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date: 06 June 2020

Crowdfunding for Entrepreneurs

Summary and Keywords

Fundraising has proved difficult for many entrepreneurs and ventures in the early stages of their businesses because of significant information asymmetries with investors and a lack of collateral. In an attempt to overcome such difficulties, since the early 2010s, some entrepreneurs have come to rely on the Internet in order to directly seek funding from the general public, or the “crowd.” The practice of collecting small amounts of capital from the “crowd” of Internet users is called crowdfunding.

Crowdfunding research is a relative newcomer to the discipline of entrepreneurial finance. However, the availability of easy-to-access data, the diffusion of this funding channel among entrepreneurs, and increasing policy attention have made crowdfunding one of the most investigated areas of research in entrepreneurial finance. The literature has discussed crowdfunding as more than a simple mean of financing. Crowdfunding also allows entrepreneurs to develop a virtual community of followers, which provides a valuable source of information with which to test and improve early versions of innovative products. Moreover, crowdfunding represents a method of gaining information about market response to a given product and the size of demand for that product, and is a powerful marketing instrument that can be used to increase brand awareness and to promote the arts, social initiatives, and financial inclusion.

However, crowdfunding also entails a number of pitfalls for entrepreneurs. In order to collect financial resources from the crowd, entrepreneurs are required to share sensitive information online. This includes information about the entrepreneurial initiative, the team, and the business model they are using. The provision of this information may facilitate product counterfeiting, or the appropriation of the value of the idea by other firms or entrepreneurs. Moreover, crowdfunding entails the risk of social stigma if the funding campaign results in a failure, because information about the performance of the crowdfunding campaign usually remains accessible online. Finally, crowdfunding entails additional challenges related to the management of the crowd of backers after the campaign, since several backers will be active providers of feedback and will interact with the entrepreneurs through direct communication. Despite these disadvantages crowdfunding has become a widely used funding source for entrepreneurs looking for financing for sustainable projects, creative initiatives, and innovative ideas.

Keywords: crowdfunding, online fundraising, community fundraising, feedback, advantages of crowdfunding, disadvantages of crowdfunding

Investors often face information asymmetries when making decisions about funding entrepreneurs: this is because they have no access to a track record of the entrepreneur’s prior business performance (Berger & Udell, 1998; Flannery, 1986), limited information about them, and limited access to tangible assets that could be used as collateral on investments (De Meza & Webb, 1987). Because of these serious information asymmetries, professional investors (e.g., banks, business angels, and venture capital funds) may decide against providing financing to start-ups, especially when these are in their early stages (Mason & Stark, 2004).

In the early 2010s, entrepreneurs began to attempt to overcome such difficulties at the beginning of 2010s, by using the Internet to directly seek funding from the general public (the “crowd”), rather than approaching traditional professional investors. Crowdfunding is the practice of collecting small amounts of capital from a “crowd” of Internet users (Lambert & Schwienbacher, 2010).

In this article, we provide a general overview of the topic of crowdfunding. We define crowdfunding and describe the most widely used classifications on this funding means available in the literature. We will then focus on the actors involved in a crowdfunding campaign and describe the reasons motivating them to participate in crowdfunding. Then, we focus on the advantages for entrepreneurs of launching a crowdfunding campaign. In addition to the collection of financial resources, if the campaign is successful, crowdfunding is a setting in which to engage a virtual community of backers who can help by providing feedback on early versions of the product in question, which can contribute to its later improvement. Moreover, crowdfunding is a powerful marketing tool (Brown, Mawson, & Rowe, 2018; Gerber & Hui, 2013) that can be used to gain information about market response to the product (Balykhin & Generalova, 2015; Strausz, 2017; Viotto Da Cruz, 2018; Colombo & Shafi, 2019), assess the level of demand for the product (Agrawal, Catalini, & Goldfarb, 2014), and increase brand awareness (Stanko & Henard, 2016). However, crowdfunding also engenders some drawbacks for entrepreneurs, which we discuss in this article. In particular, we focus on (a) the risk of knowledge misappropriation because of the disclosure of sensitive information about the entrepreneurial initiative, the team, and the business model; (b) the social stigma associated with failed crowdfunding attempts; and (c) the challenges related to the management of the crowd of backers after the campaign has ended. We conclude this article by providing evidence on how crowdfunding is changing the way in which entrepreneurs operating in specific industries are financed. In particular, we describe how crowdfunding is used for sustainable projects, for creative initiatives, and to finance innovation.

Crowdfunding Definition and Taxonomy

Crowdfunding is a novel phenomenon, but it has historical roots. A well-known case is that associated with the construction of the Statue of Liberty, donated by the French to the United States of America as a sign of friendship between the two peoples for the centenary of the Declaration of Independence. The statue was delivered without a pedestal. To finance the making of the base of the statue, Joseph Pulitzer launched a campaign to raise public funds in his newspaper the New York World, in which he asked citizens to contribute to the project by making small donations. According to many, this is one of the first examples of crowdfunding in modern history (Short et al., 2017). The development of the Internet and changes in the regulatory setting that go back to the early 2010s have allowed crowdfunding to become a popular form of financing that is increasingly used by entrepreneurs.

