An industrial organization framework to understand
the strategies of crowdfunding platforms∗
CORE and Louvain School of Management,
Universit´e catholique de Louvain
Rotterdam School of Management,
This chapter shows how the theory of industrial organization can help us understand
some important aspects of crowdfunding that go beyond the ﬁnance sphere of the ﬁrm. A
special attention is devoted to the role and behavior of crowdfunding platforms, which in-
termediate between entrepreneurs and contributors.
Keywords: crowdfunding, multisided platforms, information asymmetry, price discrimi-
∗This chapter is prepared for International Perspectives on Crowdfunding: Positive, Normative and Critical
Theory, edited by M´eric, J., Maque, I., and Brabet, J., Bingley (UK): Emerald. It draws largely from Belleﬂamme
and Lambert (2014). This version: March 2015.
The startling rise of crowdfunding over the last few years has raised awareness of and interest
in its potential. From a public policy point of view, it is now widely agreed that crowdfunding
should be promoted as it oﬀers an alternative – and potentially powerful – means for channeling
funds towards small innovative ﬁrms; these ﬁrms are indeed recognized as a leading source
of growth and job creation, but are facing diﬃculties to raise funds from traditional sources,
especially since the ﬁnancial crisis. Yet, it is also admitted that crowdfunding raises a number
of important concerns (risk of fraud, misleading advertising or advices by entrepreneurs and
platforms, payment treatment by platforms, etc). There is thus an urgent need for the adoption
of an appropriate regulatory framework concerning the sale of securities, as well as investor and
Within the European Union (EU), crowdfunding is restricted by national regulatory provi-
sions. As only an initiative at the EU level would really open up the market for crowdfunding and
level the playing ﬁeld amongst EU countries, the European Commission has recently launched
a public consultation to identify measures that could help to facilitate crowdfunding practices.
The United States are ahead of the game. On April 5, 2012, President Obama signed into
law the Jumpstart Our Business Startups (JOBS) Act, designed to help small ﬁrms start and
expand. A key provision of the JOBS Act allows various exemptions for crowdfunded securities
concerning, among other things, the number of shareholders that a private company may have,
reporting requirements by the Securities and Exchange Commission, and general solicitation.1
In this chapter, we argue that the current regulatory eﬀorts could be inappropriate if reg-
ulators overlook the fact that crowdfunding is now essentially intermediated by Internet plat-
forms.2Crowdfunding platforms assist entrepreneurs in publishing campaigns and collecting
funds. Thereby, they facilitate the interaction between entrepreneurs and the crowd of con-
tributors. As the participation of each group is beneﬁcial to the other group, we argue that
crowdfunding platforms can be seen as multisided platforms. We then use the recent research
on the economics of multisided platforms to gain a better understanding of a number of is-
sues related to crowdfunding platforms: What roles do they play? What are their price and
non-price strategies? How do they compete? Through their activities, crowdfunding platforms
have a natural tendency to self-regulation. This suggests that heavy and complex regulation by
governments may be useless, if not counterproductive.
1See Hornuf and Schwienbacher (2014a), who examine how securities regulation, particularly the exemptions
to prospectus and registration requirements, aﬀects the structure of equity crowdfunding platforms, fundraising
campaigns of ﬁrms, and the type of contributors. See also Cumming and Johan (2013) for a study of demand-
driven regulations for equity crowdfunding based on a nation-wide survey in Canada.
2Entrepreneurs may manage to collect funds directly online from many people without the help of a third
party (see Belleﬂamme, Lambert, and Schwienbacher, 2013); yet, nowadays, such practice is the exception rather
than the rule.
The rest of the chapter is organized as follows. In Section 2, we identify crowdfunding
platforms as “multisided platforms”. In Section 3, we analyze the price and non-price strategies
that these platforms implement. In Section 4, we examine the diﬀerent economic forces that
shape the competition among crowdfunding platforms. We present a number of concluding
remarks in Section 5.
2 Multisidedness of crowdfunding platforms
Crowdfunding platforms can be seen as multisided platforms. As Evans (2011) explains it, a
business opportunity emerges for a multisided platform when three conditions are met. First,
there are distinct groups of customers. Second, a member of one group beneﬁts from having his
demand coordinated with one or more members of another group; in the jargon of the economics
literature, it is said that each group exerts indirect, or cross-side, network eﬀects on the other
groups. Finally, an intermediary can facilitate that coordination more eﬃciently than bilateral
relationships between the members of the groups. Let us show how crowdfunding platforms
meet these three conditions.
