A REVIEW OF CROWDFUNDING RESEARCH AND FINDINGS

Venkat Kuppuswamy Barry L. Bayus

Kenan-Flagler Business School Kenan-Flagler Business School
University of North Carolina University of North Carolina
CB3490; McColl 4608 CB3490; McColl 4526
Chapel Hill, NC 27599 Chapel Hill, NC 27599
venkat@UNC.edu Barry_Bayus@UNC.edu

Abstract

Crowdfunding is a relatively new form of venture financing that allows entrepreneurs to appeal
directly to the general public (i.e., the crowd) for help getting their innovative ideas off the
ground. Due to the growing number of online crowdfunding communities and availability of public
data, academic research is beginning to explore the drivers behind successfully crowdfunded
projects. In this chapter, we summarize key findings from reward-based, lending-based, equity-
based, and donation-based crowdfunding studies. Based on our review, we propose several
promising directions for future research.

forthcoming
Golder, P. and D. Mitra (eds.), Handbook of New Product Development Research (2017)

Revised November 21, 2016

1. WHAT IS CROWDFUNDING?

An important barrier to commercializing innovations is the availability of early-stage funding

(Cosh, et al. 2009; Mollick 2014; Hu, et al. 2015). Given the difficulties that new ventures face

attracting financing from angel investors, banks, and venture capital funds, some entrepreneurs are

tapping into large, online communities of consumer-investors (Economist 2010; Schwienbacher and

Larralde 2012; Agrawal, et al. 2015). Called crowdfunding, this relatively new form of informal

venture financing allows entrepreneurs to appeal directly to the general public (i.e., the crowd) for

help getting their innovative ideas off the ground (Prive 2012). As defined by Belleflamme, et al.

(2014), crowdfunding involves an open call (through the Internet) for the provision of financial

resources either in the form of donation or in exchange for some form of reward in order to

support initiatives for specific purposes1.

Crowdfunding, which typically involves collecting small amounts of money from a large

number of people, is a new label for an activity that has a rich history in many domains (Ordanini, et

al. 2011). For example, Mozart and Beethoven financed concerts and new music compositions with

money from interested patrons, the Statue of Liberty in New York was funded by small donations

from the American and French people, a human rights organization is trying to raise money to buy a

communications satellite to provide Internet access to people in third world countries

(http://www.buythissatellite.com), and President Barak Obamas 2008 election campaign raised

most of its funds from small donations over the Web (Hemer 2011). Today, several hundred global

intermediaries with online platforms exist to match up consumer investors with initiatives that they

wish to help fund. Prominent examples in the popular press include the narrative movie project by

Steve Taylor that got almost 4,500 people to donate nearly $350,000 and Scott Wilsons idea to

1This is conceptually similar to crowdsourcing in which community members (the crowd) propose new product and
service ideas, as well as comment on and vote for the ideas of others (Bayus 2013).

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create a wristband that will convert an iPod nano into a watch raised over $940,000 from over

13,500 individuals (Adler 2011). One of the largest crowdfunded projects to date is Eric

Migicovskys e-Paper Pebble Watch that integrates with an Android or iPhoneeven though its

original goal was $100,000, the project eventually received contributions totaling over $10.2M in 37

days from well over 65,000 backers. Interestingly, the creators of the Pebble watch recently went

back to the crowd and raised an additional $20.3M from over 78,000 backers. According to one

industry report, crowdfunding platforms are expected to reach $34.4B (Massolution 2015). Given

the potential dollars involved, crowdfunding has recently garnered attention from policymakers and

regulators as evidenced by the Jumpstart Our Business Startups Act (JOBS Act) recently signed into

U.S. law (Stemler 2013).