In essence, crowdfunding is defined as the practice of collecting small amounts of capital from the crowd of Internet users (Lambert & Schwienbacher, 2010). However, over the years, other, more detailed, definitions have been advanced. Among these, the most widely accepted is that offered by Belleflamme, Lambert, and Schwienbacher (2014, p. 7), who define crowdfunding as “an open call, mostly through the Internet, for the provision of financial resources either in the form of donation or in exchange for the future product or some form of reward to support initiatives for specific purposes.” This definition highlights a key feature of crowdfunding: the opportunity for entrepreneurs to offer backers different kinds of rewards in exchange for their financial contribution. Based on the different types of rewards that can be offered to backers, a widely used taxonomy distinguishes crowdfunding according to the following categories: (a) donation-based crowdfunding; (b) reward-based crowdfunding, (c) lending-based crowdfunding, and (d) equity-based crowdfunding, with the last two categories sometimes referred to as crowd investing.

Donation-based crowdfunding does not encompass any kind of remuneration for backers. Philanthropists and supporters of a specific cause merely give charitable help, with no expectation of receiving anything back. Occasionally, the participants in a donation-based crowdfunding campaign are publicly acknowledged through the publication of their names on the webpage of the funded project (Pashen, 2017). Donation-based crowdfunding was reported as being one of the most diffused crowdfunding models when the phenomenon started (Massolution, 2015). However, the growth rate of this crowdfunding model has been comparatively low (Ziegler et al., 2018), making this form of crowdfunding one of the least used in the late 2010s.

In the reward-based model, the crowd’s members pledge money in exchange for a product, a gadget, or a service chosen from a list. Sometimes the reward is purely symbolic (e.g., “a grateful thank you from the proponent,” resembling those of donation-based models), such that distinction between reward- and donation-based crowdfunding is often blurred. In most cases, the reward involves the prepurchase of a product or a service. Usually, entrepreneurs offer different versions of the product/service for each different expected contribution, to increase the overall crowd participation in the crowdfunding campaign. Reward-based crowdfunding is gaining increasing popularity among entrepreneurs and is typically used to finance projects in the cultural and creative fields (Kuppuswamy & Bayus, 2017) and in high-tech industries (Riedl, 2013).

In contrast, equity-based and lending-based crowdfunding are both financial models. Equity crowdfunding, similar to an initial public offering, enables the crowd to buy shares of the financed company and to receive returns based on its future profits (Ahlers, Cumming, Günther, & Schweizer, 2015). Occasionally equity crowdfunding campaigns offer voting rights for the crowd, although this is not mandatory. Equity crowdfunding has evolved into different business models, of which the nominee structure and the direct-ownership model are the most diffused (Wright, Siegel, & Mustar, 2017). In nominee equity crowdfunding, a business is created ad hoc to administer the shares as the crowd’s legal representative (Walthoff-Borm, Vanacker, & Collewaert, 2018). For entrepreneurs, this means that they can still reach out to the crowd for advice, networking, and mentoring, but only need to report to and receive consents from one counterpart, not their entire investor base. On the contrary, in the direct-ownership equity-crowdfunding model, there is no intermediary and the company reports to each member of the crowd that participated in the campaign (Wright et al., 2017). Equity crowdfunding is highly regulated due to a risk profile and liabilities typical of other seed financing activities, such as business angels and venture capital (Lasrado & Lugmayr, 2013). Hornuf and Schwienbacher (2017) report that at least seven countries have so far approved laws to regulate equity crowdfunding, namely Austria, Belgium, France, Germany, Italy, UK, and the United States. The regulatory schemes adopted in these countries have multiple goals. The primary objective of regulators was to allow firms to offer securities online (e.g., in the United States, Title III of the JOBS Act and the following SEC regulation allowed early-stage businesses to offer and sell securities). Another important objective, especially in the initial versions of regulatory schemes, was to protect investors from fraud (e.g., in the United States, for crowdfunding campaigns larger than $500,000, the fundraiser is obliged to provide audited financial statements to potential investors). Over the years, the enlargement of supply and demand for capital has become another important goal (e.g., in Italy, the law allowed initially only innovative start-ups and then small and medium-sized enterprises (SMEs) to use equity crowdfunding; since 2018 it has been possible for any company to launch an equity crowdfunding campaign). To accomplish this latter objective, in some countries new policy schemes have been adopted that offer incentives to investors (e.g., in the UK, the government offers two attractive tax breaks, known as SEIS and EIS, for investors in equity crowdfunding) and remove barriers for entrepreneurs (as happened in Italy). Finally, lending-based crowdfunding is a form of microlending that enables the crowd to borrow money at a given interest rate (Morse, 2015). Occasionally, the interest rate is flexible and regulated by an algorithm that lowers the interest rate when more lenders place bids (Butticè, Franzoni, Rossi-Lamastra, & Rovelli, 2018). Often, in lending-based crowdfunding, the crowd buy securities in a fund, which gives the loans to individual borrowers or bundles of borrowers. As of 2018, lending-based crowdfunding was the most diffused form of crowdfunding (Ziegler et al., 2018).

Table 1. Crowdfunding Types

Type

Definition

Donation-Based

Donors provide funding with no expectation of monetary or material return. Fundraisers may be individuals, team, companies or public authorities.