2.1 Distinct groups of consumers
Crowdfunding platforms link at least two distinct groups: entrepreneurs (fundraisers) on one
side and contributors (funders) on the other side.3We discuss below the pros and cons of
bringing other groups on board.
It is important to stress that contributors are not regular investors or consumers. They have
other (intrinsic) motivations. In particular, contributors commit capital not just to get monetary
compensation, but also because they value non-monetary beneﬁts. Their participation to the
crowdfunding mechanism is truly a social activity from which they derive “community beneﬁts”
(Belleﬂamme, Lambert, and Schwienbacher, 2014). Contributors feel that they are part of a
community of “special” or “privileged” investors and/or consumers. The nature and the source
of these community beneﬁts vary, especially with the form of crowdfunding. For example,
community beneﬁts can be tied to the investment or consumption experience. The sources of
these community beneﬁts are broad: preferential access to the artist or the entrepreneur (direct
communication, voting on speciﬁc issues related to project development), token of appreciation
(name credited on a CD sleeve or listed on a website), material reward (T-shirt, original drawing,
limited edition album, memorabilia).4
3For a deeper analysis of the contributors and entrepreneurs’ respective incentives and disincentives to partic-
ipate in crowdfunding campaigns, see Agrawal, Catalini, and Goldfarb (2013).
4We give a typology of the diﬀerent forms of crowdfunding in the next section.
2.2 Network eﬀects
It is customary in the literature on multisided platforms to make a distinction between cross-side
and within-side network eﬀects (see, e.g., Belleﬂamme and Toulemonde, 2009): the former refer
to external eﬀects that members of one group exert on members on the other group(s), while
the latter concern external eﬀects exerted among the members of the same group. We consider
them in turn.5
2.2.1 Cross-side network eﬀects
Each group’s valuation of the platform depends on the participation of the other group(s). As
far as contributors are concerned, there are two reasons for which they are likely to prefer
platforms with a larger number of entrepreneurs: such platforms provide them with a wider set
of campaigns that they can choose to support and, in the reward-based model, such platforms
also increase the probability that contributors will obtain rewards that ﬁt their tastes. Yet,
another force may play in the opposite direction: the chances that any given campaign will
be successful (i.e., will reach the required threshold) are inversely related to the number of
campaigns that the platform hosts; for that reason, contributors may prefer platforms with a
smaller number of entrepreneurs. We may conjecture that the former eﬀects outweigh the latter
(in particular if contributors can ﬁnd some way to coordinate on projects that are more likely to
be successful). It is thus reasonable to say that entrepreneurs exert positive cross-side network
eﬀects on contributors.
The same obviously applies in the opposite direction: contributors exert positive cross-side
network eﬀects on entrepreneurs. Entrepreneurs value platforms that are able to attract larger
crowds of contributors as they increase their chances to raise the targeted funds; platforms that
attract a larger number of contributors are also more interesting because they allow entrepreneurs
to showcase their products and to “test the waters” on a larger scale.
Regarding the last point, it is important to understand that crowdfunding has implica-
tions that go beyond the ﬁnancial sphere of the ﬁrm as crowdfunding also aﬀects the ﬂow of
information between entrepreneurs and contributors. In fact, raising money is not the only
strong motivation for entrepreneurs. Other motivations for resorting to crowdfunding are seen
as equally important; in particular, getting attention (reduced marketing costs) and obtaining
feedback (market testing, market validation). Crowdfunding can be used as a promotion device,
as a means to support mass customization or user-based innovation, or as a way for the producer
to gain a better knowledge of the preferences of its consumers.6
5For a formalization of the various network eﬀects at play on crowdfunding platforms, see Belleﬂamme, Omrani,
and Peitz (2015).
6A indirect proof of this can be found in the observation that some large multinational companies now resort
to crowdfunding. As these companies are not constrained on the capital market, their motivation for posting
projects on crowdfunding platforms must be to test the popularity for their new products. For instance, Sony
2.2.2 Within-side network eﬀects
Agents on both sides also care about what the members of their own group do; that is, within-side
network eﬀects are also present. Such eﬀects are likely to be negative among entrepreneurs as
they compete for the funds that the crowdfunders are willing to contribute: the more campaigns
the platform hosts, the tougher the competition.
