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The Supply Side: Profiling Crowdfunders

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Abstract

The digitalization revolution has significantly altered conditions for financing new and small firms. Crowdfunding is at the forefront of this movement. While research in this area has increased significantly, it is heavily fragmented. Reflecting on this, the Handbook of Research on Crowdfunding reviews and synthesizes current knowledge on crowdfunding finance and provides an agenda for further research. This Handbook covers the role of crowdfunding and the platforms used, as well as discussing the characteristics of crowdfunders themselves and the businesses that seek finance from the ‘crowd’. It also investigates the process once crowdfunding is complete, and how it is used by non-profit, social and creative ventures as well as for-profit businesses. Potential negative aspects are also discussed, including inequality, risk, fraud and regulation. Finally, the future of crowdfunding, including new finance models, is outlined. Bringing together a wealth of previously fragmented knowledge, this Handbook is a key reference for all entrepreneurial finance researchers as well as those interested in the effects of crowdfunding more generally across entrepreneurship, innovation, management and economics.

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... It is essential to explore investors' perspective, meaning what motivates investors and whether their motives are eventually satisfied. Interestingly enough, this is an area so far largely neglected (Katzenmeier et al., 2019;Mochkabadi & Volkmann, 2020;Schwienbacher, 2019), which deserves exploration also because of the unbalanced relationship between the entrepreneur and the equity crowdfunders. ...
... All "All that glitters is not gold!": The (Unexplored) Determinants of Equity Crowdfunding in all, evidence suggests that there might be additional nuances to the crowd's investment decision (Katzenmeier et al., 2019;Lukkarinen, 2019) aside a pure financial motivation. Thus, past research proposed alternatives: Goethner et al. (2021) classifies investors according to their approach and investment strategies (Casual Investors, Crowd Enthusiasts, and Sophisticated Investors) and Feola et al. (2019) claim that investors are more heterogeneous than we think and assign diverse levels of importance to investment drivers. ...
... All those considerations lead us to develop our first proposition: P1: Equity crowdfunders' investment decisions may be driven by the search for financial benefits or reliefs, or may display high risk appetite, search for Unicorns, or self-efficacy bias. Estrin et al. (2018) argue that the willingness to help the entrepreneurs and being part of a project can influence equity crowdfunding investment decisions and Katzenmeier et al. (2019) point at the importance of personal enjoyment and identification. Thus, the crowd might also consider non-utilitarian motives when investing as emotional ones (Statman, 2017). ...
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Plain English Summary Our research presents a novel framework that delves into the intricacies of the investment experience of equity crowdfunders. We examine the underlying motives that drive their investment decisions (utilitarian, emotional and expressive), the corresponding behavioral patterns, and the challenges that they encounter along the way. Drawing on the principles of behavioral finance, we contend that the success of equity crowdfunding as an alternative funding source for entrepreneurial firms hinges on the platform's ability to meet the diverse investment motives of the crowd across different stages of the investment process. To illustrate our argument, we conducted a netnographic analysis of a UK-based online community of equity crowdfunders. Our findings expose the adverse effects of a lack of monetization and low economic returns on the utilitarian motives of investors, leading to a diminished level of satisfaction. Additionally, we reveal that the difficulties investors face in interacting with entrepreneurs and platforms, coupled with the challenges of presenting themselves as experts, supporters of valued projects, or successful crowdfunders, can hamper the expressive and emotional motives of investors, resulting in dissatisfaction. Such challenges have the potential to erode the future interest of equity crowdfunders in the platform, undermining the viability of equity crowdfunding as a funding source for entrepreneurial firms. Our framework offers valuable insights into the factors that shape the investment experience of equity crowdfunders, providing testable propositions and highlighting the importance of addressing the identified issues to ensure the long-term sustainability and success of equity crowdfunding as a funding avenue for entrepreneurial firms.
... Crowdfunders are a new type of capital provider and the first question one might ask is: who are they? Not surprisingly, they tend to be a very heterogeneous group of investors in terms of gender, age, education, and occupation (Katzenmeier et al., 2019). Crowdfunders are predominantly male across reward, lending, and equity platforms, with a larger share of female crowdfunders in donation platforms. ...
... The study by Katzenmeier et al. (2019) revealed that crowdfunders across various types of platforms show some common driving forces for making their investments, for example, they strive to be the first to consume a product, to help others, and they like novel ways of allocating their investments. More specifically, we can identify a couple of driving forces behind crowdfunding investments, which are a mix of: ...