Reward-Based

Backers provide finance to individuals, projects, or companies in exchange for nonmonetary rewards or products (e.g., product prepurchase).

Lending-Based

The crowd lends money to fundraisers at a given interest rate.

Equity-Based

Fundraisers offer equity shares in exchange for funding from private or professional investors.

Another important taxonomy used in crowdfunding campaigns relates to money collection schemes (Cumming & Johan, 2013), and distinguishes between “all-or-nothing” and “keep-it-all” models. In the all-or-nothing model, the entrepreneur is allowed to withdraw the money collected from the crowd only if a predetermined threshold, called the funding goal, is reached. A study by Wash and Solomon (2011) provides evidence that all-or-nothing schemes help entrepreneurs to collect money for risky projects and allow them to collect a greater amount of capital than they would from keep-it-all schemes. On the contrary, in the keep-it-all model, entrepreneurs can cash in the money collected in any case. An important difference between the all-or-nothing and keep-it-all schemes relates to the risk for the crowd when funding. In the all-or-nothing model the risk associated with the financing of a project that does not collect sufficient capital is negligible. Because the entrepreneurs are not allowed to withdraw the money, the crowd receive their contributions back. Conversely, in the case of keep-it-all crowdfunding, the risk for the crowd is significant because even underfunded projects can retain the raised capital (Cumming et al., 2019).

Main Participants in a Crowdfunding Campaign

Crowdfunding involves three kinds of players: the fundraisers, the crowdfunders, and the crowdfunding platform.

Fundraisers are those who propose the ideas and/or projects to be funded (Mollick, 2014). They may be profit or nonprofit entities, firms, or private individuals, who seek funding for the creation of a new venture or to finance a specific one-off project. The available evidence indicates that nonprofit entities are usually more successful at fundraising through crowdfunding than for-profit ones (Belleflamme, Lambert, & Schwienbacher, 2013; Lambert & Schwienbacher, 2010; Liao, Zhu, & Liao, 2015; Pitschner & Pitschner-Finn, 2014). Indeed, the campaigns presented by nonprofit entities typically have a broader scope and would potentially have larger effects on society (Lambert & Schwienbacher, 2010; Marshall, 2013), thus they can raise more attention among the crowd members (Lambert & Schwienbacher, 2010). Fundraisers are typically male (Mollick & Kuppuswamy, 2014), although in some industries (e.g., fashion) the use of crowdfunding among male and female is evenly split (Greenberg & Mollick, 2017). Unlike what happens with traditional entrepreneurial professional investors (e.g., venture capitalists or business angels), whereby women are typically discriminated against in getting access to funding, in crowdfunding female fundraisers are associated with higher success rates (Frydrych, Bock, Kinder, & Koeck, 2014; Greenberg & Mollick, 2017). This holds true both for individual fundraisers and for teams. This finding can be traced back to the strong tendency of women in the crowd to mainly finance those few projects presented by female fundraisers (Greenberg & Mollick, 2017), especially in sectors where women are underrepresented (e.g., high-tech). Previous studies have indicated that fundraisers use crowdfunding to overcome a funding gap (Brem, Bilgram, & Marchuk, 2017). Crowdfunding is considered by fundraisers to be an easy, safe, and well-organized way to raise money and thus is extremely valuable for those who anticipate serious challenges in obtaining funds from banks, venture capitalists, or business angels (Gerber & Hui, 2013; Mollick, 2014; Mollick & Kuppuswamy, 2014)

The crowdfunders, also referred to as investors or backers, are those who support the crowdfunding campaigns by providing financial backing for the projects. Typically, crowdfunders are very proactive and are a source of feedback and new ideas, in addition to financial resources. Many individuals operate both as fundraisers and crowdfunders of different projects (Hardy, 2013) and there are even independent open calls for successful fundraisers to become active backers of other fundraisers. For instance, the “Kicking It Forward” Initiative launched on reward-based platforms invites fundraisers to put 5% of the profits of their finished product back into other projects (Butticè et al., 2018). The available evidence indicates that crowdfunders are typically male: male crowdfunders provide about 80% of the total funding in a campaign (Mohammadi & Shafi, 2018). Despite the fact that the motivations of crowdfunders may vary, a comparison between crowdfunders and professional investors shows that there is overall agreement between the funding decisions of the crowd and those of experts (Mollick & Nanda, 2016), suggesting that crowdfunders can complement the financing of professional investors. Motivations for crowdfunders to finance a project are multiple. Some crowdfunders are driven by the desire to obtain an economic return. This motivation is especially relevant in the reward-based model, whereby crowdfunders obtain rewards in exchange for their contributions, and in the equity-based one, whereby crowdfunders become shareholders of the company (Ordanini, Miceli, Pizzetti, & Parasuraman, 2011). Beside this motivating factor, the literature has shown that some crowdfunders contribute to a crowdfunding campaign because they are driven by a strong sense of altruism and desire to help others (Agrawal et al., 2014; Giudici, Guerini, & Rossi-Lamastra, 2018). Although altruism and philanthropy are clearly particularly important in donation-based crowdfunding, interviews with crowdfunders indicate that this motive is also compelling in other crowdfunding models, especially when support is sought by fundraisers with whom the crowdfunders feel they have some connection (Hemer, 2011) and when support is sought for social causes that are perceived to be aligned with the crowdfunders’ own identities (Gerber & Hui, 2013). A third motivation for crowdfunders to participate in a crowdfunding campaign relates to social recognition. These crowdfunders envisage crowdfunding as way of obtaining reputational gain (Agrawal et al., 2014, Burtch, Ghose, & Wattal, 2015). In this respect, Gerber and Hui (2013) report that many crowdfunders contribute to a campaign for the sake of feeling that they are part of an active community, members of an influential group (Ordanini et al., 2011), or that they belong to an elite of pioneer early adopters of a new product or a new technology (Hemer, 2011).

