Due to internet facilitates instant and inexpensive communication, online crowdfunding generates a broad dispersion of investors in small and early-stage projects. This contrasts with existing theories that predict entrepreneurs and investors will be co-located due to distance-sensitive costs. This study examines the crowdfunding platform Sellaband, which finances early stage musical projects.
The average distance between artists and investors is about 5,000 km, suggesting a reduced role for spatial proximity. Still, within a single round of financing, local investors invest relatively early, and they appear less responsive to decisions by other investors. This geography effect is driven by investors who likely have a personal connection with the artist-entrepreneur (“family and friends”). Although the online platform seems to eliminate most distance-related economic frictions such as monitoring progress, pro-viding input, and gathering information, it does not eliminate social-related frictions.