The Hare and the Tortoise, Jean Grandville (1803-1847) from the 1855 edition of La Fontaine's Fables (Source: Wikipedia Commons)
Ideas for Leaders #255

Crowdfunding: How a Slow Process Helps in the Long Run

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Key Concept

The open process of crowdfunding has some unexpected marketing and funding implications. For example, getting money for your venture faster undermines the marketing potential of crowdfunding. And, for donors at least, a sudden influx of money can lead subsequent donors to look for opportunities elsewhere.

Idea Summary

Crowdfunding is becoming an increasingly popular way to raise funding for a new venture or a new cause. Because it is relatively new, academic research on how crowdfunding works, and how well it works, is still in its early stages. Researchers Gordon Burtch of the University of Minnesota’s Carlson School of Management, Anindya Ghose from NYU’s Stern School of Business, and Sunil Wattal from Temple University’s Fox School of Business decided to examine one aspect of crowdfunding, which is the behavior of donors based on the activity of previous donors.

In crowdfunding, funders are able to see what others have done — when and how much they have given. The researchers wanted to analyze whether this open information impacted the choices of the donors. Based on their analysis, they did find such an impact. Specifically, if a project is getting good funding, funders are less inclined to give money to that project. This behavior, write the researchers, suggest an altruistic motive: that is, they are looking for the projects that need their funding more than others.

Another insight from the research is that the longer it takes a venture to get money, the longer their project is on the crowdfunding site, and the more publicity it gets. From a marketing perspective, according to the research, this slow search for money actually helps in the long run. A quick funding of the project reduces the marketing benefit of the funding process. 

Business Application

The researchers used a website that secured funding for journalism projects. Because funded journalism projects would be published by the site and be made available free-of-charge, the site fell more into the charitable crowdfunding category than into rewards-based funding.

Crowdfunding can be divided into different categories: rewards-based, in which funder receive some kind of reward, which could be anything from a T-shirt to free product; equity-based funding in which lenders receive equity in the project, and lending-based crowdfunding in which money is lent with interest.

Because the crowdfunding site at the heart of the research might fall more into the charity-based funding, some implications of the results might be less applicable to entrepreneurial rewards- or equity-based crowdfunding sites. For example, because altruism seems to play a part in the donor’s decisions, the activity of previous funders may not have the same outcome as in this research; in other words, whether funders of entrepreneurial projects are going to be less likely to fund projects that have already received substantial funding — what the researchers call a ‘crowding out’ effect — is unclear. The researchers suggest that there may be some crowding out effect for rewards-based crowdfunding, which is the style facilitated by sites such as Kickstarter and IndieGoGo.

At any rate, it’s clear that any individual or organization seeking to acquire funds through crowdfunding sites should be prepared for the potential implications and influence of user behavior on the success of their venture.

In addition, a wider implication of the research for entrepreneurs and new businesses seeking funding is the potential impact of duration on the ultimate success of the venture. The longer the funding process, the greater the exposure of the pitch to the marketplace before it is implemented. This not only reveals a new ‘silver lining’ for slow-moving projects, but also raises the possibility that managers might be able to predict to some extent the performance of the venture based on its crowdfunding process.

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Idea conceived

  • April 2013

Idea posted

  • November 2013

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