Crowdfunding platforms are intermediaries that work to enable the transactions between the fundraisers and the crowdfunders. These intermediaries own and manage the websites, serve as matchmakers between fundraisers and crowdfunders, and earn a fee on the transactions between them (Burkett, 2011; Koch & Cheng, 2016). The platforms manage the search engines, check the legal requirements, provide online payment mechanisms, and, in some cases, perform an initial screening that aims to filter out low-quality projects (Löher, 2017). In so doing, they reduce search costs (Agrawal et al., 2014) and coordination costs (Crosetto & Regner, 2018) for the fundraiser and the crowdfunders, lowering the potential for fundraisers to engage in opportunistic behavior (Löher, 2017). The number of crowdfunding platforms has grown exponentially over the years, especially in large countries characterized by high national entrepreneurial rates (Dushnitsky, Guerini, Piva, & Rossi-Lamastra, 2016).

The Advantages of Crowdfunding for Entrepreneurs

By running a crowdfunding campaign, a fundraiser can obtain several benefits, among which the first and most straightforward is the collection of the financing needed (e.g., Gerber & Hui, 2013; Mollick, 2014; Mollick & Kuppuswamy, 2014). Indeed, by resorting to crowdfunding instead of traditional sources, fundraisers can access financing at a lower cost, thanks to the opportunities it provides to search for finance on a global scale. At the same time, contrary to what happens when entrepreneurs obtain financing from the traditional professional investors, entrepreneurs who choose donation-based, reward-based, or lending-based crowdfunding have the opportunity to retain control of the start-up (Fleming & Sorenson, 2016).

Beside this financial advantage, other, nonmonetary benefits are important as well (Dushnitsky & Marom, 2013; Gerber & Hui, 2013). Running a crowdfunding campaign—especially a reward-based one—allows fundraisers to aggregate a group of crowdfunders who are in pursuit of a common goal, feel they have a positive and measurable impact on the final output, develop emotional connections to the project, and engage in frequent interactions with the project’s core members (Butticè, Colombo, & Wright, 2017). This group of crowdfunders represents the social capital that the fundraiser has developed within the crowdfunding platform (Colombo, Franzoni, & Rossi-Lamastra, 2015). They are sometimes described as an “active” crowd or community (Butticè & Noonan, 2019), because they interact frequently with the entrepreneur, with the aim of improving product design. Indeed, this group of crowdfunders represents a customer base that is ready and willing to experiment with new products. Crowd feedback typically highlights defects, suggests product improvements, and provides ideas that will help reduce production time and costs. In reward-based crowdfunding, about one campaign out of three even asks crowdfunders to participate in the development of products/services after the campaign has ended but before the actual product shipment, so that they eventually become cocreators of the product (Butticè & Noonan, 2019). The literature has shown that the crowd not only provide feedback to reward-based and donation-based campaigns (Dushnitsky & Marom, 2013; Hui, Greenberg, & Gerber, 2015) but also to equity-based ones (Agrawal et al., 2014; Di Pietro et al., 2018).

Crowdfunding can also prove useful for marketing purposes (Belleflamme et al., 2014; Gerber & Hui, 2013; Mollick, 2014; Mollick & Kuppuswamy, 2014). Gerber and Hui (2013) report that for a large number of founders, the marketing aspect of crowdfunding is as important as raising funds and getting feedback from the crowd. The literature identifies a number of reasons for this. First, launching a crowdfunding campaign allows fundraisers to gain public attention (Gerber & Hui, 2013; Lambert & Schwienbacher, 2010) and increases the public awareness around the project. This is particularly important for first-time entrepreneurs or emergent artists with little or no fame, since crowdfunding bolsters their visibility in the eyes of sponsors (D’Amato, 2017), other investors (Mollick, 2014), or customers (Gerber & Hui, 2013). In this respect, crowdfunding campaigns, especially successful ones, can serve as a means to help fundraisers to achieve legitimacy (Frydrych et al., 2014). In addition to public awareness, crowdfunding offers a setting to learn about demand for the product. Reward-based crowdfunding, in particular, allows fundraisers to assess the crowdfunders’ willingness to pay by offering the product alongside a variety of rewards, set at different prices during the campaign (Belleflamme et al., 2014; Belleflamme et al., 2014). By offering crowdfunders the opportunity to purchase the product as a reward, reward-based crowdfunding can be also used as a direct sales channel, to sell products on the crowdfunding platform that would find it difficult to penetrate into traditional markets. Moreover, it can be used by fundraisers as a market test to evaluate consumers’ reactions to their products before committing to wide-scale production (Brown et al., 2017; Viotto Da Cruz, 2018). In this respect, a well-known example is FirstBuild, a subsidiary of General Electric, which in July 2015 launched a reward-based campaign for its new product. The campaign was very successful and the company then made the product available for purchase in regular stores (Cowley, 2016). Similarly, in equity-based crowdfunding, it has been proved that fundraisers can use campaigns to gain information about the size of the potential demand for their products by interacting with crowdfunders (Agrawal et al., 2014).

