Aspiring entrepreneurs who think it may be easier to raise capital via crowdfunding are mistaken, according to a new study conducted by professors at American University.
Serge da Motta Veiga and Maria Figueroa-Armijos of American’s Kogod School of Business along with co-authors John Berns and Timothy Dunne looked at 146,218 loans over a five-year period from the Kiva, a crowdfunding site that allows people to lend to low-income entrepreneurs all over the world.
Their study, “Dynamics of Lending-Based Pro-social Crowdfunding: Using a Social Responsibility Lens,” published in The Journal of Business Ethics found that lenders, even for ventures that are socially responsible, behave in ways consistent with traditional financing practices.
In other words, lenders, even those looking to fund socially responsible endeavors, still aim to finance low-risk loans.
“Our results indicate that, in order to succeed in securing a loan via pro-social crowdfunding, entrepreneurs need 1) to secure backing by a field partner (micro-lending institution who is the financial intermediary of loan) which has strong financial credentials, and 2) ensure the language on their profile indicates the highest need, when compared to other projects on the online platform,” Figueroa-Armijos and da Motta Veiga said.
The storytelling aspect of these ventures was also key, according to the researchers. Entrepreneurs who displayed strong financial credentials and were able to tell a compelling story (i.e. the need for funding) received the highest amount of funding on average.
The use of crowdfunding has steadily increased over the years, with crowdfunding platforms generating in excess of $3 trillion dollars. The study confirms that entrepreneurs looking to fund socially responsible ventures should have a solid financial strategy and be prepared to tell a good story.
“Our study’s results denote that the narrative on the entrepreneur’s profile is key,” the researchers added.