Will crowdfunding ‘democratize’ investing and make startup capital available to a wider range of founders? Our preliminary study suggests that equity crowdfunding is not providing its expected benefits to traditionally underrepresented entrepreneurs, which challenges some fundamental assumptions about the nature of crowdfunding.

Scholars and politicians argued to legitimize crowdfunding, whereby a person raises money for a project from a large number of people via an Internet fundraising portal, because it might give women and minorities greater access to capital. Indeed, female fundraisers outperform males when seeking contributions on Kickstarter and similar rewards crowdfunding sites. This revelation was welcome news to the startup finance world, where female-led firms raise only about 7% of venture capital and angel investment dollars. A recent study explained that female success in crowdfunding is due to ‘activist choice homophily’, where members of a disadvantaged group choose to support each other financially.

This phenomenon led to high hopes for female entrepreneurship when equity crowdfunding—also known as investment crowdfunding—became available in the US on 16th May 2016. While some scholars argued that compliance with the new law, Regulation CF, was too expensive for it to be useful, others argued that equity crowdfunding would make startup finance more equitable.

We questioned a basic assumption in the literature, however, that rewards crowdfunding and equity crowdfunding are essentially similar. Instead, we proposed that rewards campaigns are donative-type decisions, whereas equity campaigns are investment-type decisions. If the decision process for donating and investing is different, then the outcomes and homophily effects might be different too.

To study this, we conducted an empirical examination of the relationship between the gender of the entrepreneur leading the equity crowdfunding campaign and the amount of funding raised. We found that female-led campaigns raised significantly less funding amounts compared to male-led campaigns. This relationship was observed even after controlling for funding targets, firm characteristics (eg, assets, revenue, debt, etc), and industry categories. Moreover, results suggest that female entrepreneurs raise increasingly less than their male counterparts in equity crowdfunding as the funding target increases. We hope that our preliminary findings lead to further research in at least four areas.

First, it seems that while activist choice homophily may explain donor behavior, it does not necessarily explain investor behavior; therefore, a new theory of the behavior of investors who are members of disadvantaged groups may be needed.

Second, we believe this research sheds light on the multifaceted nature of crowdfunding. Different types of firms and different types of founders might benefit from different types of crowdfunding. This has implications for practitioners who might use crowdfunding to finance a startup.

Third, policymakers should take note that females and males might raise and invest money differently. For example, if females tend to invest smaller amounts of money in a larger number of startups, then the law should make it relatively inexpensive to run small crowdfunding campaigns, in order for the law to be engineered to reduce the gender finance gap.

Fourth, it will be interesting to see whether our results are generalizable to other traditionally underrepresented groups in finance. Examining race and age gaps in access to finance through equity crowdfunding, for instance, might further illuminate how investors behave in crowdfunding and other contexts. We also look forward to seeing whether our results change over time, as equity crowdfunding becomes more established.

There is still much work to be done if we are to understand how gender and other founder characteristics play a role in new methods of venture finance. We hope this preliminary research encourages others to explore how financial law and regulation can be designed to make the startup world a more equitable place.

Seth Oranburg is an Associate Professor of Law at the Duquesne University School of Law.

Mark Geiger is an Assistant Professor of Entrepreneurship in the Palumbo-Donahue School of Business, Duquesne University.