How to Make Crowdfunding More Transparent and Social

ACCORDING TO A STUDY PUBLISHED IN MARKETING SCIENCE, PLATFORMS COULD MAKE THE PROCESS MORE EFFICIENT AND IMPROVE THE SUCCESS RATE OF FUNDING BY PROVIDING MORE INFORMATION ABOUT INVESTORS WHO HAVE ALREADY SUPPORTED A PROJECT. THIS WOULD TRIGGER A FOLLOWING AND IMITATION PROCESS

The crowdfunding process can be made more efficient by recognizing its social dimension, according to a study by Andrea Ordanini (Department of Marketing at Bocconi) and scholars from the City University of New York and the University of Maryland, published in Marketing Science.
 
Crowdfunding is the financing of new ventures through fundraising from a large number of people, usually with the intermediation of specialized platforms. In 2018, according to the most reliable estimates, more than 10 billion dollars were raised through crowfunding.
 
By analyzing the dynamics of a sample of successful and unsuccessful projects on the specialized platform Sellaband (music projects), the authors formalize the dynamics of the crowdfunding process in three phases. In the “friend-funding” phase, new projects are normally financed only by the people closest to their promoters; in the second phase, “getting crowded”, the base of investors in the most credible projects widens and, in the wake of this enlargement, in the third “race to goal” phase, the required amount is reached – often quickly.
 
“The most delicate phase is the second one”, explains Professor Ordanini. “In this phase many collections get stuck, in a no-man's land still far from the objectives. While the first funding is relatively easy to raise, at this stage potential investors often remain at the window, trying to understand from the behavior of others what the real potential of the new project is”. It is for this reason, the authors suggest, that the platforms would do well to provide more information on previous investments raised. When such information is available, there may be a imitation or following behavior, similar to that of social media. “If I think that the first investors have attitudes or profiles similar to mine or have shown good instincts in the past, I will be more inclined to invest,” continues Prof. Ordanini.
 
The most critical point, in the decision to invest in a new project, is in fact uncertainty. Crowdfunding platforms try to reduce such uncertainty by providing detailed information about the project and its promoters, but that may not be enough. Information about who has already invested in the project can help dispel the uncertainty, directing each project more quickly towards success or failure.  Even when information about investors has the effect of inducing others not to invest, the crowdsourcing platform avoids the excess of projects stranded in the second phase of crowdfunding. This brings the most valuable projects to the third phase faster, with a better chance of success.
 
“This kind of transparency that improves efficiency,” concludes Prof.  Ordanini, “is not widespread. It could be an additional service provided by the platforms and would help make crowdfunding more popular”.
 
Chul Kim, P. K. Kannan, Michael Trusov, Andrea Ordanini (2020), “Modeling Dynamics in Crowdfunding”, in Marketing Science 39(2):339-365, doi: 10.1287/mksc.2019.1209.

by Fabio Todesco