STUDY | Crowdfunding benefits cities – not rural areas

Equity crowdfunding has long been seen as a tool to increase funding for new businesses. Through digital platforms, entrepreneurs should be able to reach investors wherever they are. But a new German study shows that geographical location still matters.

Equity crowdfunding is when a large group of individuals invest money in a company in exchange for ownership shares. Researchers have now examined the geographic locations in Germany where successful campaigns are taking place and how these locations relate to traditional investors such as venture capital firms and banks.

Concentrated in big cities

The results show that crowdfunding is heavily concentrated in three cities – Berlin, Munich and Hamburg. In rural areas, however, successful campaigns are very rare. This means that equity crowdfunding is not closing the so-called regional funding gap, where businesses in peripheral areas have less access to capital. On the contrary, it is growing where venture capital is already flowing.

Complementing venture capital – not replacing loans

The study shows that equity crowdfunding and venture capital often occur together. In regions with many venture capitalists, crowdfunding is also more common. However, the opposite is true for banks: in areas where there are plenty of banks, crowdfunding is less common.

The researchers conclude that crowdfunding acts as a complement to venture capital, but as a substitute for bank loans. In cities with a lot of venture capital, crowdfunding offers an additional financing step for companies that do not reach the thresholds of venture capital firms.

Change in law had a temporary effect

In 2015, the German Small Investor Protection Act (KASG) was introduced, which aimed to strengthen the protection of small investors and create clearer rules for crowdfunding. It was also intended to allow entrepreneurs to raise capital directly from investors online, without being dependent on proximity to banks or venture capital firms. After the law was introduced, the number of campaigns increased significantly – but only temporarily. The effect quickly faded and the geographical concentration on big cities persisted.

According to the researchers, the results point to an important lesson for policymakers: replacing local venture capital and banks with digital platforms is not enough to equalize access to capital.

They also argue that if crowdfunding is to help close the urban-rural divide, active efforts are needed to build entrepreneurial ecosystems outside big cities. Otherwise, there is a risk that crowdfunding will remain a form of financing concentrated in cities – and rural businesses will continue to be left out.

More about the study and the authors
The study Complementary funding: how location links crowdfunding and venture capital is published in the scientific journal Small Business Economics. It is written by Torben Klarl, University of Bremen, Germany, Alexander S. Kritikos, and Knarik Poghosyan both at DIW Berlin, Germany.

Read also:
Crowdfunding levels the playing field for women
How to reduce uncertainty in crowdfunding
Researcher’s top 5 tips for crowdfunding success