In contrast, positive within-group eﬀects exist among contributors: the project that a partic-
ular contributor has chosen to support is more likely to reach the required threshold the larger
is the number of contributors who may choose to back this project too.
2.3 Added value of intermediation
Finally, as for the third condition, even though entrepreneurs may be able to connect with
the crowd by their own means,7platforms undoubtedly oﬀer them both higher prospects of
success and lower costs. In particular, as we discuss it below, crowdfunding platforms are able
to mitigate the problems raised by information asymmetries much more eﬃciently than any
individual fundraiser could do on his/her own.
Even though platforms are more eﬃcient than isolated entrepreneurs in attracting funders,
funding on platforms remains highly skewed. On the one hand, the rate of failure is relatively
high. For example, by early 2014, Kickstarter listed about 57% of failed projects – that is, not
reaching their initial funding goal. During their period of observation on Sellaband, a music-only
platform based in Amsterdam, Agrawal, Catalini, and Goldfarb (2011) report a more impressive
rate of failures: only 34 artists raised the threshold required to access their capital to ﬁnance
the making of their album – this represents less than 1% of the artists having received at least
$10 via this platform. On the other hand, a small number of project accounts for a very large
proportion of funds raised. The 34 successful projects examined in Agrawal et al.’s (2011) study
account for 73% of the total amount invested on Sellaband over the period. Belleﬂamme et al.
(2013) draw similar conclusions from their sample of individually crowdfunded projects.
3 Strategies of crowdfunding platforms
Facing these various cross-side and within-side network eﬀects, crowdfunding platforms use price
and non-price instruments to manage participation and usage on both sides of the market. As
far as prices are concerned, what matters for a platform’s proﬁts is not the sum of the prices
paid on the two sides but the structure of these prices (see Rochet and Tirole, 2006). In general,
did so for two products, the FES Watch and the Qrio Smart Lock (see, e.g., www.pcmag.com/article2/0,2817,
2473598,00.asp., last consulted on 21/01/2015).
7For instance, Verity Price, a South-African singer, managed to crowdfund her ﬁrst album by appealing to
her fans through her own website. See more speciﬁcally Belleﬂamme et al. (2013) who analyze a broad set of
individual crowdfunding campaigns.
a multisided platform that decides to charge a little bit less on one side and to compensate by
charging a little bit more on another side, thereby keeping the sum of prices unchanged, is likely
to aﬀect its proﬁts in a dramatic way. This certainly applies to crowdfunding platforms. As for
now, the vast majority of them only charge the entrepreneur side and let contributors use the
platform services for free. One can easily understand that platforms would not achieve the same
levels of proﬁts if they lowered the entrepreneurs’ fees and charged, in compensation, a small fee
to contributors. It is indeed very likely that any positive fee would discourage many contributors
to participate; this would in turn make the crowdfunding platform much less attractive for
entrepreneurs, whose willingness to pay would therefore decrease. Subsidizing the participation
on one side is often the only way for multisided platforms to solve the so-called “chicken-and-
egg” problem: as each group’s participation is conditioned on the other group’s participation,
the intermediary has no choice but to let one group use the platform for free so as to initiate a
positive feedback loop.
Regarding non-price instruments, Hagiu (2014) explains the importance for multisided plat-
forms to make the right decisions about the design of the platform (functionalities and features
of the platform, which sides to take on board) and about its governance rules (regulation of
access and participation). We describe these two types of strategies in turn.
3.1 Design strategies
We focus here on two main strategies. The ﬁrst strategy concerns the choice of a particular
crowdfunding model (donation-, lending-, reward-, equity-, or royalty-based); the second strat-
egy has to do with the extension of the platform to other groups of users.
3.1.1 Choice of crowdfunding model
While crowdfunding is an umbrella term used to describe the request of funding from many
individuals through an online platform, ﬁve types of crowdfunding models can be identiﬁed.