2. EMPIRICAL STUDIES AND FINDINGS

Due to the rapidly growing interest in this online form of venture financing, academic

research is beginning to explore the drivers behind successfully crowdfunded projects. Tomczak

and Brem (2013) and Moritz and Block (2016) provide recent reviews of the general crowdfunding

process, including definitions and its role in the financing of new ventures. In Table 1, we

summarize the key findings from the empirical crowdfunding literature organized by the four types

of crowdfunding platforms identified in Massolution (2015). Research details for each of these

studies are in Table 2. Given all the information in these tables, our discussion is intentionally brief.

In general, crowdfunding platforms differ in terms of whether the contributors primary

motivation for participating is the expectation of a financial return. For example, crowdfunding

communities like SellaBand and Wefunder offer consumer investors an interest in the venture in the

form of equity or some sort of profit sharing agreement (Ward and Ramachandran 2010; Agrawal, et

al. 2015). Other crowdfunding platforms such as Prosper and Zopa involve peer-to-peer lending in

2
which it is expected that the original principal is repaid, along with some fixed interest (Herzenstein,

et al. 2011a; Zhang and Liu 2012). Research in this stream is particularly interested in evidence for

herding behavior, i.e., do individuals contribute to projects that already have a lot of support from

other community members? Because consumer investors in these communities expect a financial

return, herding behavior is a rational way for individuals to reduce their own risk in the face of

uncertainty about the proposed new ventures. Following the literature on information cascades

(Bikhchandani, et al. 1992), these studies argue that an initiative with a lot of community support

signals that the project is of high quality.

Some crowdfunding communities involve no monetary compensation for participation. For

example, JustGiving and Spot.us rely on altruistic motivations in which funders voluntarily donate

their money with no expectations of any tangible reward (Burtch, et al. 2013; Smith, et al. 2014).

Research on these types of donation-based crowdfunding communities draws on the extensive

literature involving philanthropy and public goods (Andreoni 2006; Vesterlund 2006). Because the

consumption of public goods cannot be withheld from non-contributors, free-riding is a potential

issue in which contributions can be crowded-out by the prior funding decisions of others

(Bergstrom, et al. 1986). At the same time, there are several models based on social norms that

predict a positive effect of others funding decisions (Sugden 1984; Bernheim 1994). Depending on

the perspective taken, some donation-based crowdfunding studies find positive effects for other

community members funding decisions on contributions (Smith, et al. 2014), while others find the

opposite (Burtch, et al. 2013a).

Finally, project backers in crowdfunding communities like Kickstarter and Indiegogo receive

non-financial rewards for their financial contributions (Mollick 2014). These rewards often take the

form of tokens of appreciation (thank-you message, artists autograph, mentioning the

crowdfunders name in the credits, tee-shirt) or the pre-purchasing of products or services (Hemer

3
2011). Not surprisingly, qualitative studies find that rewards are one of the most important

motivations for participating in crowdfunding communities (Gerber, et al. 2012; Steinberg 2012).

Reward-based crowdfunding also has the largest number of online platforms and is one of the

fastest growing forms of crowdfunding (Masssolution 2015).

[insert Tables 1 and 2 about here]

As indicated in Table 1, the empirical crowdfunding literature mainly focuses on the rational

motivations behind the contribution decisions of investors, funders, and donors. While we

cannot rule out the role of emotional motivations for contributions by believers (e.g., family and

friends) who simply want to support the fundraiser (or want to feel the warm glow from making a

contribution), very few studies take this perspective (Agrawal, et al. 2015). Given the rational

motivations of investors, funders, and donors, most of the existing crowdfunding literature studies

the effects of quality signals on fundraising success. For example, researchers show that funding

success is significantly related to project quality signals such as preparedness, narrative, and others

contribution decisions as well as individual quality signals like personal characteristics (including

gender and race), creditworthiness, and social networks (see Table 1). Some research also considers

the effects of social norms, finding that the contribution amount for reward and donation-based

crowdfunding projects is related to the size of others contributions (see Table 1).

