We examine the geography of early stage entrepreneurial finance in thecontext of an internet marketplace for funding new musicalartist-entrepreneurs. A large body of research documents that investorsin early-stage projects are disproportionately co-located with theentrepreneur. Theory predicts this will be particularly true ofartist-entrepreneurs with preliminary-stage projects,difficult-to-contract-for effort, difficult-to-observe creativity,negligible tangible assets, and limited reputations. At the same time,however, observers of the spatial effects of the internet and relatedtechnologies report that many economic activities have become much lessgeographically dependent. At an aggregate level, the internetmarketplace we examine does indeed demonstrate a spatial transformationof the entrepreneurial finance process: the average distance betweeninvestors and artist-entrepreneurs is 4,831 km. However, geography stillmatters; investors are disproportionately likely to be local and,conditional on investing, local investors invest more. This apparentrole for proximity is strongest before entrepreneurs visibly accumulatecapital. Within a single round of financing, local investors are morelikely to engage earlier in the funding cycle. However, this differencein the timing of investment is almost entirely explained by a particulartype of investor, whom we characterize as 'family, friends, and fans.'We conjecture that these individuals, who are disproportionatelyco-located with the entrepreneur, have offline information about theentrepreneur and therefore derive less new information from observingthe aggregate financing raised. We speculate that the path-dependentrole of this offline network in conveying information to the onlinecommunity limits the 'flat world' potential of these communication technologies.
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