Complementary funding: how location links crowdfunding and venture capital

Abstract While Equity Crowdfunding (ECF) platforms are a virtual space for raising funds, geography remains relevant. To determine how location matters for entrepreneurs using equity crowdfunding (ECF), we analyze the spatial distribution of successful ECF campaigns and the spatial relationship between ECF campaigns and traditional investors, such as banks and venture capitalists (VCs). Using data from the two leading German platforms – Companisto and Seedmacht – we employ spatial eigenvalue filtering and negative binomial estimations. In addition, we introduce an event study based on the implementation of the Small Investor Protection Act in Germany allowing us to obtain causal evidence. Our combined analysis reveals a significant geographic concentration of successful ECF campaigns in some, but not all, dense areas. ECF campaigns tend to cluster in dense areas with VC activity, while they are less prevalent in dense areas with high banking activity and are rarely found in rural areas. Thus, rather than closing the so-called regional funding gap, our results suggest that, from a spatial perspective, ECF fills the gap when firms in dense areas seek external financing below the minimum equity threshold offered by VCs and when there are few banks offering loans. Plain English Summary Equity crowdfunding is not closing the regional funding gap — it thrives where venture capital already flows. We study where successful equity crowdfunding campaigns happen in Germany and how their locations relate to those of traditional investors like banks and venture capitalists. Using data from the country’s two main crowdfunding platforms, we find that geography still matters, although equity is offered through digital marketplaces: crowdfunding campaigns cluster in urban areas with strong venture capital activity but are less common in rural regions or in places with many banks. Our findings imply that equity crowdfunding complements venture capital more than it replaces it — especially in cities — and is unlikely to solve funding challenges in under-served regions. This has important implications for policy, suggesting that additional measures are needed if crowdfunding is to help bridge regional finance gaps for small businesses.