Disadvantages of Crowdfunding

Despite all the aforementioned benefits, crowdfunding has some disadvantages, which may reduce fundraisers’ willingness to resort to it.

Fundraisers in a crowdfunding campaign are obliged to publicly disclose information about the product and the business model in order to reduce the information asymmetries with the crowd that may hamper financing (Ahlers et al., 2015; Courtney, Dutta, & Li, 2016). Yet, the disclosure of information also raises the risk that the product might be counterfeited by others, reducing fundraisers’ ability to appropriate the innovation value (Roma et al., 2017; Stanko & Henard, 2017), because they have accidentally allowed their knowledge to be misappropriated. The disclosure of information may also reduce a firm’s competitive advantage against competitors. Indeed, driven by the goal of providing sufficient information to potential crowdfunders, the fundraiser may be obliged to disclose operational information of strategic value, which can be used by competitors to improve their own performance, practices, and processes (Gleasure, 2015).

Because information about the performance of a crowdfunding campaign usually remains accessible online, crowdfunding entails the risk of social stigma for fundraisers unable to attract enough crowdfunders (Gerber & Hui, 2013). The literature has shown that the failure to raise funds using crowdfunding deters both potential crowdfunders (Butticè et al., 2017) and professional investors (Roma et al., 2017; Signori & Vismara, 2018) from contributing to future campaigns. Professional investors also react negatively to bad news received after the end of the campaigns, such as failure to deliver timely products to backers of reward-based campaigns or negative feedback from the crowd, especially if both types of bad news reinforce each other (Colombo & Shafi, 2019). The availability of such information about the failure to achieve a crowdfunding goal might also negatively influence future customers (Gleasure, 2015), and deter potential investors from further financing the entrepreneurial project.

Even in the positive case of running a successful campaign that attracted a large crowd, fundraisers may experience disadvantages related to the management of the crowd of backers associated with the fundraising. Usually, crowdfunders each provide a small amount of money (Gerber & Hui, 2013), thus the successful crowdfunding campaign may face high costs per crowdfunder when these are numerous. This is particularly true for those active crowdfunders who provide feedback about the product or project and repeatedly interact with the fundraisers. Although, on the one hand, this may provide advantages in terms of knowledge acquisition and may result in an improved final product, on the other hand it represents an additional challenge for fundraisers. Indeed, management of the crowd has been described in the literature as a costly activity that takes time, energy, and effort (Butticè & Noonan, 2019) and may ultimately result in additional challenges during production (Viotto Da Cruz, 2018) and delays to product delivery (Mollick, 2014). The presence of an active crowd, whose members typically provide the fundraiser with a wide range of feedback and suggestions about product development (Stanko & Henard, 2017), also poses an additional challenge for entrepreneurs. In this case the difficulty for fundraisers is that their desire to include as many suggestions made by the active crowd as possible during product development may be achieved at the expense of final product quality (Butticè & Noonan, 2019). Finally, the attraction of having a large number of crowdfunders may be deleterious for nascent entrepreneurs, as achieving this reduces the time between idea generation and the point at which a high demand for the product must be faced. For these fundraisers, crowdfunding reduces the opportunity to learn by doing or through trial and error, and can lead to their being suddenly presented with a challenge not aligned with the knowledge base they have accumulated through prior experience. This in turn leads to delays, and early failure of start-ups.

The Diffusion of Crowdfunding in Different Industries

Crowdfunding is changing the ways in which entrepreneurs operating in specific industries are acquiring funding. Crowdfunding has proved particularly useful for filling the funding gap experienced by many start-ups in their early stages, and sustaining their later growth, particularly in those industries that are typically underfinanced by other entrepreneurial finance investors. In the following sections, we describe how crowdfunding is used to finance sustainable projects and creative initiatives, as well as innovative ideas. These are the fields in which crowdfunding is mostly used.

