The wisdom of the crowd in funding: information heterogeneity and social networks of crowdfunders

Abstract

Crowdfunding has enabled large crowds to fund innovative projects. This type of funding might tap into the wisdom of crowds who were previously disconnected from the funding process. We distinguish between in-crowd and out-crowd funders (with and without ties to project creators) in order to test for heterogeneity in their information use. Based on the analysis of a large-scale survey amongst project funders, this paper shows that in-crowd investors rely more on information about the project creator than out-crowd investors. Outcrowd investors do not seem to attach more importance to information about the project itself than in-crowd investors, except in the case of donation-based crowdfunding. For financial return crowdfunding, financial information becomes less important once a strong relationship with the project creator is established. Our study allows project creators to target information to specific audiences based on their relationship strength across different types of crowdfunding projects.

Which updates during an equity crowdfunding campaign increase crowd participation?

“…However, it needs to be considered that investors' motivations have been shown to depend on the specific crowdfunding model (Cholakova and Clarysse 2015;Lukkarinen et al 2016;Vulkan et al 2016;Polzin et al 2017), which suggests that the effects of updates and the signals used also differ according to the crowdfunding model. Focusing on findings in relation to venture financing with a profit participation of investors, the content of these signals can be roughly summarized into information about the start-up's quality (i.e., the management team, its preparedness and openness, and the start-up's financials) and external credentials provided by third parties (i.e., through social networks, reputable investors, protection of intellectual property, reception of grants, and the reaction by the crowd).…”

“…Furthermore, Aoterra, (2015), Lukkarinen et al (2016), Polzin et al (2017) Share of retained equity Mixed Entrepreneurial intention Ahlers et al (2015), Ralcheva and Roosenboom (2016), Vismara (2016a) External certification Social network (size) Mixed Social capital; quality disclosure; larger investor base Ahlers et al (2015), Lukkarinen et al (2016), Vismara (2016a) Reputable investors (business angels, experts) + Quality disclosure; certification Kim and Viswanathan (2013), Ralcheva and Roosenboom (2016) Investors with large investments + Quality disclosure Vulkan et al (2016) Intellectual capital (patents) Mixed Quality disclosure Ahlers et al (2015), Ralcheva and Roosenboom (2016) Reception of grants None Quality disclosure Ralcheva and Roosenboom (2016) Campaign developments…”

“…Prior research has investigated the success drivers of equity crowdfunding campaigns and has shown that information provided by the start-up, such as the human and social capital of the founders, risks involved, and financial projections, have a positive influence on campaign success (Ahlers et al 2015;Vismara 2016b;Polzin et al 2017). This information usually does not change during a crowdfunding campaign and is typically provided by the start-up before a campaign starts.…”

“…We analyze how start-ups can use updates during the campaign to encourage the crowd to provide funding. This particular determinant of equity crowdfunding participation has been overlooked in the literature so far, and as such, there is an important gap on the effects of information disclosure on crowd participation (Ahlers et al 2015;Bernstein et al 2017;Vismara 2016b;Polzin et al 2017). Updates enable start-ups to signal their value to the crowd and to establish credibility and legitimacy during a crowdfunding campaign.…”

A diverse and resilient financial system for investments in the energy transition

“…These funding platforms bring back the judgment call aspect of relationship banking and VC, but 'scale' the investment process through organizing the flow of information in a different, non-proprietary way [49]. In contrast to VC, investors do not try to gain an exclusive information position on the investees, but rather generate information by making their decision known to the rest of the investor community.…”