As suggested by our review of the empirical crowdfunding literature in Table 2, the level of

analysis for the vast majority of empirical studies is the project. To date, relatively few studies use

panel data to model the dynamics of project funding behavior over the project funding cycle and,

more importantly, to control for unobserved project-level heterogeneity (e.g., with fixed project

effects). While many studies attempt to include appropriate controls with measured variables, the

reported conclusions from project-level (cross-sectional) studies should be viewed with caution due

to unobserved differences in the inherent quality of projects.

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3. PROMISING RESEARCH DIRECTIONS

In this section, we outline several promising topics for future empirical research involving

the crowdfunding model.

What are the drivers of project support over the crowd funding cycle? Because most

crowdfunding campaigns last for only a few weeks, understanding project-level funding behaviors

over time is important as we do not expect contributions to be uniform over the funding cycle. Like

in online auction bidding (Ariely and Simonson 2003), contribution decisions by many consumer

investors during the project funding cycle suggests that earlier decisions can dynamically impact later

behaviors. Furthermore, as suggested by related research in online auction bidding, the key drivers

of contribution decisions may also vary over the beginning, middle and later stages of a

crowdfunding campaign. For example, Kuppuswamy and Bayus (2014) find that the dynamic

pattern of project support for reward-based crowdfunding is bathtub shaped--this pattern of

backer support is sharply different from the generally increasing pattern associated with herding

observed with equity or lending-based crowdfunding (e.g., Zhang and Liu 2012), or the decreasing

pattern found with donation-based crowdfunding (Burtch, et al. 2013). Insights into the drivers of

these various patterns is lacking.

Is funding behavior by the crowd rational or irrational? (Should crowdfunding be

regulated?) In crowdfunding communities, potential donors can see the level of support from

other project backers as well as its timing before making their own funding decisions. This suggests

that social information (i.e., others funding decisions) plays an important role in the ultimate success

of a crowdfunded project. Understanding these effects is important because studies find that social

information can lead to non-rational behaviors. For example, people often choose music for

downloading based on popularity not quality (Salganik, et al. 2006) and bidders tend to herd into

online auctions with more bids even though this signal is not indicative of higher quality (Simonsohn

5
and Ariely 2008). Many legal scholars and policy makers believe that this kind of irrational herding

behavior increases the chances for fraud in crowdfunded projects since consumer investments are

not protected by government regulations or oversight (Griffin 2013). To date however, there is very

little empirical research to definitively support any position.

How important to crowdfunding success are family, friends and strangers? Several

guidebooks stress crafting an online marketing campaign and its importance in generating

excitement and project support throughout the funding cycle (Steinberg 2012). Industry pundits

recommend that successful crowdfunding campaigns primarily rely on the project creators own

social network of family and friends (this is supported by the numerous stories reported in online

blogs; Steinberg 2012). One study even reports that funding activity within the first four hours after

a campaign is launched determines whether there will be a successful outcome (Etter, et al. 2013).

Anecdotal cases studies suggest that friends and family tend to be early project supporters, while

strangers, who make up the majority of contributors, often provide funding as a project nears its

conclusion (Kuppuswamy and Bayus 2014; Agrawal, et al. 2015). However, very little is currently

known about the project creators direct (family and followers) and indirect (followers of followers)

social networks. While research in early stage entrepreneurial financing notes several significant

issues in relying on money from family and friends (e.g., entrepreneurs may harm their personal

relationships if the donated money is not used in a successful venture; Lee and Persson 2016), these

concerns have not as yet been explored within the crowdfunding model.

How can the crowdfunding model be applied in the new product development

process? The fundamental premise underlying crowdfunding (and crowdsourcing) is that crowds

can be wise. In his popular book, Surowiecki (2004) gives several persuasive anecdotes in which

the crowd is shown to be wiser than its smartest individual member. The wisdom of crowds is an

important idea that is receiving a lot of attention because it can apply to many market situations.

6
For example, Nobel-winning economist William Sharpe has suggested that this idea can explain

market prices without the constrictive assumptions associated with most economic models: the

basic argument [of The Wisdom of Crowds] is that if we have enough people even though they may be

ill-informed and irrational coming to market, it is entirely possible the prices of assets, thereby true

risks and rewards, are what you get if they were all rational and well informed (Ferliel 2004, p24)2.