Crowdfunding for Sustainable Projects

The literature on the financing of sustainable initiatives has largely shown that these initiatives often face serious challenges in attracting sufficient external financing (Bürer & Wüstenhagen, 2009; Fedele & Miniaci, 2010; Moore & Wüstenhagen, 2004; Ridley-Duff, 2008) because of a high level of information asymmetry (Ghosh & Nanda, 2010; Petkova et al., 2014), highly uncertain returns (Bürer & Wüstenhagen, 2009; Foxon & Pearson, 2008), and long payback periods (Hargadon & Kenney, 2012; Gaddy et al., 2017). Crowdfunding represents a growing source of financing for these projects (Testa, Nielsen, Bogers, & Cincotti, 2018). In this respect, Butticè, Colombo, Fumagalli, and Orsenigo (2019) show that the propensity to launch sustainable initiatives on crowdfunding platforms is higher in countries with a limited environmental sustainability orientation. Indeed, in countries where there is a lack of sustainability policies and regulations (e.g., public subsidies) as well as of sustainability-oriented shared values and beliefs, and where for those reasons fundraisers cannot rely on conventional financing channels, they are more inclined to resort to crowdfunding. The idea of crowdfunding as a means of financing sustainability stems from the view that crowdfunders are not driven by profit goals alone, but often base their financing decisions on prosocial motivations related to their personal wish to help others (Allison, Davis, Short, & Webb, 2015) or to safeguard the planet (Calic & Mosakowski, 2016). As such, backers of crowdfunding campaigns may have a higher willingness to invest in sustainable initiatives due to the positive feelings and expected positive societal impacts associated with such initiatives (Cumming, Leboeuf, & Schwienbacher, 2017). This view is consistent with the scientific literature that has described crowdfunders as motivated to contribute to crowdfunding campaigns by the desire to support specific causes that may be close to their own hearts, or the desire to help others (Allison et al., 2015; Gerber & Hui, 2013; Lehner & Nicholls, 2014). Prior conceptual and empirical papers have reported that crowdfunding is a suitable means of funding for sustainable initiatives. Several studies have reported a positive relationship between the sustainability orientation of projects and the likelihood of success of their crowdfunding campaigns (Calic & Mosakowski, 2016; Lehner, 2014). However, the debate on the use of crowdfunding to finance sustainability is still open, with other authors countering with empirical evidence that contradicts this view. J. Hörisch (2015) and H. Hörisch (2018) do not observe any positive connection between sustainability orientation (specifically environmental sustainability) and crowdfunding success. Butticè et al. (2019) show that environmentally sustainable campaigns are less likely to obtain financing than others. The authors of the latter study show that the penalties of sustainable initiatives are more severe for green campaigns launched in countries in which institutions are more oriented toward environmental sustainability and thus green entrepreneurial initiatives are more legitimatized. Indeed, in these countries, green crowdfunding campaigns are more likely to be crowded out by other green entrepreneurial initiatives.

Crowdfunding for Cultural and Creative Projects

Crowdfunding has also been described as a tool with which to finance cultural and creative projects such as a piece of art or a novel. Cultural and creative entrepreneurs have faced many financial shortages in recent years, due to severe cuts in public funding and increasing competition for donors and sponsors. Crowdfunding has helped the fundraisers of these projects to receive financial support. In the five years between 2013 and 2017, the largest reward-based crowdfunding platform (Kickstarter) has provided more funding alone than the National Endowment for the Arts and is one of the biggest publishers of graphic novels in the United States (Kuppuswamy & Bayus, 2018). Crowdfunding in order to raise funds for cultural and creative projects has been proven effective, particularly in the case of donation- and reward-based crowdfunding, because in these crowdfunding models, the crowd share a culture that tends to support activities of a creative nature (Josefy, Dean, Albert, & Fitza, 2017). Empirical research in a number of different fields, such as the music industry (Agrawal, Catalini, & Goldfarb, 2015), the tabletop game industry (Butticè & Noonan, 2019), and the film industry (Josefy et al., 2017), all supports this view. These studies show that cultural and creative projects tend to receive financing mainly from crowdfunders in a location in close proximity to the fundraising activity, because these participants share the same creative culture as the project’s leaders (Mendes-da Silva, Rossoni, Conte, Gattaz, & Francisco, 2016).

Crowdfunding for Innovative Projects

Crowdfunding is also changing how fundraisers collect financing for innovation projects, by allowing thousands of innovating entrepreneurs to raise money while still in the product development phase (Harvè & Schwienbacher, 2018; Stanko & Henard, 2016). A famous example of a crowdfunded product is the Oculus Rift, a virtual-reality gaming headset that collected $2.4 million via reward-based crowdfunding. Oculus Rift was later acquired by Facebook for $2 billion. Another interesting example is the Pebble Smart Watch, an IT product and device, but also a fashion product (Choi & Kim, 2016), which extend the functions of smartphones to a more personalized level (Rawassizadeh, Price, & Petre, 2015). This product was designed by a Canadian engineering student, who saw a gap in the market for a product that would make it possible to check smartphone messages quickly and easily, and brought an early version of the watch to Y-Combinator (a Californian high-tech accelerator), who provided some early seed funding and guidance. However, the entrepreneur needed more money. After some failures with traditional players in venture financing, he turned to reward-based crowdfunding in April 2012, in order to raise financial resources. The target goal ($100,000) was achieved within a few hours. Pebble Technology closed its successful campaign with $10.2 million, gathered from approximately 70,000 backers.

The literature has shown that crowdfunding is particularly appropriate for financing incremental innovations, defined as the cumulative improvement of existing knowledge, capabilities, or technologies (Madjar et al., 2011), rather than radical innovations, which are characterized by a breakthrough or paradigm-shifting knowledge, capabilities, or technologies (Anderson et al., 2014). Chan and Parhankangas (2017) show that crowdfunding campaigns characterized by greater incremental innovativeness are more comprehensible and generate more user value for typical crowdfunders, especially in the context of reward-based crowdfunding, in which crowdfunders behave like general consumers and mainly contribute to a campaign in exchange for future products or services. Accordingly, incremental innovations result in a more favorable funding performance. By comparison, campaigns that feature greater radical innovativeness are riskier to develop, harder for crowdfunders to understand, and result in less favorable funding outcomes.

