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«WHAT DO WE KNOW ABOUT CROWDFUNDING? A REVIEW AND A RESEARCH FRAMEWORK Chenwei Li, Department of Information Systems, City University of Hong Kong, ...»

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Chenwei Li, Department of Information Systems, City University of Hong Kong, Hong Kong,


Chong Wang, Department of Information Systems, City University of Hong Kong, Hong

Kong, alex.wang@staff.cityu.edu.hk

Wei T. Yue, Department of Information Systems, City University of Hong Kong, Hong Kong,

Wei.T.Yue@cityu.edu.hk Abstract Crowdfunding is an innovative financing model which has been growing rapidly and received a lot media attention. Being an innovative solution for financial needs of entrepreneurs and individuals, it is believed that crowdfunding is going to have major impacts on the financial industry. Theoretical and empirical research works are thus called for to deepen our understanding about crowdfunding. In this review, we first discuss the common funding processes and business models related to the current crowdfunding practice. We then review the existing literature and discuss potential research directions based on our proposed research framework.

Keywords: Crowdfunding, P2P lending, Crowdfunders, Entrepreneurs, Platforms.


Crowdfunding is an innovative solution to personal and entrepreneurial financial needs. This form of funding model is growing rapidly and spreading around the world. According to a recent report, crowdfunding has reached over 90% of the Internet population (The Crowd Data Center 2014). There are 500 new projects created every day, which translates to a new crowdfunding project is being created in every three minutes. Enabled by the Internet, crowdfunding utilizes the Internet (platforms) to initiate an open call for funding (Belleflamme et al. 2014). Unlike the traditional funding channels, this kind of model allows a project to engage a large number of potential funders by utilizing the Internet platform. In many instances, funding requirements are met with a majority of funders each contributed a small amount of funds to a project.

The purpose of this article is threefold. First, we clarify the process of crowdfunding, differentiate it from traditional funding channels, and categorize the crowdsourcing platforms.

Second, we provide a systematic review of the literature to consolidate the existing knowledge 1. Based on our review, we aim to discuss issues from the perspectives of the various stakeholders that are prominent in the crowdfunding eco-system. We also provide ideas for further research. Lastly, we conclude this article.


The crowdfunding industry emerges through the combination of two innovative concepts, crowdsourcing and micro-finance. Crowdsourcing refers to the practice of outsourcing tasks to a large number of individuals, typically by creating or using Internet platforms (Hemer 2011). Micro-finance refers to financial services provided to individual, start-up entrepreneurs and small businesses who otherwise may not have access to capital. Crowdfunding integrates the ideas of these two innovative models and offers a new fund raising approach via the Internet.

2.1 Crowdfunding Process Most of the crowdfunding platforms share common features in their funding processes. A typical funding process begins with a seeker (registered user of the platform) initiating a request for funding by indicating the purpose of the request, the amount needed and the forms of returns or rewards for the funders. After the creation of a funding request, the platform will make necessary verifications of the project request before announcing the request publicly.

The platform will keep the request open for a period of time during which potential funders (registered users of the platform) could commit their investments to fund the project. In some cases, a project can provide a list of different rewards, and funders of the project can indicate their preference on rewards and investment amount. After the funding solicitation period ends, the invested funds (that met certain pre-specified conditions) will be transferred to the seeker.

The rewards will then be paid to the funders at the agreed time. During this process, the platform also facilitates other additional exchange of information between funders and seekers.

There are a few review works that summarize existing works, we complement their effort to provide a more thorough and systematic treatment of the literature.

2.2 Crowdfunding Platforms

Depending on the funding model, we categorize crowdfunding platforms into four types:

donation-based crowdfunding, reward-based crowdfunding, debt-based crowdfunding and equity-based crowdfunding following order of flexibility. In the donation-based model, funders do not seek returns from the project that they help to fund. They are driven by a sense of responsibility to contribute for charitable causes. Reward-based crowdfunding platform allows fund seeker to promise non-monetary rewards to the funders, ranging from "prepurchase" of products in development to souvenir and experience. Debt-based crowdfunding model (a.k.a., peer-to-peer lending), is the practice that a pool of funders collectively lend money to a seeker and expect the seeker to repay the loan with interests. Equity crowdfunding model is mainly designed for start-ups and small businesses to raise funds by offering shares to the funders. This type of crowdfunding model is typically subjected to the supervision of a country’s security and financial department as it involves equity transaction.

2.3 Research Framework

To organize the existing and future theoretical research on crowdfunding, we adopt the stakeholder view and propose a conceptual framework for the crowdfunding ecosystem, as shown in Figure 1. According to Freeman (2010), stakeholders of an organization (in our case, the crowdfunding platform) are groups and individuals who are participants in the process of achieving the organization’s objective. Based on our review of general practice of crowdfunding activities, we identify four major stakeholders, namely, the investors (crowdfunders), the fund seekers (entrepreneurs, borrowers, etc.), the platform, and the governments that represent the interest of the general public and oversee the financial market operations.

Figure 1. Crowdfunding Ecosystem


This section reviews the existing literature on crowdfunding and proposes some future research directions on the topic. We organize the discussions according to the conceptual proposed framework.

3.1 Understanding Funders in Crowdfunding Many of the early research have focused on what motivates crowdfunders to participate in this type of funding process. One important finding from these studies is that crowdfunders are not motivated solely by extrinsic rewards, whether they are in the form of products or financial return. Intrinsic motivations, such as fun to invest, curiosity, altruism, reciprocity, and identification, can also motivate the funders to invest in a project (Bretschneider et al.