... Lenders on loan-based platforms will strongly explore the financial metrics, but also emphasize the purpose of the loan, and the trustworthiness of the project. Finally, investors on equity-based platforms will scrutinize the financial aspects of the project -financial metrics and equity retention -but also the experience of the management team and attractiveness of the product (Katzenmeier et al., 2019). ...
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Book
I: Background.- 1. An Introduction.- 2. Conceptualizations of Intrinsic Motivation and Self-Determination.- II: Self-Determination Theory.- 3. Cognitive Evaluation Theory: Perceived Causality and Perceived Competence.- 4. Cognitive Evaluation Theory: Interpersonal Communication and Intrapersonal Regulation.- 5. Toward an Organismic Integration Theory: Motivation and Development.- 6. Causality Orientations Theory: Personality Influences on Motivation.- III: Alternative Approaches.- 7. Operant and Attributional Theories.- 8. Information-Processing Theories.- IV: Applications and Implications.- 9. Education.- 10. Psychotherapy.- 11. Work.- 12. Sports.- References.- Author Index.
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We estimate risk aversion from investors' financial decisions in a person-toperson lending platform. We develop a method that obtains a risk-aversion parameter from each portfolio choice. Since the same individuals invest repeatedly, we construct a panel data set that we use to disentangle heterogeneity in attitudes toward risk across investors, from the elasticity of risk aversion to changes in wealth. We find that wealthier investors are more risk averse in the cross section and that investors become more risk averse after a negative housingwealth shock. Thus, investors exhibit preferences consistent with decreasing relative risk aversion and habit formation.
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Many entrepreneurs are struggling with the question of how to deliver a successful fund-raising pitch on crowdfunding platforms. In this study, we focus on the linguistic style of crowdfunding pitches and how such a style relates to the success in raising funds. Based on the language expectancy theory, we hypothesize that the importance of linguistic style depends on whether an entrepreneur belongs to an emergent category of new ventures (social entrepreneurs) or to an established category (commercial entrepreneurs). In particular, social entrepreneurs need to compensate for their incomplete social categorization and the related ill-formed expectations by relying more extensively on linguistic style to attract funding. Empirical analyses of 656 Kickstarter campaigns demonstrate that linguistic styles that make the campaigns and their founders more understandable and relatable to the crowd boost the success of social campaigns, but hardly matter for commercial campaigns.
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This study draws upon affective events theory, research regarding funders' perceptions, and research regarding expectation alignment between products and their presenters to develop and test an indirect effects model of crowdfunding resource allocation decisions. To test our hypothesized relationships, we drew upon a sample of 102 participants who each assessed ten different product pitches made by ten different entrepreneurs. Results from the study indicate that perceived product creativity is positively related to crowdfunding performance, both directly and indirectly, via positive affective reactions of prospective funders. Moreover, we find the indirect effect of product creativity is contingent upon the extent to which funders perceive an entrepreneur to be passionate, such that perceived entrepreneurial passion increases the positive nature of the indirect effect. Implications for future theory development, empirical research and implications for practitioners are discussed as well.
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This study investigates the advocates of crowdfunding projects. Advocates refer to individuals who have invested in a project, and the information of such endorsement is spread through their social networks. By using a combined set of sizable data, this research empirically examines the relationships between two attributes of advocates, namely their geographical distance and social capital, and funding performance. Results reveal that higher funding can be secured with advocates who are (1) of further geographical distance and (2) of higher social capital. Additionally, the relationship between advocates’ social capital and funding performance is further enhanced with a lower geographical propinquity.
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Crowdfunding has grown quickly and attracted significant scholarly attention. However, the diverse approaches to crowdfunding that have emerged, as well as the uncertain relationship of these approaches to the umbrella concept of crowdsourcing, means it is not clear to what extent crowdfunding presents theoretically novel behaviours, nor what those behaviours may be. This study addresses this lack of clarity through a metatriangulation of 120 peer-reviewed studies on crowdfunding. These studies are distributed across the four dominant paradigms of crowdfunding, namely crowd lending, crowd equity, crowd patronage, and crowd charity. Research for each paradigm is analysed separately to determine the topics of interest, the dominant theoretical perspectives, the methods employed, and the most common focus of analysis. We bridge these paradigms to identify three common variables relating to funding behaviours and three relating to impact. Of these, we argue that two are fundamentally novel and under-researched, namely the ‘erosion of organisations’ financial boundaries’ and ‘paying to participate’. The implications of these findings are discussed for crowdfunding and crowdsourcing.