First, in the donation-based model, crowdfunding takes the form of donations, where individuals
give money to a given project and are not promised anything in return. Second, the reward-based
model oﬀers the contributors a non-ﬁnancial beneﬁt in return for their funding. Many reward-
based models oﬀer the possibility to pre-order the product that the entrepreneur is launching.
Third, the lending-based model oﬀers the possibility for entrepreneurs to act as borrowers, while
contributors take the position of lenders. Fourth, in the royalty-based model, contributors receive
a share in the proﬁts of the business or royalties of the artist. Finally, the equity-based model
implies investments into securities: shares or bonds.
The ﬁve models can be grouped into two broad categories according to whether or not they
oﬀer monetary compensations to the crowdfunders: the ﬁrst two do not and are called ‘non
investment-based models’, whereas the last three do and are called ‘investment-based models’.
Because the nature of the compensation diﬀers, the motivations of the contributors are likely
to diﬀer as well. As a result, entrepreneurs will also perceive the two models as diﬀerent. A
crucial issue is thus to understand what drives platforms (and entrepreneurs) to choose among
the diﬀerent models of crowdfunding.
Belleﬂamme et al. (2014) build a stylized model to address this question. In their model, an
entrepreneur can choose between the two main forms of crowdfunding, namely the reward-based
and the proﬁt-sharing models.8To make the comparison as neat as possible, the authors assume,
without loss of generality, that (1) launching a reward-based or a proﬁt-sharing crowdfunding
campaign is equally costly for the entrepreneur, and (2) participating in one or the other type
of campaign is a priori the same for the crowd.
By “freezing” the cost and the participation dimensions, the authors clearly want to focus
on another dimension of crowdfunding that they see as crucial, namely the relationship that
crowdfunding allows the entrepreneur to establish with the crowd. The key argument developed
in the paper is that this relationship diﬀers across crowdfunding models. That is, when choosing
one or the other form of crowdfunding, the entrepreneur also chooses what she can learn about
the crowd and what she can extract from them through the pricing of her product.
Indeed, the reward-based model of crowdfunding that the authors depict is based on pre-
ordering: the contributors are consumers who have a strong taste for the announced product
and who therefore decide to pre-order it, that is, to pay for it before it is actually produced.
The entrepreneur can reward the contributors in various ways, as described above; what matters
for the analysis is that these rewards (called “community beneﬁts”) increase the contributors’
willingness to pay for the product. It is assumed that this increase in willingness to pay is
proportional to the consumer’s taste for the product; that is, those consumers who like the
product the most are also those who value the rewards the most. As a result, this form of
crowdfunding allows the entrepreneur to segment her consumers into two groups: the early
contributors who signal themselves as high-paying consumers (and whose willingness to pay is
further enhanced by the value that they attach to the rewards), and the other, regular, consumers
who wait for the product to be put on the market before considering to buy it. The entrepreneur
can thus price discriminate between these groups, which has the potential to raise her proﬁts
as she is assumed to be in a monopoly position for her product.9However, the optimal price
discrimination scheme may not be feasible if the initial capital requirement is too high. The
obligation to ﬁnance the capital through pre-sales puts indeed a constraint on the price that can
8See also Sahm, Belleﬂamme, Lambert, and Schwienbacher (2014), which slightly corrects (and, thereby,
simpliﬁes) the analysis. Although entrepreneurs are the unit of decision in this analysis, one can easily repeat it
with platforms choosing between crowdfunding forms.
9We have here a form of behavior-based price discrimination (BBPD) as consumers self-select into one group
and are then charged a speciﬁc price corresponding to their choice; see, for example, Fudenberg and Villas-Boas
(2007) for a general analysis of BBPD and Belleﬂamme and Peitz (2010, chapter 10) for a textbook treatment.
be charged to those consumers who choose to pre-order the product.
The proﬁt-sharing model diﬀers with the reward-based model on two accounts. First, the
nature of contributions and compensations is diﬀerent: instead of pre-ordering the product, the
crowd is invited to directly provide a ﬁxed sum of money to the entrepreneur and is promised
a share of the future proﬁts in exchange. Second, contributors also enjoy community beneﬁts
but it is assumed here that these beneﬁts are independent of the contributor’s taste for the
product; this assumption makes sense as contributors are seen here as investors, who may well
decide to ﬁnance the venture without purchasing the product eventually.10 The implications
of these diﬀerences are the following. On the minus side, the entrepreneur is no longer able to
segment the crowd and, especially, to single out the high-paying consumers. On the plus side, all
individuals value community beneﬁts in the same way, which makes it easier for the entrepreneur
to capture this extra value; moreover, this ability to capture the value that contributors attach
to community beneﬁts is not impaired by the size of the capital requirement.