Crowdfunding also facilitates the financing of innovation through another mechanism; that is, by removing geographical barriers to financing and thus democratizing access to finance. Historically, innovation has been funded through venture capital financing. However, due to the need for in-person evaluation and monitoring, venture capital activity has been highly concentrated in a few geographic areas in the United States where venture capital firms are located (Stuart & Sorenson, 2003), such as Silicon Valley, the Boston and New York metropolitan areas; and, in Europe, the London metropolitan area (Bertoni et al., 2019). Crowdfunding has reduced the geographical constraints on the source of financing (Agrawal et al., 2015) and has allowed fundraisers from places that have typically been excluded from venture capital investments to collect financing (Mollick & Robb, 2016; Sorenson, Assenova, Li, Boada, & Fleming, 2016).

Conclusion and Future Research Avenues

In the last ten years, crowdfunding has emerged as a valuable funding source for entrepreneurs. In this essay we have provided an overview of the topic, have described the actors involved and their motivations, and have illustrated the potential advantages and disadvantages for entrepreneurs of launching a crowdfunding campaign.

Despite the proliferation of studies on this topic, the infancy of the research on crowdfunding leaves open several questions that may represent valuable directions for future research. The majority of contributions to the crowdfunding literature has focused on the drivers of success of crowdfunding campaigns. It is only relatively recently that a number of studies have started to investigate the implications of running a crowdfunding campaign for a firm’s ability to innovate (e.g., Di Pietro et al., 2018; Stanko & Henard, 2017) and its ability to obtain additional financing from professional investors (Colombo & Shafi, 2019; Roma, Messeni Petruzzelli, & Perrone, 2017; Signori & Vismara, 2018). However, this literature is still in its infancy and a number of research questions remain open. First, raising financing through a crowdfunding campaign may legitimate fundraisers (Lehner & Nicholls, 2014) and represent a signal of good quality for traditional entrepreneurial finance investors. However, it is unclear which conditions have to exist for professional investors to value this signal and rely on the “wisdom of the crowd” in their investment decisions. It is also unclear what specific information investors rely on to judge the success or otherwise of a particular campaign, and whether there are differences in behavior across different investor types (e.g., business angels and venture capitalists, private and governmental venture capitalists, independent and corporate venture capitalists). Second, crowdfunding often implies the involvement of a large number of crowdfunders, which can burden entrepreneurs’ strategic choices. In equity crowdfunding, because crowdfunders also become shareholders, a successful crowdfunding campaign may lead to greater agency costs with potential follow-on investors (Butticè et al., 2019) and may raise corporate governance concerns. Hence, raising money through crowdfunding may discourage traditional entrepreneurial finance investors from providing additional funding and therefore might correlate negatively with the probability of attracting further investments. Related to this research question, future research may also focus on the motivations that lead fundraisers to choose crowdfunding rather than other funding means. The commonly accepted view, inspired by the “pecking-order theory” (Myers, 1984; Myers & Majluf, 1984) is that equity crowdfunding, as with any form of external equity finance, is considered by fundraisers to be the last resort (Walthoff-Borm et al., 2018). However, it is questionable that the same reasoning should apply to other crowdfunding models, especially reward-based crowdfunding (Colombo & Shafi, 2019). Indeed, there are reasons to believe that crowdfunding may represent a credible substitute for other financing means. Obtaining financing from traditional entrepreneurial finance investors is costly if one considers the cost of preparing the necessary documents, attending investor events, and so on. Moreover, these investors often have sufficient bargaining power to greatly dilute entrepreneurs’ ownership and limit their control rights by imposing contractual conditions that are favorable to them at the expense of entrepreneurs (Hellmann, 1998), which may engender conflicts (Masulis & Nahata, 2009; Ueda, 2004; Wasserman, 2003). In light of the above, one can argue that fundraisers may avoid seeking seed financing from traditional investors, preferring to turn to crowdfunding, which does not entail many of the abovementioned pitfalls. However, whether they could also use crowdfunding repeatedly to scale up their operations, is an interesting—and, so far, neglected—issue.

The investigation of the implications of running a crowdfunding campaign should also focus on the long-term performance of firms that have received crowdfunding, measured by “classical” performance indicators, such as growth, or the likelihood of going through an initial public offering (IPO) or of becoming the target of an acquisition. Researchers may want to quantify the effect of having received money from the crowd as compared to cases of firms that have not received money from professional investors or have not obtained any external financing. Different models of crowdfunding can also be compared with each other.

Finally, because information about the crowdfunding campaign usually remains accessible online, also in cases for which the fundraiser failed to obtain financing, future studies on the aftermath of crowdfunding campaigns may consider investigating the implication of having launched an unsuccessful campaign (as was carried out by Viotto Da Cruz, 2018, in that case focusing on reward-based crowdfunding).

