Why some microenterprises get funded faster than others
New research suggests that online backers of microenterprises tend to make funding decisions based on the venture’s description and how their investment will help people.
“Among the microentrepreneurs we study, we see that those who emphasize social impact more, gather funding from the crowd faster,” says Maija Renko, associate professor of entrepreneurship at the University of Illinois at Chicago and the study’s co-author.
Additionally, using social themes has a larger impact on where lenders choose to put their money than economic themes. This is an important finding because it helps explain why some small-scale entrepreneurs get funded faster than others.
Think of a microenterprise as having no intentions to grow (for example, a small family-owned business). A start-up, by comparison, has a connotation that it is an early-stage business that will grow to be something bigger — at least that is the plan, Renko said.
Renko and co-authors Todd Moss, Syracuse University; Emily Block, University of Alberta; and Moriah Meyskens, University of San Diego, used software developed for the psychology field to quantify the features of more than 83,000 microenterprise descriptions, spanning 15 industries and 60 nations in 2012.
The data showed that ventures emphasizing social themes are funded more quickly. It also showed that ventures are increasing their emphasis on social themes over time. This suggests they may be learning how to best present themselves online to maximize their funding potential, according to the study.
“Social and environmental themes resonated most with potential funders, including words, such as ‘family,’ ‘support’ and ‘happiness,’” said Moss. “What also caught funders’ attention were descriptions that showed the good their ventures would do.”
Prosocial crowdfunding provides opportunities for ordinary individuals to make small loans to small businesses worldwide, connected through online platforms. Kiva, the platform used in this study, has enabled more than 1.6 million individuals to lend more than $1 billion to more than 2.6 million microenterprises in 83 countries.
Most of the people who invest through the Kiva website are in Western countries, whereas most of the microenterprises that receive the funds are in the developing world, according to Renko.
”So, what our study shows is that the reasons for the ‘crowd’ to invest in this context have more to do with what social good their money can do (e.g. help microentrepreneurs educate their children, access medical care, and alike) rather than the economic viability of the business of the entrepreneur they are funding,” she said.
The study, “Funding the story of hybrid ventures: Crowdfunder lending preferences and linguistic hybridity” is forthcoming in the Journal of Business Venturing.