What we do not know about crowdfunding yet

What we do not know about crowdfunding yet

I seem, then, in just this little thing to be wiser than this man at any rate, that what I do not know I do not think I know either

Plato, Socrate’s Apology

Digital transformation affected not only how startups do business, but also the way they raise funds and other resources. Notably, we observed an explosive growth in crowdfunding platforms. Crowdfunding is very new and exciting. It provides new opportunities for startup founding and other activities and proposes creative ways to reward investors. But today, is so new that we are only just becoming aware of all the gaps in our knowledge. Identifying what we do not know will enable us to discover new opportunities.

Spotting what we do not know about crowdfunding
In order to identify gaps in crowdfunding knowledge, we focused on major themes in entrepreneurial finance: (1) platform intermediation; (2) crowdfunders’ goals; (3) how crowdfunders “herd” into investments; (4) crowdfunders’ value added; (5) crowdfundees signaling; and (6) what are the outcomes for crowdfundees.
We also grouped crowdfunding platforms into four broad categories based on the nature of the crowdfunding platforms. We classified as non-pecuniary crowdfunding platforms those where crowdfunders donate money or loan it without asking for interest rates (donation platforms), or pre-purchase an item (reward platforms). Notable platforms in this category are Kiva for donation platforms and Kickstarter for reward platforms. We classified as pecuniary crowdfunding platforms those where crowdfunders allocate funds in order to achieve a financial return in terms of capital gain and dividend (equity platforms) or interest rate (lending platforms). Notable platforms in this category are Crowdcube for equity platforms and Prosper for lending platforms.
We cross tabulated the themes with crowdfunding platforms. We populated each cell with academic studies that investigated a given theme within a given crowdfunding platform. This exercise allowed us to identify areas where we need to know more (gaps), and areas of agreement or inconsistencies.

Gaps and Inconsistencies in Crowdfunding

What do platforms do?

Crowdfunding platforms are commonly thought to provide direct interaction between crowdfunders and crowdfundees. This does not mean that the platform is neutral: change in platform features like information disclosure about crowdfunders affects funding behaviors. While we know much about visible design changes, we identified a gap about the effect of the platforms’ choices that we cannot observe. Due to privacy reasons, we also found a gap about the effect of platforms’ contractual terms. The role of platforms as intermediaries also begs the question of the comparison between experts and the crowd. The result of this comparison depends on the type of platform: the crowd fares as well as experts on reward platforms, while we identified inconsistencies on lending platforms.

How do crowdfunders allocate resources?

We investigated what we know about how crowdfunders make their decisions. First, we highlight an important gap: we do not know much about the portfolio strategies of crowdfunders. We studied the phenomenon only at the relationship between the crowdfunder and one single campaign, but information about the relationship between the crowdfunder’s behavior and their portfolio is yet to be discovered. Second, we highlight an important distinction. Compared to traditional financial resource providers that are mostly profit oriented, crowdfunders exhibited consistently a mix of profit orientation but also some social orientation across all types of platforms. Finally, we spot inconsistencies in what motivates crowdfunders across platforms. Take for example women’s investment patterns. Studies of female crowdfunders on equity platforms showed both preference for women to favor other women and the tendency of women to favor campaigns where men are overrepresented.

What are crowdfunders following?

When information is limited, individuals tend to rely on other people’s past choices to make their present ones. The phenomenon of “herding” takes place when individuals disregard actual information and utilize only others’ past choices. Crowdfunding platforms seem exposed to this phenomenon. We documented a consistent herding behavior across all types of platforms with the only inconsistency of donation platforms. This exception suggests that crowdfunders on donation platforms tend to “favor the underdogs” showing compassion.

What value is crowdfunding bringing beyond resources?

Traditional sources of finance for startups like business angels and venture capitalists offer additional value beyond money. For what concerns crowdfunding, the value added lie in the community of crowdfunders attached to a given campaign. The crowd can turn into a cohort of customers, employees, or developers in support of the crowdfundee during and after the campaign. However, there is a gap about what else crowdfunding platforms contribute to. On crowdfunding, there is still an important gap about the monitoring of the startup by the crowd or the platform or the stage-based investment typical of traditional sources of startup finance.

How do crowdfundees indicate their quality?

Crowdfunding platforms can carry but a limited amount of information. Consequently, crowdfundees rely on an array of signals in order to attract resources from crowdfunders. Crowdfundees engage in both verifiable signals, like holding intellectual property, and non-verifiable ones, like stories and rhetoric. Interestingly, we found several inconsistencies between the effectiveness of established signals in traditional finance for startups and crowdfunding. For example, holding intellectual property does not seem to attract any extra resources. We also found inconsistencies in the signal of network disclosure: more crowdfunders are likely to invest but they invest lower amounts. Overall, we cannot take established signals for granted in the context of crowdfunding platforms.

What happens after a crowdfunding campaign?

Crowdfunding is but a step in the journey of a startup. There is still a gap about the relationship between crowdfunding and other (subsequent) sources of finance. Is crowdfunding a substitute of other sources or does it complement them? The answer is that it depends. We spotted some inconsistencies: some studies that documented how successful reward crowdfunding campaigns favor subsequent venture capital investment, but others also found that lending crowdfunding represents a substitute for traditional lending activity. Ultimately, we also identified a gap about what the effect of successful crowdfunding on subsequent performance is.

Mind the gap. Why should crowdfundees and platforms care?

Our results highlighted what we do not know about crowdfunding yet. The several inconsistences we highlighted show the limitations in generalizing results from one crowdfunding platform only. These results are not only important for researchers to direct their research efforts in the future, but they also have implications for crowdfundees and crowdfunding platforms too. The results suggested that each crowdfunding platform is different and, for some characteristics, one size does not fit all.  Success factors on one platform do not automatically translate into another platform. For this reason, platforms should be careful in when they borrow design changes from other platforms. Similarly, our results showed that crowdfundees should be aware of the inconsistencies that can arise when they import established best practices to the crowdfunding field.

Dushnitsky, G and Zunino, D (2019) The role of crowdfunding in entrepreneurial finance. In: Handbook of Research on Crowdfunding. Research Handbooks in Business and Management series . Edward Elgar, Cheltenham, pp. 46-92. ISBN 9781788117203

DOI: https://doi.org/10.4337/9781788117210.00008

Diego ZuninoDiego Zunino, Professor of Strategy and Entrepreneurship , KTO Research Centre, SKEMA Business School - University Côte d'Azur, France, GREDEG

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Gary DushnitskyGary Dushnitsky, Associate Professor of Strategy & Entrepreneurship, London Business School

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