The comparison of the proﬁts that the entrepreneur can achieve under the two forms of
crowdfunding yields the main result of the analysis: the entrepreneur prefers the reward-based
model when the capital requirement is relatively small and the proﬁt-sharing model otherwise.
The intuition behind this result has been outlined above: pre-ordering in the reward-based model
allows the entrepreneur to practice price discrimination, which should give her a higher proﬁt
than in the proﬁt-sharing model (in which she is bound to set a uniform price for her product).
However, price discrimination is constrained, and thus less proﬁtable, when the initial capital
requirement grows larger than some threshold. Above this threshold, the proﬁt-sharing model,
which allows the entrepreneur to turn all individuals into investors, becomes the best option.
Ellman and Hurkens (2014) also examine a reward-based model that allows contributors to
pre-order the product, and where entrepreneurs can commit to produce only if aggregate funding
exceeds a deﬁned threshold. Yet, in their model, pre-ordering does not confer any additional
community beneﬁt. Their objective is to determine the optimal crowdfunding mechanism in the
presence of two conﬂicting forces: a high threshold allows the entrepreneur to set higher prices
for high type buyers, while a low threshold raises the probability of production.
3.1.2 Attracting other groups
Crowdfunding platforms may consider bringing an additional side on board, namely sophisti-
cated investors (such as venture capitalists, business angels, and institutional investors). Two
Belgian platforms have chosen this route: MyMicroInvest allows projects to be funded by the
crowd together with a professional venture capitalist; Angel.me has established a partnership
10Cholakova and Clarysse (2015) explore empirically the extent to which ﬁnancial or nonﬁnancial motivations
determine contributors’ decisions to invest for equity (in equity-based crowdfunding) or to pledge (in reward-based
with the bank Belﬁus. The objective is clear: the participation of sophisticated investors is
meant to reassure individual contributors in a market where the asymmetries of information
are quite pronounced (as explained in the next section). Because these investors have much
larger capacities and experience to investigate the reliability and success probability of proposed
projects, crowdfunders can infer useful information from the choices that these investors make.
The opposite may be true as well: sophisticated investors may use the “wisdom of the crowd”
as an indicator of the potential success of a new product (something that they may have a hard
time to evaluate otherwise).
A potential drawback of this strategy is that it may create conﬂicts of interest between the
two groups of investors. An important empirical question is then to measure the extent to which
the two groups complement or substitute each other; Hornuf and Schwienbacher (2014b) make
a ﬁrst step in that direction by focusing on equity crowdfunding and angel ﬁnance.
3.2 Governance strategies
In the case of crowdfunding platforms, governance decisions are generally geared to address issues
related to information asymmetries. As clearly explained by Agrawal et al. (2013), crowdfunding
faces the two typical asymmetric information problems of hidden information and hidden action,
which plague the relationship between entrepeneurs and contributors respectively before (“ex
ante”) and after (“ex post”) ﬁnancing takes place. Ex ante, contributors often lack the necessary
information to evaluate correctly how successful the proposed projects are likely to be. This can
lead to adverse selection and the well-known “lemon eﬀect” (see Akerlof, 1970): platforms only
manage to attract low-quality projects because high-quality entrepreneurs anticipate that they
will not be identiﬁed as such by the contributors and will therefore fail to raise the capital that
Ex post, a problem of moral hazard arises as contributors face diﬃculties to control whether
entrepreneurs exert the needed eﬀort to keep up with their promises. In this respect, the main
risks faced by contributors are delay in the delivery of the promised goods and services and,
worse, outright fraud. The money is usually raised up front and the likelihood that unscrupulous
entrepreneurs take advantage of contributors is in theory not negligible. Among the projects in
the Technology & Design category on Kickstarter, potential fraud was identiﬁed in only 14 out
of 381 projects, accounting for less than 0.5% of dollars in pledges (Mollick, 2014). However,
there are more concerns about the ability of entrepreneurs to deliver on their initial promises.
