An Empirical Analysis of Crowdfunding
Thomas Lambert *
Université catholique de Louvain
Armin Schwienbacher *
Université catholique de Louvain & University of Amsterdam Business School
Abstract:
This study investigates characteristics of crowdfunded projects and drivers of success. In
line with the community view of crowdfunding, our results indicate that much of the funds
provided are either donations or are entitled to receive a final product created by the
project, rather than equity or cash payments. Moreover, crowdfunding initiatives that are
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structured as non-profit organizations tend to be significantly more successful than other
organizational forms, even after controlling for various project characteristics. This finding
张家界市一中is in line with theoretical arguments developed by the contract failure literature (e.g.,
Glaer and Shleifer, 2001) that postulates that not-for-profit organizations may find it
easier to attract money for initiatives that are of interest for the general community due
to their reduced focus on profits.
This version: March 24, 2010
* Contact details of authors: Louvain School of Management, Université catholique de Louvain, Place des Doyens 1, 1348 Louvain-la-Neuve, Belgium; thomas.lambert@uclouvain.be& armin.schwienbacher@uclouvain.be. We are grateful to all participants in this survey. We wish to thank Paul Belleflamme and Ulrich Hege for their helpful comments and also Grégoire Krieg for his excellent rearch assistance. Any remaining errors are the authors alone.
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1. Introduction
It is well recognized that new ventures face difficulties in attracting external finance at their very initial stage, regardless whether bank loans or equity capital (e, e.g., Cosh et al., 2005). While business angels and venture capital funds fill gaps for larger amounts, the smallest amounts are provided by entrepreneurs themlves and the 3Fs (friends, family and fools). Still, many ventures remain unfunded, partially becau of a lack of sufficient value that can be pledged to investors, partially becau of unsuccessful attempts to find and convince investors. Recently, creative founders1have made u of a new source of finance – so-called crowdfunding – by tapping the crowd instead of specialized investors.
The concept of crowdfunding finds its root in the broader concept of crowdsourcing, which us the “crowd” to obtain ideas, feedback and solutions in order to develop corporate activities. In the ca of crowdfunding, the objective is to collect money for investment; this is generally done by using social networks, in particular through the Internet (Twitter, Facebook, LinkedIn and different other specialized blogs). The crowd-funders (tho who provide the money) can at times also participate in strategic decisions or even have voting right. In other words, instead of raising the money from a very small group of sophisticated investors, the idea of crowdfunding is to obtain it from a large audience (the “crowd”), where each individual will provide a very small amount. For instance, artists
eking money for their new album through SellaBand ll participation rights at the price of $10 each. Once 5000 are sold, the artist can approach a record company that will then start producing the CD.
While crowdfunding has been primarily ud in the entertainment industry so far (especially music and movie), a few initiatives have been undertaken recently in other industries such as journalism (Spot.Us), beer (BeerBankroll), software (Blender Foundation) and fashion (Cameesa). Even more surprising, the amounts that have been raid through crowdfunding have continuously incread, reaching more than £ 1 million by Trampoline Systems for the financing of the commercialization stage of their new software. To take another example, BeerBankroll was able to rai $ 2.5 million from its 5000 members.
The recent entrepreneurial experiences in raising capital through crowdfunding rai new and interesting questions. For instance, what affects the success chances of entrepreneurs to reach their capital targets through crowdfunding? What drives the crowd to participate in the first place? Does a
1 In this study, we instead u the term “entrepreneurs”. With this term, we encompass all the individuals and organizations using crowdfunding.
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promi to reward the crowd-funders or give them voting right make fundraising more successful? And from a conceptual perspective, how does crowdfunding distinguish from crowdsourcing?
In this paper, we first discuss a definition of crowdfunding and veral issues pertaining to the practice of crowdfunding in connection with entrepreneurial activities. Crowdfunding leads to complexities that are distinct from its overarching concept, namely crowdsourcing. Next, we derive characteristics of crowdfunding initiatives by means of hand-collected data of 51 initiatives. The data are helpful in providing a better understanding of how such initiatives are structured and what motivates them. Perhaps surprisingly, only a limited fraction of initiatives is bad on donations. The major fraction are passive investments; i.e., investments with a promi of compensation but no direct involvement in the decision-making process or provision of time or experti for the initiative. In most of the cas, the compensation is to receive a product or rvice from the financed activity (e.g., BeerBankroll gives tangible benefits such as a t-shirt from BeerBankroll, gift cards to popular retailers, and memorabilia). Shares are offered in one third of our sample.
