crowdfunding breaks the mold

A new paper by Ajay Agrawal, Avi Goldfarb and Christian Catalini of the University of Toronto seeks to understand how crowdfunding disrupts the typical pattern for early stage financing.  Heretofore this was almost always done by local investors, countering information problems and the need for "high touch" support.  They discuss how "reputation signalling", rules and regulations, and "crowd due diligence" all help overcome assymmetric information barriers between entrepreneurs and funders, and control opportunistic behavior by entrepreneurs after they raise capital.  A "provisioning point mechanism", where funds aren't liberated for the entrepreneur until the pre-set target is achieved, avoids the free-rider problem. So crowdfunding could challenge the "hub" pattern that has characterized much early stage investment to date (Silicon Valley, etc) - though it's early to say, as the authors note, as true equity crowdfunding is still quite rare.The authors feel that certain types of ventures are more likely to benefit from crowdfunding, such as consumer products where the value proposition can be easily communicated via text and video (see CircleUp's operation for a good example here, and Proctor and Gamble already has bought a stake in this outfit).  They also note that the data trail being created by crowdfunding platforms will yield new "big data" opportunities to refine both risk management and policy development in this field. Lots of useful data on Kickstarter's history also in this piece.