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Handbook of Research on Crowdfunding

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 1.  Crowdfunding: an introduction
Annaleena Parhankangas, Colin Mason and
Hans Landström

1.1  DEFINITION, HISTORY AND SCALE

Crowdfunding can be defined as ‘efforts by individual entrepreneurs or

groups to fund their ventures by drawing small contributions from large
groups of individuals over the internet without using standard financial
intermediaries’ (Mollick, 2014), or ‘open calls, mostly through the Internet,
for the provision of financial resources either in the form of donation or
in exchange for the future product or some form of reward to support
initiatives for specific purposes’ (Belleflamme et al., 2014). Crowdfunding
emerged as part of a recent movement where the general public, or ‘the
crowd’, is invited to participate in the process of value creation traditionally
conducted within more closed systems. Whereas crowdsourcing, its close
relative, focuses on how the crowd may take an active part in a company’s
innovation process (Bughin et al., 2012; Ghezzi et al., 2018), crowdfunding
provides a mechanism through which the general public can financially
support nascent ideas and entrepreneurs, a role traditionally reserved to a
select few, such as accredited equity investors and bankers.
In this sense, crowdfunding has led to a more distributed or collective
nature of entrepreneurial finance and created new classes of investors,
such as ‘customer investors’ (Aldrich, 2014). This allows entrepreneurs
to engage with a greater number, and a more diverse set, of backers and
investors all over the world (Nambisan, 2017). Some see crowdfunding
‘democratizing’ access to entrepreneurial finance for underrepresented
minorities and entrepreneurs hailing from unfavourable geographic
­locations (Agrawal et al., 2011; Greenberg and Mollick, 2017).
As a phenomenon, crowdfunding has a long history in the areas of art,
charity and political campaigns (Kuppuswamy and Bayus, 2018; Ordanini
et al., 2011). Famous projects that were funded by small contributions
from a large number of donors include the Statue of Liberty, some of
Mozart’s piano concertos, and the translation of Homer’s Iliad from
Greek to English (Kuppuswamy and Bayus, 2018; Short et al., 2017).
The recent surge in crowdfunding activities draws from the emergence of
Internet and particularly Web 2.0 facilitating interaction between users,

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 2  Handbook of research on crowdfunding

which ­ drastically reduces time and opportunity costs associated with

soliciting small sums from a large number of contributors (Lambert and
Schwienbacher, 2010). The first successful online crowdfunding campaign
took place in 1997 when British rock band Marillion raised money from its
fans for an overseas tour (Agrawal, 2018). The first online crowdfunding
platform, ArtistShare, was launched in 2003, a website where musicians
could seek donations from their fans to produce digital recordings. The
success of ArtistShare inspired many other crowdfunding platforms
to enter the markets, most prominent of them Indiegogo in 2008 and
Kickstarter in 2009. The take-off of the crowdfunding industry was fur-
ther facilitated by the financial crisis of 2008, leaving many entrepreneurs
and new businesses searching for alternative sources of funding (Pelizzon
et al., 2016).
The first crowdfunding activities were associated with arts, but since
then a proliferation of new platforms have been formed that host cam-
paigns for social causes, entrepreneurs and small businesses (Freedman
and Nutting, 2015), and consumer lending which is now the largest market
segment. There are more than 1250 platforms globally (Statista, 2018d),
catering to varied audiences, such as large corporations, scientific research,
real estate, social enterprises, personal causes and cultural enterprises.
Crowdfunding has grown from US$1 billion in 2011 to US$34 billion
in 2018 (Massolution, 2015; Fundly, 2018). In the United Kingdom (UK)
crowdfunding has grown year on year, from £0.31 billion in transactions in
2011 to £4.58 billion in 2016 (CAF, 2017). Crowdfunding is also growing
fast in China ‒ especially peer-to-peer (P2P) and reward crowdfunding ‒
and some large platforms have emerged, although it remains less developed
than in the West (Daxue Consulting, 2017). According to some estimates,
crowdfunding has created 270 000 jobs worldwide and added $65 billion
to the global economy (CreditAngel, 2015). Currently the volume of the
crowdfunding activity is similar to venture capital investments (UNDP,
2017), but as the crowdfunding industry is projected to grow to more than
$300 billion in 2025, it is likely to surpass the volume angel and venture
capital investment (Meyskens and Bird, 2015). In the UK equity crowd-
funding accounted for 17 per cent of the total seed and early-stage equity
market in 2016, up from just 0.3 per cent in 2011 (CAF, 2017).