A vivid illustration comes from the hit TV show Who Wants to be a Millionaire? in which a contestant

is asked a series of increasingly difficult multiple-choice questions, with a payoff of $1 million if all

questions are answered correctly. Help is available to the contestant in the form of three options:

eliminating incorrect answers (to have a 50-50 chance of being correct), phoning a pre-determined

expert for advice, polling the studio audience (i.e., the crowd). While experts are correct around

two-thirds of the time, surprisingly the audience average (composed of regular people without any

special knowledge) is correct over 90% of the time! Building off of these ideas, organizations like

IBM and the German bank Sparkasse are experimenting with the crowdfunding model to internally

assess new product ideas (Feldman, et al. 2013; Muller, et al. 2013). Promising results have been

reported by allowing employees to allocate money for employee-initiated new products and ideas

(Zuchowski, et al. 2016). In addition, entrepreneurs and established companies are using

crowdfunding platforms as a form of pre-production market research in order to test demand for

their innovative ideas before commiting to large scale production (Postrel 2014; Ellman and

Hurkens 2015; Strausz 2016).

In addition, an interesting link between the diffusion of innovations literature and

crowdfunding can be made: project supporters from the crowd can be thought of as adopting the

proposed idea (Rogers 2003). Thus, another promising direction for future research is to explicitly

2Prediction markets involve another situation in which information is crowdsourced and then aggregated (e.g., Horn, et
al. 2014).

7
consider the potential role of factors like relative advantage, compatibility, risk, observability, and

complexity affecting contributions over the funding cycle of a crowdfunding project (MacVaugh and

Schiavone 2010; Kapoor, et al. 2014).

4. CONCLUSION

Crowdfunding research is only in its infancy. Practice is currently well ahead of academic

research. Very little is known about the factors driving crowdfunding project success and the

associated implications for developing crowdfunding platforms and communities. To date, relatively

few crowdfunding papers have been publishedthe vast majority of research appears in working

papers that have not undergone peer review. While there is potential to develop new theoretical

frameworks for crowdfunding, most research draws upon existing theory in entrepreneurial and

venture financing or philanthropy. We hope that our review helps stimulate further research in this

important and exciting domain.

