorsfocused on technology-based projects in the technology and games categories,obtaining data covering April 2009 through December 2013 and accounting for9,120 projects that attracted more than US$257 million in pledges fromapproximately 3.4 million contributors.

Impact of Housing Prices

"We foundthat tightened credit constraints imposed because of declines in local housingprices led to increased use of crowdfunding. This finding supported the ideathat crowdfunding serves as a supplement to traditional sources of financing,"says Prof. Kim.

"We also observedthat a decline in housing prices led to even more people turning tocrowdfunding in areas with a large share of homeowners and in states withunlimited homestead exemptions," he adds. Homestead exemptions are legalprovisions that shield homeowners from partial or full seizure of theirproperties in the event of a default, and previous studies have shown thatbanks are less willing to lend to individuals in states with high or evenunlimited homestead exemptions.

"Ourresearch indicated that crowdfunding can serve as an addition to traditionalfinancial sources, implying that online crowdfunding has the potential todemocratize access to finance in the sense that it can be an option forentrepreneurs who have difficulty accessing traditional funding," Prof.Kim says.

The researchersdid not find a link between a fall in housing prices and whether a crowdfundingproject was successful or not.

However, theyalso found a stark contrast in the ability to access capital using crowdfundingbetween the wealthier and the poor. Specifically, they observed that a decreasein housing prices led to an increase in successful crowdfunding projectsprimarily for areas in high socio-economic status and an increase inunsuccessful projects primarily for areas of low socio-economic status.

"Althoughentrepreneurs from areas of low socio-economic conditions have at least equalaccess to online crowdfunding, they may still suffer from lower demand fortheir projects. This may be partly because of less support of their socialnetworks," Prof. Kim says.

"The role ofaccess to financing is essential as difficult access discouragesentrepreneurship, as measured by self-employment surveys and census data, andentrepreneurship is very important," he adds.

In the U.S. alone,small businesses employ more than 50% of the private sector workforce andaccount for 66% of all net job creation. Most jobs are created by young,typically small businesses. High-growth start-ups contribute significantly tojob creation in the U.S. economy.

Leveling the Crowdfunding Playing Field

Crowdfunding hasthe potential to offset a decrease in entrepreneurship. "However,entrepreneurs need to be strategic in seeking funding from sources that may befavourable to them," cautions Prof. Kim

The study showedthat while decreasing housing prices made banks reduce credit supply toentrepreneurs in need, crowdfunders were still willing to back them. "Entrepreneursliving in disadvantaged areas should exploit crowdfunding aggressively andattempt to build upon their social networks or improve their projects forsuccessful funding," he says.

"To helpentrepreneurs from disadvantaged areas in achieving real economic benefits fromcrowdfunding, we must understand its underlying mechanisms," says Prof.Kim.

He advises thatpolicymakers should seek to implement policies to help entrepreneurs from areasof low socio-economic status to obtain sufficient resources to raise money fromonline crowdfunding successfully.

A shortfall oftheir research, he concedes, was that though their ad hoc analysis suggeststhat social networks play a considerable role in the socio-economic divide,they could not explore this in a meaningful way due to data limitation.

According to theprofessor, another limitation was that their study focused only ontechnology-intensive projects, meaning that they have a limited ability todiscuss crowdfunding in other types of projects.

"Although werecognise that bank financing and crowdfunding offer different fundingconditions in terms of funding duration, success rates of funding, interestcharges, and so on, the two channels considerably overlap," concludesProf. Kim, adding that a significant number of creators are potentially able touse both channels and choose the optimal combination that offers the best termsand conditions.

Reference:

Keongtae Kim,Il-Horn Hann (2019) Crowdfunding and the Democratization of Access to Capital --An Illusion? Evidence from Housing Prices. Information Systems Research30(1):276-290. https://doi.org/10.1287/isre.2018.0802

This article was first published inthe China Business Knowledge (CBK) website by CUHK Business School: https://bit.ly/3hcehWv.

About CUHK Business School

CUHK Business School comprises two schools -- Accountancyand Hotel and Tourism Management -- and four departments --Decision Sciences and Managerial Economics,Finance, Management and Marketing. Established in HongKong in 1963, it is the first business school to offer BBA, MBA and ExecutiveMBA programmes in the region. Today, the Schooloffers 11 undergraduate programmes and 20graduate programmes including MBA, EMBA,Master, MSc, MPhil and Ph.D.

In the Financial Times GlobalMBA Ranking 2020, CUHK MBAis ranked 50^th. In FT's2019 EMBA ranking, CUHK EMBA isranked 24^th in the world. CUHK Business School has the largestnumber of business alumni (37,000+) amonguniversities/business schools in Hong Kong -- many ofwhom are key business leaders. The School currently has about4,800 undergraduate and postgraduate students and Professor Lin Zhou is the Dean ofCUHK Business School.

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