1.2 HOW CROWDFUNDING WORKS: THE ACTORS

ON A CROWDFUNDING SCENE

There are three central actors in crowdfunding: the fund-seeking entrepre-

neurs, the crowdfunders (that is, members of the general public providing

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 Crowdfunding: an introduction  ­3

the funds) and an intermediary, usually a crowdfunding platform bringing

the project initiators and supporters together (Macht and Weatherston,
2015; Pelizzon et al., 2016). In addition, many crowdfunding platforms
rely on a number of service providers, which may conduct financial due
diligence or assessment of social or environmental outcomes (UNDP,
2017). In a similar vein, campaign creators (entrepreneurs) increasingly
hire service providers to create campaign content and manage their
­campaigns (Agrawal, 2018).
It is important to note that some fundraisers make a direct appeal to a
specific audience via their own fundraising platform (for instance, their
own website). This type of crowdfunding is called direct crowdfunding
(Tomczak and Brem, 2013). The UK company Brewdog, which raised
£35.5 million over several funding rounds, is widely regarded as one of
the most successful examples of the use of this type of crowdfunding.
However, most crowdfunding research focuses on indirect crowdfunding
that takes place on an intermediary platform. Crowdfunding platforms
belong to the class of two-sided platforms matching the two sides of the
market, that is, the fundraisers and the funders (Belleflamme et al., 2015).
There are more than 375 crowdfunding platforms in the United States
(US) alone (Statista, 2018a). As discussed by Ciuchta, Santos, Jia and
Yacus in Chapter 4 of this book, many of these platforms are financed by
private equity, venture capital, corporate venture capital, individual cor-
porations, or alliances between them. Most crowdfunding platforms do
not charge membership fees, but instead finance their operations through
transaction fees for successful campaigns, fees for additional services and
interest on dedicated funds (Belleflamme et al., 2015).
Crowdfunding platforms operate under four major models. On
donation-based platforms, backers contribute without expecting any
return to support disaster relief, famine, health and other charity-related
programmes (UNDP, 2017). Examples of donation-based platforms
include JustGiving and GoFundMe. On reward-based crowdfunding plat-
forms, backers are treated as early customers or ‘prosumers’ and receive
a product reward or a token of appreciation, such as a thank-you note in
return for their monetary contribution (Mollick, 2014). The prominent US
platforms IndieGogo and Kickstarter fall into this category. On lending-
based platforms (peer-to-peer lending or microfinance), such as Kiva
and Proper.com and Funding Circle, backers offer loans to individuals
and projects and their financial compensation takes the form of interest
payments (Pelizzon et al., 2016). Peer-to-peer platforms specializing in
property lending, invoice trading and debt-based securities (CAF, 2017)
and different types of platform models1 (FCA, 2018) have emerged in
recent years. A relatively new, yet rapidly growing crowdfunding model,

