Crowdfunding Still Attracts Local Investors to Local Ventures - Ideas for Leaders
Idea #593

Crowdfunding Still Attracts Local Investors to Local Ventures

This is one of our free-to-access content pieces. To gain access to all Ideas for Leaders content please Log In Here or if you are not already a Subscriber then Subscribe Here.
Main Image
Main Image


Entrepreneurs seeking funding through crowdfunding Internet platforms must still overcome the ‘home bias’ of investors — that is, their preference for funding projects located close to their homes.  


Entrepreneurs need money to fund their ideas. Many legendary start-ups received their early funding from venture capitalists. However, VC’s are now more interested in contributing to later stage companies rather than take a chance with early stage start-ups that have a much greater chance of failing.

Into the breach steps the Internet-based crowdfunding platforms, in which entrepreneurs put a description of their project online where potential investors can discover them. The individual investment on these platforms is often small, but as the name implies, the investors are part of a crowd that together can represent a significant sum.

Crowdfunding platforms can also benefit from one of the defining features of the Internet: the irrelevance of geographic distance. Just as geography plays no part in a Google search for information on Mary Queen of Scots, for example (the geographic location of either the searcher or the source of the information is irrelevant), investors can invest in any venture no matter whether they or the venture might be located.

However, a new study shows that when it comes to investing, the earth, to borrow a familiar phrase, may not be as flat as all that. Researchers Christina Guenther of the WHU Otto Beisheim School of Management, Sofia Johan of York University’s Schulich School of Business, and Denis Schweizer of Concordia University’s John Molson School of Business studied more than 400 investors in an Australian-based crowdfunding platform, and discovered that the investor home bias was alive and well.

Specifically, the researchers found that both retail investors (unsophisticated, occasional investors who invest small sums), and accredited investors, (wealthy, knowledgeable investors who contribute significant sums to ventures) preferred to support ventures close to their homes. Overseas investors (investors from another country) were less sensitive to distance, but still relatively sensitive (the researchers used different algorithms and models to define sensitivity for each investor category).

In conclusion, crowdfunding does have the potential to alleviate distance bias. For example, potential investors access the same information about a new venture at virtually no cost whether they live within 50 miles or 5000 miles of the venture. In addition, through video-conferencing, investors at any distance can communicate with the entrepreneur.

However, there remain advantages to investing in local ventures that are not overcome by the Internet. There is still some value in personally (i.e., in person) familiarizing yourself with a potential investment, by visiting the store, for example, or engaging in face-to-face conversations with employees or entrepreneurs.

The researchers also note that, given the significant size of their investments, accredited investors are more likely to want to see first-hand where their money is going. As for retail investors, the researchers suspect that some may be mimicking the behaviour of wealthy investors with their in-person due diligence, and why not: retail investors assumedly hope to some day be part of the wealthy, accredited investor category.


The results of the study highlight the continuing challenge of entrepreneurs seeking funding for their projects — especially entrepreneurs who might not live near highly populated areas. An Australian-based crowdfunding platform is well chosen to highlight the hurdles of rural entrepreneurs given Australia’s broad expanse of lowly populated areas.

The bottom line: If you are going to start up a venture and hope to acquire investors from crowdfunding sites, do not be fooled by the borderless attributes of the Internet. Geography still counts, and you will have more success setting up the venture in populated areas that boast a far larger pool of local investors, many of whom will want to visit your site and meet you in person — or at least know that they can.



Is the Crowd Sensitive to Distance? How Investment Decisions Differ by Investor Type. Christina Guenther, Sofia Johan & Denis Schweizer. SSRN White Paper (January 2016). 

Ideas for Leaders is a free-to-access site. If you enjoy our content and find it valuable, please consider subscribing to our Developing Leaders Quarterly publication, this presents academic, business and consultant perspectives on leadership issues in a beautifully produced, small volume delivered to your desk four times a year.


Idea conceived

January 1, 2016

Idea posted

Apr 2016
challenge block
Can't find the Idea you are after?
Then 'Challenge Us' to source it.


For the less than the price of a coffee a week you can read over 650 summaries of research that cost universities over $1 billion to produce.

Use our Ideas to:

  • Catalyse conversations with mentors, mentees, peers and colleagues.
  • Keep program participants engaged with leadership thinking when they return to their workplace.
  • Create a common language amongst your colleagues on leadership and management practice
  • Keep up-to-date with the latest thought-leadership from the world’s leading business schools.
  • Drill-down on the original research or even contact the researchers directly

Speak to us on how else you can leverage this content to benefit your organization.