According to Mollick (2014), the majority of products are delivered late. Of the delayed projects,
the mean delay is 2.4 months. Empirical tests also suggest that larger projects tend to have longer
delays than smaller projects. Two reasons can be put forward to explain the evidence that many
entrepreneurs struggle to meet deadlines in delivering their product: (1) entrepreneurs tend to
be overoptimistic about outcomes,11 and (2) when unexpected success occurs, entrepreneurs
may face a range of problems such as shipping and manufacturing problems, changes in scale
and scope, administrative/certiﬁcation issues.
We review here some strategies that crowdfunding platforms implement to address these
Disseminate information. To reduce information asymmetries and let contributors make
more informed choices, crowdfunding platforms may collect and disseminate information about
entrepreneurs by themselves. The empirical study by Ahlers, Cumming, Gunther, and Schweizer
(2015) suggests that retaining equity, disclosure of detailed information about risk (e.g., ﬁnancial
forecasts), and internal governance (e.g., qualiﬁed board member, proper board structure) are
seen as eﬀective signals by the crowd and enhance the likelihood of funding success. In a
similar vein, Mollick (2014) uses the universe of projects on Kickstarter and shows interesting
correlations between funding propensity and quality signals, as captured by preparedness of
project pitches in terms of time and eﬀort. Some platforms also force entrepreneurs, whose
projects are deemed more risky, to disclose more information.
Combat fraud. Crowdfunding platforms often devote substantial resources to prevent and
detect potential fraud. For instance, hardware and product design projects on Kickstarter
require further detailed information about the products development and progress. With those
projects, entrepreneurs are also constrained in the number of rewards per pledge they can oﬀer
(to avoid delay or fraud). In the same vein, the publishing house Sandawe designs its contracts
with authors so as to have the exclusivity in the edition of the author’s comic book project.13
Provision point mechanism. Most platforms have implemented the “provision point mech-
anism”, whereby entrepreneurs only receive funds if the total contributions reach (or surpass) a
chosen threshold within a certain period of time; as pointed by Agrawal et al. (2013), contribu-
tors know with this mechanism that they will only provide funds for projects that will eventually
raise the capital that they need to be viable.
11This tendency is well documented in psychology. Indeed, most people display systematic planning fallacy
(Buehler, Griﬃn, and Ross, 1994) and unrealistically rosy views of their abilities and prospects (Weinstein, 1980).
12For a more systematic description of strategies addressing asymmetric information problems, see Belleﬂamme
et al. (2015).
13In general, outright fraud on crowdfunding platforms remains rare. It is only in May 2014 that a ﬁrst
consumer protection lawsuit involving crowdfunding was ﬁled in the United States (by the Washington State
Oﬃce of the Attorney General). The suit alleged that the company Altius Management failed to make good
on a successful Kickstarter campaign for a card game. In particular, after having collected the money, the
company neglected to deliver either the cards or the various backer rewards. See, e.g., www.geekwire.com/2014/
Facilitate the exchange of information among contributors. Free-riding among con-
tributors may worsen the hidden information problem: because contributors only have a small
stake, their incentive to investigate entrepreneurs may be low. As a result, the natural tendency
is to wait for the due diligence eﬀorts of other crowdfunders. Such a wait may lead to a mere
failure of projects (everyone waiting for someone else to make the ﬁrst move) or to information
cascades. Herd behavior is indeed observed on crowdfunding platforms because crowdfunders
take accumulated contributions as a signal of quality. For such cascades to be eﬃcient, early
contributors must have carefully screened the proposed projects. Otherwise, the risk is that ev-
eryone bets on the wrong horse because the ﬁrst contributors made their decision carelessly. By
disseminating more precise information about entrepreneurs and their projects, crowdfunding
platform may mitigate the latter risk.
What do we observe in practice? On a lending platform, Zhan and Liu (2012) observe
that well-funded borrowers tend to attract more funding and ﬁnd evidence of herding among
lenders. On a proﬁt-sharing platform in the recording industry, Agrawal et al. (2011) show that
individuals are more likely to invest if the funding goal is almost reached. Although herding
patterns are found in proﬁt-sharing and lending-based platforms, contributor support over time
on reward-based platforms – such as Kickstarter – is bathtub shaped. This means that projects
typically get a lot of ﬁnancial support in the early and last weeks of their funding cycle, consistent
with bystander eﬀects (Kuppuswamy and Bayus, 2013).