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 4  Handbook of research on crowdfunding

equity crowdfunding or crowdinvesting, allows backers to purchase equity

of new firms or enter into some sort of profit-sharing agreement (Ahlers et
al., 2015). Examples of equity crowdfunding platforms include Wefunder
and Localstake, and in the UK Crowdcube and Seedrs. In contrast to
equity-based and lending-based platforms, donation and reward-based
platforms do not offer monetary incentives for backer participation. Of
all crowdfunding models, equity-based crowdfunding transactions tend
to be the most complex, both from a legal standpoint and in terms of
uncertainties (Ahlers et al., 2015). In 2015, lending-based crowdfunding
platforms accounted for the majority of total crowdfunding volume (74
per cent), followed by reward-based platforms (10 per cent), donation-
based platforms (8 per cent) and equity-based platforms (8 per cent)
(Massolution, 2015). It is important to note that while the US leads the
overall crowdfunding, Europe and China pioneer equity crowdfunding
because of their less restrictive policy environment (Dushnitsky et al.,
2016; Lin, 2017; Pelizzon et al., 2016).
Why are individuals willing to back entrepreneurial projects on crowd-
funding platforms? The motivations of the crowdfunding backers are
likely to depend on the type of platform. While the backers on lending
and equity-based platforms may participate for financial reasons, backers
on reward and donation-based platforms have other motivations, such
as furthering social causes, helping entrepreneurs to bring innovative
products to the market, receiving product rewards, being part of the
community and receiving recognition from their peers (Bretschneider and
Leimeister, 2017; Cholakova and Clarysse, 2015; Gerber et al., 2012).
While data on their demographic characteristics are scarce, statistics on
Kickstarter and IndieGogo platforms demonstrate that backers tend
to be young (millennials), and more often male than female (Art of the
Kickstart, 2016). Approximately one-third of the backers are repeat back-
ers on the Kickstarter platform (Statista, 2018c). But, as discussed further
below, crowdfunding sites are now also attracting professional investors
and corporations.
Who is raising funding on crowdfunding platforms? Business and
entrepreneurship account for a majority of the crowdfunding market, 41.3
per cent, while social causes represent 18.9 per cent (Massolution, 2015).
Relative to industry sectors, most crowdfunding campaigns completed
in 2016 operated in film, technology, music and design sectors (Statista,
2018b). However, the importance of crowdfunding for individual industry
sectors depends heavily on the type of crowdfunding model adopted. For
instance, the first equity crowdfunding campaigns in the United States
(since 2016) featured mobile app and Internet-related sectors, consumer
gadgets, and beer and hospitality industries (CrowdCrux, 2018).

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 Crowdfunding: an introduction  ­5

How does the crowdfunding process proceed? Entrepreneurs initiate

their crowdfunding campaigns by uploading a video pitch and/or other
audio-visual materials on to the crowdfunding platform. They often use
email and social media campaigns, as well as press releases, to draw the
attention of potential backers. Various signalling and communication
strategies used in campaign pitches are found to boost the chances of
a crowdfunding campaign getting funded (Belleflamme et al., 2014;
Mollick, 2014). In addition to financial support, many backers provide
feedback and advice to entrepreneurs related to their campaigns (Gerber
et al., 2012; Lin et al., 2014). There is some empirical evidence that most
of the successful crowdfunded projects on Kickstarter remain ongoing
ventures (Mollick and Kuppuswamy, 2014), and that a significant portion
of equity crowdfunded firms go on to raise further capital (Signori and
Vismara, 2018). However, while most crowdfunded campaigns make a
well-intended effort to live up to their campaign promises, many campaign
rewards are delivered late, or they do not meet the expectations of the
backers on reward-based platforms (Mollick and Kuppuswamy, 2014;
Mollick, 2014).
Governments undoubtedly play a critical role in the crowdfunding land-
scape. Regulators and politicians worldwide have recognized the potential
of crowdfunding for allowing more individuals to engage as producers,
consumers and investors in the economy without the backing of high net
worth individuals and institutions (Cholakova and Clarysse, 2015; Gerber
et al., 2012). However, the crowdfunding process may also expose the
backers to the irresponsible or deliberate criminal behaviour of the project
creator. It is thus not surprising that many governments have gone to
great lengths to improve conditions for crowdfunding (Belleflamme et al.,
2015; Ganatra, 2015), and have created legislation to protect the backers.
The nature of the regulations depends on the type of the crowdfunding
platform (UNDP, 2017). Equity crowdfunding investments are typically
monitored by national securities exchange commissions. For instance,
the Startups Act (JOBS Act) in 2012 and its subsequent provisional
approval by the Securities and Exchange Commission in 2013 made
equity crowdfunding in the United States a legal alternative for early-stage
equity investments and a viable tool for raising seed capital (Cholakova
and Clarysse, 2015). Lending-based platforms follow banking regulation,
whereas the reward-based platforms fall under the purview of consumer
protection legislation (Ganatra, 2015; Moores, 2015). Despite these leg-
islative efforts, the general consensus seems to be that crowdfunding
remains lightly regulated.
Finally, it is important to consider crowdfunding’s role in the wider
entrepreneurial finance landscape. Research on this topic is scarce, and a