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Individuals' actions in online social contexts are growing increasingly visible and traceable. Many online platforms account for this by providing users with granular control over when and how their identity or actions are made visible to peers. However, little work has sought to understand the effect that a user's decision to conceal information might have on observing peers, who are likely to refer to that information when deciding on their own actions. We leverage a unique impression-level data set from one of the world's largest online crowdfunding platforms, where contributors are given the option to conceal their username or contribution amount from public display, with each transaction. We demonstrate that when campaign contributors elect to conceal information, it has a negative influence on subsequent visitors' likelihood of conversion, as well as on their average contributions, conditional on conversion. Moreover, we argue that social norms are an important driver of information concealment, providing evidence of peer influence in the decision to conceal. We discuss the implications of our results for the provision of online information hiding mechanisms, as well as the design of crowdfunding platforms and electronic markets more generally.
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In recent years, the growing success of social media has led to a proliferation of social information such as customer product reviews and product ratings in electronic markets. While this information can serve as a quality signal and help consumers to better assess the quality of goods before purchase, its impact on consumer decision-making also incentivizes sellers to game the system by creating fake data in favor of specific goods in order to mislead consumers deliberately. Consequently, consumers could make suboptimal decisions or choose to disregard social information altogether. Although few studies have been devoted to identifying fake quantitative social information such as fake product rankings and ratings, tracing and examining the effects of such fake information on consumers' actual financial decision-making over time has thus far received only little research attention. In this exploratory study, we assess the effects of non-genuine social information on consumers' decision-making in the context of reward-based crowdfunding. Specifically, we capture unnatural peaks in the number of Facebook Likes that a specific crowdfunding campaign receives on the platform Kickstarter and observe subsequent campaign performance. Our results show that fake Facebook Likes have a very short-term positive effect on the number of backers funding the respective crowdfunding campaign. However, this short-term peak is followed by an immediate, sharp drop in the number of backers funding the campaign reaching levels that are lower than prior to the occurrence of the non-genuine social information, leading to a total negative effect over time. We further reveal circumstances that foster this artificial manipulation of quality signals, including market and campaign characteristics. Key implications for research and practice are discussed.
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Over the past 15 years, digital media platforms have revolutionized marketing, offering new ways to reach, inform, engage, sell to, learn about, and provide service to customers. As a means of taking stock of academic work’s ability to contribute to this revolution, this article tracks the changes in scholarly researchers’ perspectives on three major digital, social media, and mobile (DSMM) marketing themes from 2000 to 2015. The authors first use keyword counts from the premier general marketing journals to gain a macro-level view of the shifting importance of various DSMM topics since 2000. They then identify key themes emerging in five-year time frames during this period: (1) DSMM as a facilitator of individual expression, (2) DSMM as decision support tool, and (3) DSMM as a market intelligence source. In both academic research to date and corresponding practitioner discussion, there is much to appreciate. However, there are also several shortcomings of extant research that have limited its rel...
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Scholars of the theory of the firm have begun to emphasize the sources and conditions of what has been described as “the organizational advantage,” rather than focus on the causes and consequences of market failure. Typically, researchers see such organizational advantage as accruing from the particular capabilities organizations have for creating and sharing knowledge. In this article we seek to contribute to this body of work by developing the following arguments: (1) social capital facilitates the creation of new intellectual capital; (2) organizations, as institutional settings, are conducive to the development of high levels of social capital; and (3) it is because of their more dense social capital that firms, within certain limits, have an advantage over markets in creating and sharing intellectual capital. We present a model that incorporates this overall argument in the form of a series of hypothesized relationships between different dimensions of social capital and the main mechanisms and processes necessary for the creation of intellectual capital.
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An extensive literature in economics and finance has documented home bias, the tendency that transactions are more likely to occur between parties in the same geographical area rather than outside. Using data from a large online crowdfunding marketplace and employing a quasi-experimental design, we find evidence that home bias still exists in this virtual marketplace for financial products. Furthermore, through a series of empirical tests, we show that rationality-based explanations cannot fully explain such behavior and that behavioral reasons at least partially drive this remarkable phenomenon. As crowdfunding becomes an alternative and increasingly appealing channel for financing, a better understanding of home bias in this new context provides important managerial, practical, and policy implications.