Act as trusted intermediary. Finally, crowdfunding platforms can tackle information asym-
metry by acting as trusted intermediaries. Their objective is to become bearers of reputation
and, thereby, eﬀectively certify the quality and reliability of the projects that they take on board.
To do so, platforms must carefully screen projects so as to accept only the high-quality ones.
They should also try, from an ex post point of view, to make sure that funded entrepreneurs
deliver on their commitments. The reason is simple: a project accepted on the platform is
believed to be of high quality by a contributor unless he/she previously experienced low quality
of some other project proposed on the platform; hence, to avoid any stain on its reputation,
the platform must keep away from low quality projects. Understanding that, entrepreneurs do
not ﬁnd it proﬁtable to try to have low quality projects funded, implying that only high quality
projects are eventually proposed on the platform. In a nutshell, the platform can be trusted
simply because it suﬃces to have one rotten apple in the bag to spoil the rest of them in no
time, something that crowdfunding platforms simply cannot aﬀord. In practice, crowdfunding
platforms are aware of the importance of acting as trusted intermediaries. For instance, MyMi-
croInvest publishes on its website a Code of ethics, which stresses the values that the platform
itself and the entrepreneurs it selects commit to abide by. Similarly, Fr´ed´eric L´evy Morelle,
founder and manager at Look&Fin, mentioned in a recent interview about the ﬁrst year of ex-
istence of his platform: “We have received more than 120 ﬁles and if we only kept 5 of them, it
was because we wanted to keep our independence and to take the time to select the right projects
on which our investors would take a limited risk.” 14
4 Competition among crowdfunding platforms
We have explained above that crowdfunding platforms facilitate the interaction between con-
tributors and entrepreneurs, with the participation of each group reinforcing the other’s. The
presence of such positive cross-side network eﬀects on both sides of a platform is a powerful
force towards the concentration of the crowdfunding market: big platforms tend to become even
bigger, whereas small platforms face a downward spiral, which will eventually lead them to leave
the market. Economies of scale in the operation of crowdfunding services (e.g., due diligence
eﬀorts and project screening) further contribute to this “winner-takes-all” market conﬁguration.
However, some forces may play in the opposite direction and favor the coexistence of several
crowdfunding platforms. First, we have mentioned above that contributors may have reasons
to prefer smaller platforms (i.e., platforms attracting fewer entrepreneurs, thereby raising the
prospect for each contributor to be pivotal for the existence of any particular project). We
also evoked the negative within-side eﬀects among entrepreneurs: they may also prefer smaller
platforms where competition for funds may be relaxed.
Second, like in any market, diﬀerentiation allows ﬁrms to coexist. In the crowdfunding mar-
ket, diﬀerentiation is mostly horizontal: platforms diﬀerentiate in terms of business model (e.g.,
reward-based versus equity), sector of activity (e.g., artistic creations, innovating companies).
For instance, on the Belgium crowdfunding market, MyMicroInvest proposes an equity-based
model and focuses on new ventures with a clear innovative content, whereas Look&Fin oﬀers a
More contentious is the possibility for crowdfunding platforms to diﬀerentiate on a geo-
graphical basis. On the one hand, as these platforms use the Internet, they can easily cross
geographical borders, meaning that competition should be global rather than local. On the
other hand, crowdfunding regulations still largely diﬀer across countries and the social aspect of
crowdfunding may favor interaction among entrepeneurs and contributors located in the same
region. The study by Agrawal et al. (2011) interestingly suggests that the two conﬂicting forces
are simultaneously at play. They uncover that artists and contributors on Sellaband are on
average distant by approximately 3,000 miles, suggesting attenuation of the links between spa-
tial proximity and funding. Still, geography does matter at early ﬁnancing stage. The latter
14Original quote: “Nous avons re¸cu plus de 120 dossiers, et si nous n’en avons retenu que 5, c’est pour
garder notre ind´ependance, et pour prendre le temps de s´electionner de bons dossiers sur lesquels les investis-
seurs prendront un risque limit´e.”www.lecho.be/dossier/techno/Les_defis_du_crowdfunding_en_Belgique.