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 6  Handbook of research on crowdfunding

certain level of controversy remains over whether crowdfunding comple-

ments or competes with other sources of entrepreneurial finance. Some
suggest that receiving equity crowdfunding and along with it a ‘crowd of
shareholders’ might deter subsequent investment from accredited inves-
tors (Babich et al., 2018). However, it also seems likely that crowdfunding
enables entrepreneurs to raise smaller sums at earlier stages of their
development, especially when venture capitalists, business angels and
banks show decreasing interest in screening smaller deals and funding
nascent ventures (Clark, 2014; Mason et al., 2016; Schwienbacher and
Larralde, 2012; Tomczak and Brem, 2013). Some anecdotal evidence and
empirical work suggest that reward-based crowdfunding campaigns might
be used by entrepreneurs to demonstrate their market potential, and that
a successful crowdfunding campaign may help to attract venture capital
funding (Belleflamme et al., 2015; Roma et al., 2017). Crowdfunding is
also likely to enable ventures that are not of interest to venture capitalists,
angel investors and banks, and suffering from decreasing public subsidies
directed to their areas, to raise funding. These would include creative
industries (Bao and Huang, 2017), social campaigns (Boslet, 2015; Lehner,
2013) and geographically distant ventures (Agrawal et al., 2011).

1.3  CROWDFUNDING: A CRITIQUE

The early proponents of crowdfunding claimed that it would democratize

access to finance, reducing funding constraints by enabling entrepreneurs
who were excluded from institutional sources of finance to attract funding
for their projects, providing new investment opportunities for people with
even relatively modest amounts of discretionary wealth,2 particularly
in an era of low interest rates, and facilitating not-for-profit projects to
raise funding from investors with philanthropic motives. As Greenberg
(Chapter 11 in this book) comments, ‘the advent of crowdfunding brought
great optimism about the technology’s capacity to facilitate profound
and beneficial economic and social change, including with respect to
disparities in access to entrepreneurial financing’. Certainly, there is a
much greater diversity of entrepreneurs and businesses that raise finance
from crowdfunding platforms compared with those that are financed by
traditional funding sources (banks, business angels, venture capital funds).
However, as research on crowdfunding has increased in volume, so this
narrative has become qualified in several important respects.
First, the crowd has preferences and biases. It is clear that some types of
projects are less attractive than others to the crowd. For example, consumer-
based products and services work well on rewards-based crowdfunding

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 Crowdfunding: an introduction  ­7