Finally, we examine what drives their chances of success. This is done through multivariate analysis.
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A striking result is that non-profit associations are significantly more likely to achieve their target level of capital in comparison with other organizational forms (corporation, individual or in connection with a single project). This result appears robust to different econometric specifications. This finding is consistent with the notion that non-profit associations find it easier to attract capital from donors and other sources, since their focus is not purely profit-driven. As shown theoretically, among others, by Glaer and Shleifer (2001) and Ghatak and Mueller (2009), profit-driven organizations may be prone to focus too much on profits at the expen of other dimensions such as quality of the product or rvice provided. This in turn may not be desired from donors and other sources aimed at fostering specific initiatives.2
The remainder of the paper is structured as follows. Section 2 offers a definition of crowdfunding and how it relates to concepts such as crowdsourcing and open-source practices. Section 3 prents the related literature. Section 4 discuss data collection and defines the variables ud. Section 5 prents key characteristics of crowdfunding initiatives, bad on our hand-collected datat. Section
2 A related strand of literature argues that individuals may provide public goods due to social reputation, which induces pro-social behavior (Bénabou and Tirole, 2006). Moreover, experimental e
conomics studies indicate that individuals become discouraged when faced with fines in ca of underperformance or when treated unfair (Falk and Kosfeld, 2006), indicating that monetary incentives may at times deter individuals to undertake initiatives and behave altruistically.
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6 provides results of a multivariate analysis on determinants of crowdfunding success. Finally, Section
7 concludes by suggesting topics for future rearch.
2. A Definition of Crowdfunding
As mentioned, the concept of crowdfunding can be en as part of the broader concept of crowdsourcing, which us the “crowd” to obtain ideas, feedback and solutions in order to develop corporate activities.3 The term “crowdsourcing” has been first ud by Jeff Howe and Mark Robinson in the June 2006 issue of Wired Magazine, an American magazine for high technology. Kleemann et al. (2008) point out that “crowdsourcing takes place when a profit oriented firm outsources specific tasks esntial for the making or sale of its product to the general public (the crowd) in the form of an
open call over the internet, with the intention of animating individuals to make a [voluntary] contribution to the firm's production process for free or for significantly less than that contribution is worth to the firm.” Taking Kleemann’s et al. (2008) definition as starting point, veral caveats and clarifications need to be made in order to transpo the definition of crowdsourcing to crowdfunding. Hereafter, we offer a discussion on the application of this definition to crowdfunding; we ultimately provide key elements in understanding why crowdfunding is embedded in the definition of crowdsourcing.
Raising funds by tapping a general public (or the crowd) is the most important element of crowdfunding. This means that consumers can volunteer to provide input to the development of the product, in this ca in form of financial help.4From this perspective, crowdfunding is a subt of crowdsourcing, since the latter encompass also financial help.
Several platforms have emerged recently, such as Fundable, Kickstarter, Kiva, Sandawe, and SellaBand. The intermediate between entrepreneurs and potential crowd-funders. Therefore, a distinction can be made between direct and indirect fundraising becau at times entrepreneurs make u of such crowdfunding platforms instead of eking direct contact with the crowd. The platforms at times share some similarities with online lending markets5 (Everett, 2008; Freedman an
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3 For a non technical introduction of crowdsourcing, e Howe (2008).黎明是什么意思
4We note that an important motivation for relying on crowdsourcing is that it may contribute in reducing production costs (Kleemann et al., 2008). For instance, the pharmaceutical company Innocentive has organized its crowdsourcing practice in form of a tournament, where the provider of the best solution was rewarded with a prize (Albors et al., 2008).
5 The platforms are sometimes called online peer-to-peer lending.
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学生综合素质评价平台Jin, 2010); while the latter more prominently target social entrepreneurship, crowdfunding platforms have a broader scope of entrepreneurial initiatives.