9389750-7342.art (published online on August 19, 2013).
geography eﬀect is driven by investors who have a personal tie with the artist (the so-called
“friends and family”). While the latter empirical evidence is robust, the eﬀect of geography on
entrepreneurs is less clear cut. Mollick’s (2014) exploratory study contains a very preliminary
eﬀort in that direction. It shows that geographic clusters are still apparent in crowdfunding and
determine the type of crowdfunded project and the success in raising funds.
In view of these conﬂicting forces and of the fact that the crowdfunding market is still in
its infancy, it is hard to predict how it will evolve. It is, however, quite clear that among the
500 or so crowdfunding platforms that were listed in 2013 (see Massolution, 2013), many will
quickly disappear because they will have failed to reach a critical mass of either contributors
or entrepreneurs, or failed to ﬁnd the right business model to monetize the interaction between
the two sides. For instance, among the 70 crowdfunding platforms that existed in France in
2014, 30 started their activity in 2014, 4 ceased their activity in 2014 (for 7 in 2013), about 10
accounted for more than 85% of transactions, and only 2 were proﬁtable.15 Another illustration
of such failure on the Belgian crowdfunding market is Akamusic, which created Akastarter to
further develop its business model by enlarging its ﬁeld of activity, but failed to reach a suﬃcient
number of projects to be proﬁtable and allow the continuation of its business. In contrast, it is
also likely that platforms that are currently successful will extend their activities. The obvious
example is the US-based Kickstarter that now intends to set up in Continental Europe (starting
with the Netherlands) so as to enlarge its base of proposed projects (and thereby further fuel
the positive reinforcing eﬀects between the two sides of the platform).16
To date, research about crowdfunding – mostly empirical – has brought important insights into
the role and behavior of entrepreneurs and contributors. No less important though, crowdfunding
platforms have received less attention. While early empirical ﬁndings on crowdfunding provide
signiﬁcant advances, we think that important theoretical eﬀorts have still to be made to better
understand the underlying logic of the dynamics of crowdfunding, in particular regarding the
roles and strategies of crowdfunding platforms. This chapter is an attempt in this direction:
we have examined how advances in the theory of multisided platforms can be applied to shed
insightful light on the working of crowdfunding platforms.
As food for thought for future research, we would like to stress the following points. After
a few years of existence, crowdfunding is surely becoming an important alternative method of
15See www.usine-digitale.fr/article/crowdfunding-vers- une-concentration-du- secteur.N240679 and
www.edubanque.com/actualites/entrepreneurs/1187-l-industrie-du- crowdfunding.html (last consulted
16While Kickstarter has been accepting contributors from all over the globe for some time now, only en-
trepreneurs in the United States, the United Kingdom, Canada, Australia and New Zealand were allowed to
actually create campaigns.
ﬁnancing. We think that two features are instrumental in this development. First, crowdfund-
ing has implications that go beyond the ﬁnancial sphere: on the one hand, it is a vector by
which information can ﬂow between entrepreneurs and contributors (e.g., marketing and signal-
ing dimensions); on the other hand, crowdfunding cleverly leverages the contributors’ extrinsic
and intrinsic motivations by complementing monetary compensations with community beneﬁts.
Second, crowdfunding platforms provide new and inventive ways to match entrepreneurs and
contributors, and to reduce information-related market failures.
Clearly, the latter two features have been made possible by the development of the Internet.
Therefore, the current success of crowdfunding blatantly shows that the traditional ﬁnancial
sector, concentrated in bodies such as stock exchanges and banks, can no longer ignore the
potential of Internet for its future evolutions. Internet is a general-purpose technology that has
already triggered a number of important (r)evolutions. Think, for example, of the eﬀects of dig-
ital piracy on cultural industries or of the so-called “sharing economy” (with platforms like Uber
or Airbnb) on the transportation and traveling industries. What crowdfunding demonstrates is
that similar forces threaten the traditional ﬁnancial sector as it is now possible to “desinterme-
diate” or “debank” the ﬁnancial system by letting individuals and ﬁrms interact more directly
and (at least partially) bypass traditional intermediaries. Future research is therefore in order
to address all the issues that this new trend inevitably raises.
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