Further Reading

Agrawal, A., Catalini, C., & Goldfarb, A. (2015). Crowdfunding: Geography, social networks, and the timing of investment decisions. Journal of Economics & Management Strategy, 24(2), 253–274.Find this resource:

Ahlers, G. K., Cumming, D., Günther, C., & Schweizer, D. (2015). Signaling in equity crowdfunding. Entrepreneurship Theory and Practice, 39(4), 955–980.Find this resource:

Allison, T. H., Davis, B. C., Short, J. C., & Webb, J. W. (2015). Crowdfunding in a prosocial microlending environment: Examining the role of intrinsic versus extrinsic cues. Entrepreneurship Theory and Practice, 39(1), 53–73.Find this resource:

Belleflamme, P., Lambert, T., & Schwienbacher, A. (2014). Crowdfunding: Tapping the right crowd. Journal of Business Venturing, 29(5), 585–609.Find this resource:

Bertoni, F., Colombo, M. G., & Quas, A. (2019). The role of governmental venture capital in the venture capital ecosystem: an organizational ecology perspective. Entrepreneurship Theory and Practice, 43(3), 611–628.Find this resource:

Burtch, G., Ghose, A., & Wattal, S. (2013). An empirical examination of the antecedents and consequences of contribution patterns in crowd-funded markets. Information Systems Research, 24(3), 499–519.Find this resource:

Burtch, G., Ghose, A., & Wattal, S. (2015). The hidden cost of accommodating crowdfunder privacy preferences: A randomized field experiment. Management Science, 61(5), 949–962.Find this resource:

Butticè, V., Colombo, M. G., & Wright, M. (2017). Serial crowdfunding, social capital, and project success. Entrepreneurship Theory and Practice, 41(2), 183–207.Find this resource:

Chan, C. S. R., & Parhankangas, A. (2017). Crowdfunding innovative ideas: How incremental and radical innovativeness influence funding outcomes. Entrepreneurship Theory and Practice, 41(2), 237–263.Find this resource:

Cholakova, M., & Clarysse, B. (2015). Does the possibility to make equity investments in crowdfunding projects crowd out reward-based investments? Entrepreneurship Theory and Practice, 39(1), 145–172.Find this resource:

Colombo, M. G., Franzoni, C., & Rossi-Lamastra, C. (2015). Internal social capital and the attraction of early contributions in crowdfunding. Entrepreneurship Theory and Practice, 39(1), 75–100.Find this resource:

Courtney, C., Dutta, S., & Li, Y. (2016). Resolving information asymmetry: Signaling, endorsement, and crowdfunding success. Entrepreneurship Theory and Practice, 41(2), 265–290.Find this resource:

Dushnitsky, G., & Marom, D. (2013). Crowd monogamy. Business Strategy Review, 24(4), 24–26.Find this resource:

Dushnitsky, G., Guerini, M., Piva, E., & Rossi-Lamastra, C. (2016). Crowdfunding in Europe: Determinants of platform creation across countries. California Management Review, 58(2), 44–71.Find this resource:

Giudici, G., Guerini, M., & Rossi-Lamastra, C. (2018). Reward-based crowdfunding of entrepreneurial projects: the effect of local altruism and localized social capital on proponents’ success. Small Business Economics, 50(2), 307–324.Find this resource:

Greenberg, J., & Mollick, E. (2017). Activist choice homophily and the crowdfunding of female founders. Administrative Science Quarterly, 62(2), 341–374.Find this resource:

Hervé, F., & Schwienbacher, A. (2018). Crowdfunding and innovation. Journal of Economic Surveys, 32(5), 1514–1530.Find this resource:

Josefy, M., Dean, T. J., Albert, L. S., & Fitza, M. A. (2017). The role of community in crowdfunding success: Evidence on cultural attributes in funding campaigns to “save the local theater.” Entrepreneurship Theory and Practice, 41(2), 161–182.Find this resource:

Koch, J. A., & Cheng, Q. (2016). The role of qualitative success factors in the analysis of crowdfunding success: Evidence from Kickstarter, working paper.Find this resource:

Kuppuswamy, V., & Bayus, B. L. (2017). Does my contribution to your crowdfunding project matter? Journal of Business Venturing, 32(1), 72–89.Find this resource:

Lin, M., & Viswanathan, S. (2015). Home bias in online investments: An empirical study of an online crowdfunding market. Management Science, 62(5), 1393–1414.Find this resource:

Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of Business Venturing, 29(1), 1–16.Find this resource:

Mollick, E., & Nanda, R. (2015). Wisdom or madness? Comparing crowds with expert evaluation in funding the arts. Management Science, 62(6), 1533–1553.Find this resource:

Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 574–592.Find this resource:

Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221.Find this resource:

Ordanini, A., Miceli, L., Pizzetti, M., & Parasuraman, A. (2011). Crowd-funding: transforming customers into investors through innovative service platforms. Journal of Service Management, 22(4), 443–470.Find this resource:

Skirnevskiy, V., Bendig, D., & Brettel, M. (2017). The influence of internal social capital on serial creators’ success in crowdfunding. Entrepreneurship Theory and Practice, 41(2), 209–236.Find this resource:

Tomczak, A., & Brem, A. (2013). A conceptualized investment model of crowdfunding. Venture Capital, 15(4), 335–359.Find this resource:

Vismara, S. (2016). Information cascades among investors in equity crowdfunding. Entrepreneurship Theory and Practice, 42(3), 467–497.Find this resource:

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