As pointed out by Brabham (2008) and Kleemann et al. (2008), among others, the development of Web 2.0 is a critical ingredient that has facilitated the access to the “crowd”.6 Roughly speaking, Web 2.0 is a Web-as-participation-platform7that facilitates interaction between urs. This structure is crucial for entrepreneurs to be able to easily reach networks of investors or consumers. Through a
ca study, Larralde and Schwienbacher (2010) highlight the importance of efficient communication and networking. They argue that this is an inherent component of any crowdfunding process. The argument is also in line with the study of Lee et al. (2008), who identify three properties of Web 2.0 that enhances the ability of entrepreneurs: openness, collaboration, and participation. In contrast to the Internet that existed before the bursting of the dot-com bubble, the more recent Web 2.0 technology allows ur to provide content (beyond simply reading existing one), interact with each other and thereby create value for the company (Lee et al., 2008).
While the u of the Internet to make an “open call” may be very efficient for crowdsourcing in general, it can become more problematic for crowdfunding, especially if it involves the offering of equity to the crowd. Indeed, making a general solicitation for equity offering is limited to publicly listed equity. Companies cannot do a general solicitation, unless they received prior authorization from their national curities regulator. In many countries, there is also a limit as to how many private investors a company can have. For instance, Media No Mad could not have more than 100 shareholders, as impod by French law (Larralde and Schwienbacher, 2010). While the crowdfunding process of this company was made in the public domain, shareholder contracts for the purcha of shares were however only signed with 100 individuals, as a way to overcome the lega
l problems. This creates important legal limitations to crowdfunding initiatives, given that the input of the crowd is capital and not an idea or time. In the ca of Trampoline Systems, the company was required to prepare a detailed mechanism in order to avoid any problems with the UK financial markets regulator. Therefore, most initiatives do not offer shares but provide other types of rewards such as a product or membership.
Crowd-funders make voluntary financial contributions with or without the expectation of receiving compensation. This can take various forms, including cash, bonds, stocks, profit sharing and pre-ordering of products. At times, this can be accompanied by voting rights or other active involvement 6 In spite of the fact that ventures could be theoretically tapping the crowd via other means of communication than tho associated with Web 2.0, we think that it could be marginal and does not exist to our knowledge.
7 Refer to O’Reilly (2007) for an in-depth understanding of Web 2.0.
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in the crowdfunding initiative. Our empirical study will provide evidence on different types of rewards and rights, as well as the magnitude of the financial contributions generated through crowdfunding.
In practice, entrepreneurs relying on crowdfunding may combine it with other forms of crowdsourcing. This is the ca for instance of Media No Mad that also obtained from the crowd time and experti (Larralde and Schwienbacher, 2010).
Crowdsourcing differs in many ways from open-source practices (Brabham, 2008); some of the differences can be transpod to crowdfunding. An important distinction is that in the of open-source ca, the idea belongs to the community who can then exploit it on an individual basis (there is no restriction on who can u it); in the ca of crowdsourcing, the generated idea ultimately belongs to the company who will be the only one to exploit it. This distinction with open-source practices becomes even more obvious when related to crowdfunding, since capital cannot be shared. Unlike an idea or a software code, capital is not a public good in the economic n that assumes non-rivalness and non-excludability (Samuelson, 1954). Under the conditions, a public good is a good that can be ud by many consumers at the same time, without duplicating costs.
Bad on this discussion and in the spirit of Kleemann et al. (2008), we offer the following, refined definition: crowdfunding involves an open call, esntially through the Internet, for the provision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights in order to support initiatives for specific purpos.
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3. Related Literature貂笼
Perhaps unsurprisingly, there is virtually no literature at all on crowdfunding. The little that exists can be primarily found in the one on crowdsourcing, which is a broader concept that encompass crowdfunding.
One of the very few academic articles on crowdfunding is from Kappel (2009) that distinguishes ex post , when a product is offered after financing is provided) from ex ante crowdfunding (e.g., financial support for lobbying or political activities). Wojciechowski (2009) discuss donations in connection with projects funded through crowdfunding. The author argues that social networks can become a worthwhile model of money collection for many charity organizations and NGOs. Whether it can be transpod to entrepreneurial activities is not discusd however. Relatedly,
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