When Investors Meet Consumers: The Interaction of Different Backers in Crowdfunding Markets

Description

Crowdfunding has changed the way startups, entrepreneurs, and individuals raise capital by harnessing the power of the crowd. Backers can choose from two types of crowdfunding: reward-based crowdfunding is an established and attractive fundraising option for entrepreneurs with creative projects, while investment-based crowdfunding has also gained popularity thanks to the progress of related regulations. Different types of crowdfunding backers (i.e. consumers and investors) exhibit distinct motivations. The goal of this research project is to understand the behavior and interaction of different types of backers, and to help entrepreneurs make decisions on when to use each type of crowdfunding in order to launch a successful fundraising campaign. To address this issue, we plan to conduct a field study on a popular crowdfunding platform, where each campaign can offer both reward- and investment-based funding. Specifically, we will test the relationship between investors’ contribution in the early stage of the campaign and the likelihood of the campaign’s success. We propose two mechanisms to explain our theoretical development: a screening effect, in which early investors can better extract information about the innovation project to predict crowdfunding success, and a cheerleading effect, in which early investors voluntarily act as sales agents to encourage purchases by potential consumers of reward-based crowdfunding. Moreover, we further argue that despite these critical roles (predictors and sales agents) of early investors, the funding goal of a successful campaign is mainly accomplished by consumers in the later stage. Upon completion of this project, our findings will provide relevant managerial implications for entrepreneurs and valuable insights towards crowdfunding platform design.