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Key Findings from the Crowdfunding Literature
Equity-Based
Crowdfunding
Rational Motivation Investors want to maximize their
(Emotional Motivation) financial return. (Investors want to
support the entrepreneur.)
General Research What are the effects of project and
Questions entrepreneur quality signals?
Key Findings Venture funding success is related to
financial and risk transparency,
leadership and human capital, and
level of uncertainty (Ahlers, et al.
2015).
Only investments by individuals who
are not friends and family are
positively related to others prior
funding decisions (Agrawal, et al.
2015).
Friends and family tend to contribute
early in the venture funding cycle
(Agrawal, et al. 2015).
Investors respond most strongly to
information about the founding
team, but not to firm traction or
existing lead investors (Bernstein et
al. 2016).
The dynamic pattern of crowd
investing is L-shaped (Hornuf and
Schwienbacher 2015).
Table 1
Lending-Based
Crowdfunding
Investors want to maximize their
financial return and minimize the risk of
default. (Investors want to support the
borrower.)
What are the effects of project and
borrower quality signals?
Bidding on a loan is positively related
to borrower creditworthiness and
others prior bids (Desai and Kharas
2009; Herzenstein, et al. 2011a;
Hildebrand, et al. 2016).
Only bids on projects with obvious
credit defects are positively related to
others prior bidding decisions (Zhang
and Liu 2012).
The bids a loan receives are subject to
cultural and home bias (Lin and
Viswanathan 2015; Burtch, et al.
2014).
Loan funding success is positively
related to social networks (Lin, et al.
2013).
Loan funding success is related to the
project narrative (Hersenstein, et al.
2011b; Allison, et al. 2015).
Loan default rates are related to the
readability, positivity, objectivity and
deception cues embedded in texts
written by borrowers (Gao and Lin
2015).
Reward-Based
Crowdfunding
Funders want the project to be
implemented. (Funders want to
support the project creator.)
What are the effects of project and
creator quality signals? What are
the effects of social norms?
Project funding success is related
to preparedness, social networks,
gender, prior track record, and
updates (Mollick 2014).
Project funding success is related
to the language in the project
description (Marom and Sade
2013).
Project support is positively
related to target goal proximity
(Kuppuswamy and Bayus
2016b).
The dynamic pattern of backer
support over the project funding
cycle is U-shaped (Kuppuswamy
and Bayus 2016a).
Contributions are positively
related to the creators internal
social capital accumulated from
supporting other projects in the
community (Colombo, et al.
2015; Younkin and Kashkooli
2013; Zheng, et al. 2015;
Zvilichovsky, et al. 2015).
Donation-Based
Crowdfunding
Donors want to support the cause.
(Donors want to feel good.)
What are the effects of project and
recipient quality signals? What are
the effects of social norms?
Donations are positively related to
charity efficiency and negatively
related to competition (Meer
2014).
Donations that complete the
projects goal are larger than
other donations (Wash 2013).
Donations are positively related to
social networks (Saxton and
Wang 2013).
Donations are crowded-out by
others prior donations (Burtch,
et al. 2013).
Donations are positively related to
others prior donation decisions
(Bg, et al. 2012; Smith, et al.
2014).
Donations are inversely related to
the size of the first donation
(Koning and Model 2013).
15
 Loan funding success is related to race,
gender, and personal characteristics of
the borrower (Desai and Kharas 2009;
Ly and Mason 2012a; Pope and
Syndor 2011; Ravina 2012).
Loan funding success is negatively
related to competition (Ly and Mason
2012b).
Pledges are positively related to
being featured on the platform
home page (Qiu 2013).
Reducing access to privacy
controls results in a net increase
in fundraising (Burtch et al.
2015).
Small, scalable projects are more
likely to choose the Keep-It-
All fundraising format, while
large non-scalable projects are
more likely to choose the All-
Or-Nothing alternative
(Cumming et al. 2015).
There is significant agreement
between the funding decisions of
crowds and experts, suggesting
that crowdfunding can be used
to lower the incidence of "false
negatives" in the funding process
(Mollick and Nanda 2016).
Women enjoy higher rates of
success than men in funding
their projects). (Greenberg and
Mollick 2014; Gorbatai and
Nelson 2015; Marom et al. 2015).
Women are less likely than men
to be serial creators
(Kuppuswamy and Mollick
2015).
Tweets by the project creator lead
to tweets by fans, which in turn
leads to greater project support
(Kuppuswamy and Bayus 2016c).
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 Table 2
Details of Selected Crowdfunding Studies

Paper Type of Crowdfunding Platform Unit of Analysis Dependent Variable

Australian Small Scale

Ahlers, et al. (2015)
Agrawal, et al. (2015)
Bernstein, et al. (2016)
Allison, et al. (2015)
Burtch, et al. (2014)
Desai and Kharas (2009)
Equity Project Number of investors, total funds raised
Offerings Board (ASSOB)
Equity (Revenue-Sharing) Sellaband Project-Contributor-Week Project received investment (1/0)
Whether an investor clicked on the View
Equity AngelList Email About Venture
button in the featured email (1/0)
Lending Kiva Project Time taken to reach project goal
Country-Country-Microfinance
Lending Kiva Count of bids
Institution-Industry-Year
Lending and Donation Kiva and GlobalGiving Project Time taken to reach project goal

Gao and Lin (2015) Lending Prosper Project Whether the loan defaulted (1/0)

Herzenstein, et al. (2011a) Lending Prosper Bid (Panel Data) Project received a subsequent bid (1/0)