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Crowdfunding has matured into a meaningful online marketplace, both for traditional ecommerce activities and for charitable fundraising. For charities, crowdfunding presents novel donation behaviors, including those where donors may proactively seek out causes and give (often anonymously) to help others with whom they share little social connectivity. Understanding these behaviors is challenging compared to traditional fundraising, where charitable giving is partly explained by factors such as guilt avoidance, reciprocity, image, vicarious enjoyment, and group-level benefits. This suggests some subset of charitable motivations is brought uniquely into focus in crowdfunding marketplaces. These marketplaces are often inhabited by fundseeking individuals and larger formal organizations. This adds further complexity, given donors traditionally perceive and interact differently with charitable organizations and less formal fundraising entities. This study explores donation behavior in charitable crowdfunding based on the distinction between ‘pure altruism’ and ‘warm glow’ motivations. We offer a discriminatory model of donation behaviors towards individuals and organizations, which is then tested in a large-scale field study of Razoo.com. Findings suggest donations to organizations are more influenced by outcome-related factors, such as fundraising targets and the likelihood of meeting that target, while donations to individuals are more influenced by interaction-related factors, such as the level of dialogue around a campaign.
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Crowdfunding has recently become available for entrepreneurs. Most academic studies analyse data from rewards-based (pre-selling) campaigns. In contrast, in this paper we analyse 636 campaigns, encompassing 17,188 investors and 64,831 investments between 2012 and 2015, from one of the leading European equity crowdfunding platforms. We provide descriptive statistics and carry out cross-campaign regression analysis. The descriptive statistics address its size, growth and geographic distributions in the UK. The regressions analyse which factors are associated with the probability of a successful campaign. We find some similarities and some interesting dissimilarities when comparing the descriptive statistics and regression results to research on rewards-based crowding. The data show that equity crowdfunding will likely pose great challenges to VC and business angel financiers in the near future. We discuss some research challenges and opportunities with these kind of data.
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Information asymmetry presents a challenge to equity crowdfunding just as in other markets for equity capital. Investors are less likely to finance startups when it is difficult to assess quality. Syndicates reduce market failures caused by information asymmetry by shifting the focal investment activities of the crowd from startups to lead investors. Syndicates align the incentives of issuers, lead investors, and follow-on investors by providing incentives for lead investors to conduct due diligence, monitor progress, and exploit their reputation. Preliminary evidence foreshadows a meaningful role for syndicates in the allocation of capital to early-stage ventures.
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In crowdfunding, rewards can make or break success. Yet reward design, choice, and planning still occur based on availability rather than strategy. To address this challenge, this article provides an empirically derived crowdfunding reward toolbox offering guidance in strategically selecting rewards. Based on a large-scale analysis of successful and unsuccessful Kickstarter projects, this article classifies rewards that are currently offered along eight dimensions. It identifies emerging patterns and derives five strategic core tools and two add-on tools. Finally, it delivers exploratory insights into the relative effectiveness of different tools that can facilitate decision making and strategic planning for entrepreneurs and individuals who plan to launch a crowdfunding project and who seek ways to reward their supporters. This is where the publisher says you should go to get the full text: For educators who are looking for a complimentary review copy: Harvard for Educators OR Study.Net For non-educators: Harvard Business Review OR Study.Net OR University Readers
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This study develops a crowdfunding sponsor typology based on sponsors’ motivations for participating in a project. Using a two by two crowdfunding motivation framework, we analyzed six relevant funding motivations—interest, playfulness, philanthropy, reward, relationship, and recognition—and identified four types of crowdfunding sponsors: angelic backer, reward hunter, avid fan, and tasteful hermit. They are profiled in terms of the antecedents and consequences of funding motivations. Angelic backers are similar in some ways to traditional charitable donors while reward hunters are analogous to market investors; thus they differ in their approach to crowdfunding. Avid fans comprise the most passionate sponsor group, and they are similar to members of a brand community. Tasteful hermits support their projects as actively as avid fans, but they have lower extrinsic and others-oriented motivations. The results show that these sponsor types reflect the nature of crowdfunding as a new form of co-creation in the E-commerce context.