2014). Participation in crowdfunding activities is social and investors derive community benefits (Belleflamme et al. 2014). Agrawal et al (2014) find that family members and friends are important source of funds in reward-based crowdfunding projects, which indicates social relationship could motivate funding behavior. Liu et al. (2014) show that close offline friends act as financial “pipes” on P2P lending platforms as they are more likely to offer loans.

Burtch et al. (2014) find that, on Kiva.com, lenders prefer borrowers who are geographically or culturally proximal. Similarly, using data from Prosper.com, Lin and Viswanathan (2014) confirm the existence of “home bias”, that is, lending transactions are more likely to occur between parties in the same country or state.

Crowdfunders also care about whether the project they help to fund would succeed. Indeed, their collective judgements have been found to be a good indicator of project success (Herzenstein et al. 2011; Mollick & Nanda 2014). Investors often assess the quality of investment opportunities taking into consideration the information provided on the platform, such as credit evaluation, financial information of projects. Comparing to professional investors, crowdfunders are more likely to rely on less objective information and assess creditworthiness based on their perceptions (Iyer et al. 2009; Yum et al. 2012). Unverifiable information disclosure by the seekers is shown to increase chance of the project getting funded and may also lead to reduction in interest rate (Herzenstein et al. 2011; Michels 2012).

Meanwhile, crowdfunders tend to follow funding choices of others. Shen et al. (2010) find evidence that crowdfunders may not strictly make their decisions based on the trade-off between risk and return but also take the decisions of others into consideration. Zhang and Liu (2012) find that well-funded borrowers are likely to attract more funds in P2P lending. Liu et al. (2014) observe a “relational herd” effect in P2P lending, that is, crowdfunders follow their close friends’ investment decisions. Yum et al. (2012) find that lenders are more likely to react to social influence when there is a lack of objective information on creditworthiness of the seekers. Agrawal et al. (2014) show that crowdfunders are more likely to invest in projects that near its funding goal. Herzenstein et al. (2011) find that while lenders do bid on projects that received more bids in the past, they only do it to the point at which the projects receive full funding. Further, Kuppuswamy and Bayus (2014) discover that funding exhibit a “bathtub” shape, that is, investments are more intensive in the early and last weeks of the funding window, which is consistent with the prediction of a bystander effect.

Next Step It has been demonstrated that extrinsic motivations (direct rewards) are important drivers for funders to participate in crowdfunding. Additional research is needed to deepen our understanding about the design of rewards that better fits the heterogeneous preference of crowdfunders and how reward preference shapes the investment pattern. Meanwhile, past experience and prior social interactions have been demonstrated as influential in crowdsourcing platforms. Given its social nature, it is interesting to understand how online social interactions and community building shape investment decisions beyond offline social relationships. Further, impacts of additional psychological states or traits, such as privacy concern and risk preference, are potential topics that can be further investigated.

Like any investment, crowdfunding exposes funders to risks of financial (and psychological) losses. Existing discussions about risk exposure mostly focus on risk evaluation using information provided by the website and by observing others’ investment decisions. Future research could study how funders manage their risk exposure and how risk management capabilities influence funding activities.

3.2 Guiding Seekers in Crowdfunding

The primary goal of seekers in crowdfunding market is to achieve their funding goal. Existing research shed lights on how seekers could improve the chance of their project being successfully funded.

First, information provision is beneficial to seekers. Ahlers et al. (2012) show that careful elaboration on the projects’ plan, such as financial roadmaps, risk factors and internal governance, reduces the perceived risks. Announcing the seed money received at an appropriate time during the fundraising process increases the total amount of final funds (Verhaert & Van Den Poel 2012). Information provision also needs to be customized. For example, product videos emphasizing a creator’s perspective leads to improved investment performance, while product videos emphasizing on a customer’s utility and benefits will lead to a better pre-order performance (Y. Liu et al. 2014). Comparing to narratives framed as a business opportunity, funders respond more positively to narratives framed as an opportunity to help others (Allison et al. 2015).

Second, on reward based platforms, rewards are set to fit with the seekers’ fund-raising goals (Li et al. 2011; Kuo et al. 2014), purpose of fundraising (Mach et al. 2014) and targeted funders (Verhaert & Van Den Poel 2012) and rewards with fewer tiers are shown to attract more funds (Xiao et al. 2014). Meanwhile, seekers could emphasize the meeting specifications of promised rewards to increase crowdfunders’ overall satisfaction with the projects (Zheng et al. 2014).

Third, exposure matters. For example, getting projects featured on the front pages or leader boards (Do et al. 2012; Qiu 2013) and leveraging both traditional and social media improve the chance of getting funds (Stephen & Galak 2012). Projects holding an early momentum of a sufficient size of contributions are more likely to succeed (Koning 2013). Seekers can also leverage on their social capital (Zvilichovsky et al. 2014). It has been shown that if an earlier project attracted sufficient funders, later projects from the same funder will be more likely to be funded (Jung et al. 2014). The influence of social capital changes with individuals, culture and time (Greiner & Wang 2009; Xu et al. 2011). The influence is more significant among online friends made in the platform community than offline friendships that are carried over to the community (Lu et al. 2012). Personal social networks of entrepreneurs are closely associated with the success of crowdfunding projects (Freedman & Jin 2014; Mollick 2014).

Contrary to what we believe, sparse, thus diverse social networks of entrepreneurs are more beneficial for the success of a project than denser networks (Hekman & Brussee 2013).

Next Step Most existing studies pay more attention to the issue of funding success. While further insights on how to improve funding success are desired, it is also noted that seekers in crowdfunding platforms have other goals in minds. Additional empirical research is needed to shed lights on how goals other than fundraising are achieved. Meanwhile, additional research is needed to understand the motivating and demotivating factors of seeker participation.

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