Herzenstein, et al. (2011b) Lending Prosper Project Loan funding and reduction in interest rate
Project becomes a loan, loan interest rate,
Hildebrand, et al. (2016) Lending Prosper Project
loan performance
Lin and Viswanathan (2015) Lending Prosper Borrower-Lender Dyad Whether lender bids on borrower (1/0)

Lin, et al. (2013) Lending Prosper Project Probability of loan funding (1/0), loan
interest rate, and loan time-to-default
Ly and Mason (2012a) Lending Kiva Project Funding time of the listing

Ly and Mason (2012b) Lending Kiva Project Funding time of the listing

Pope and Syndor (2011) Lending Prosper Project Whether the loan was funded (1/0)
Whether the loan was funded (1/0), loan
Ravina (2012) Lending Prosper Project
interest rate
Zhang and Liu (2012) Lending Prosper Project-Day Funds raised each day

Potential Contributor Size of contribution and the likelihood of

Burtch, et al. (2015) Reward Undisclosed
(Panel Data) contribution

Colombo, et al. (2015) Reward Kickstarter Project Whether the project was funded (1/0)
Choice of fundraising format: Keep-It-All
Cumming, et al. (2015) Reward Indiegogo Project
vs. All-Or-Nothing

17
Gorbatai and Nelson (2014) Reward Kickstarter Project Amount raised by the project

Greenberg and Mollick (2014) Reward Kickstarter Project Percentage of project backers who were
female, whether the project was funded (1/0)

Geographic Area Category Change in the number of projects per million

Kim and Hann (2014) Reward Kickstarter
Year (Panel Data) people, change in the number of
contributions to all projects
Project-Contributor
Kuppuswamy and Bayus (2016a) Reward Kickstarter (Panel Data) Number of Daily Backers

Project-Contributor
Kuppuswamy and Bayus (2016b) Reward Kickstarter (Panel Data) Number of Daily Backers

Project-Contributor
Kuppuswamy and Bayus (2016c) Reward Kickstarter Number of Tweets
(Panel Data)

Kuppuswamy and Mollick (2015) Reward Kickstarter Project Whether the project creator launched a
second project (1/0)

Marom and Sade (2013) Reward Kickstarter Project Whether the project was funded (1/0),
percent of goal raised, number of investors

Whether the project was funded (1/0), raise

Marom et al. (2015) Reward Kickstarter Project premiums above original goal, number of
investors, percentage of investors who are
female.
Whether the project was funded (1/0),
Mollick (2014) Reward Kickstarter Project
delivery delay of rewards

Average judge score; indicator variable that

Mollick and Nanda (2016) Reward Kickstarter Project
takes the value of 1 if the crowds and experts
agree on the funding decision
Qiu (2013) Reward Kickstarter Project-Day (Panel Data) Number of Daily Backers, Dollars Raised

Younkin and Kashkooli (2013) Reward Kickstarter Project Whether the project was funded (1/0), total
funds raised
Zheng, et al. (2015) Reward Kickstarter and Demohour Project Proportion of goal raised

Zvilichovsky, et al. (2015) Reward Kickstarter Project Whether the project was funded (1/0)
Whether the mode for the campaign goes
Bg, et al. (2012) Donation JustGiving Contribution (Panel Data) down or remains equal to the mode during
the first two days
Burtch, et al. (2013) Donation Undisclosed Contribution (Panel Data) Size of contribution

18
 Time to project funding, size of first
Project-Day, Contribution
Koning and Model (2013) Donation DonorsChoose contribution, likelihood of first contribution,
(Panel Data)
and time until first contribution

Whether the project was funded (1/0),

Meer (2014) Donation DonorsChoose Project
whether the project received any
contributions (1/0)
Saxton and Wang (2013) Donation Facebook Causes Project Total funds raised

Smith, et al. (2014) Donation JustGiving Contribution (Panel Data) Size of contribution

Wash (2013) Donation DonorsChoose Contribution (Panel Data) Size of contribution

19