platforms because the nature of their activities means that appropriate

‘rewards’ – such as a product or an experience ‒ can be offered. However,
science and technology projects are difficult to work on such platforms
because their activities do not lend themselves to ‘rewards’. But even on
donation-based platforms there are variations in the response of the crowd
to different types of projects. Specifically, environmental projects fare worse
than campaigns in other categories (Calic and Mosakowski, 2016; Hörisch,
2015). Bannerman (2013) discusses how the ability of cultural projects
to raise funding is dictated by public taste. This prompts Tosatto et al.
(Chapter 10 in this book) to observe in the context of the cultural sector that
although ‘crowdfunding liberates creatives from the oppressive and control-
ling hand of existing CCI [creative and cultural industry] gatekeepers  . . .
in moving the funding decision to the crowd, creatives merely exchange
one master for another’. The consequence, they suggest, may be ‘a cultural
“race to the bottom” where every successful CCI crowdfunding project
resembles one another’. Indeed, consolidation in numbers of crowdfunding
platforms (CAF, 2017), as a result of fewer new entrants and more exits of
previously active platforms, is increasing the dominance of a small number
of platforms. This trend is linked at least in part to rising costs associated
with increased regulation, prompting a shake-out of smaller platforms.
Second, entrepreneurs differ in their ability to access the crowd. This
has a number of dimensions. Entrepreneurs often need to have raised ini-
tial finance to get their project off the ground before coming to a platform.
Typically this comes from the entrepreneur’s own financial resources and
their family and friends. However, by no means everyone has access to
sources of initial finance. Entrepreneurs are also likely to need to attract
one or more investors before going to the crowd. Once on the platform
early traction is important, with funding success linked to raising finance
early in the campaign (Vulkan et al., 2016; Vismara, 2016). These early
investors, in turn, send out signals to potential follow-on investors. The
sensitivity of crowdfunders to the signals from funding campaigns means
that the entrepreneur’s social capital plays a critical role in their success
(Polzin et al., 2017). Entrepreneurs therefore need to be visible on social
media and have social contacts. Indeed, it is now well established that
financing success is associated with entrepreneurs who are active on exter-
nal social platforms such as Facebook and Twitter, and generate projects
that have created social buzz, as indicated by many shares and likes, high
engagement on social networks, and many online reviews (Bi et al., 2017;
Thies et al., 2014; Mollick, 2014; Zheng et al., 2014; Kuppuswamy and
Bayus, 2018; Colombo et al., 2015).
The entrepreneur’s human capital also matters. The evidence from
equity crowdfunding platforms is that the team’s operational capabilities

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 8  Handbook of research on crowdfunding

and its commitment to the venture, despite attractive outside options,

signals an attractive investment (Bernstein et al., 2017) as investors favour
projects with entrepreneurs who understand the product, market and busi-
ness model based on experience (Estrin et al., 2018). Entrepreneurs there-
fore need to signal competence and trustworthiness. Other studies indicate
that teams with pronounced human capital in the form of management
degrees or similar certifications (Ahlers et al., 2015), and extensive social
capital (Vismara, 2016), are attractive to investors. They also need strong
communication abilities and presentation skills.
Third is the question of who is funded on crowdfunding platforms.
Does crowdfunding enable traditionally underrepresented groups to gain
access to early-stage finance? In terms of gender, the majority of funders
are male, although there is variation by type of platform, with the gender
balance more equal on donation sites. Nevertheless, gender diversity
is higher on crowdfunding platforms than for other financial sources
(Vismara et al., 2017), with robust evidence that women perform better
than men in crowdfunding even after controlling for differences in funding
goals and observable founder and product characteristics (see Greenberg,
Chapter 11 in this book). For example, the lack of gender discrimination
in P2P lending is reported in several studies (e.g., Barasinska and Schäfer,
2014; Duarte et al., 2012; Pope and Sydnor, 2011). Indeed, women-led
projects seem to be more successful in raising finance than those led by
men, although in volume terms projects led by men attract most of the
funding. Donation and reward platforms have the highest levels of female
participation as both funders and fundraisers, while the lowest is on equity
platforms (CAF, 2017). The academic literature on race and crowdfund-
ing is, relative to the academic literature on gender and crowdfunding,
less developed. What research does exist, however, suggests that in the US
African Americans are less likely than observably similar white founders to
successfully raise funds on Kickstarter (Pope and Sydnor, 2011; Rhue and
Clark, 2016; Younkin and Kuppuswamy, 2017). There is some evidence
of homophily effects. Vismara et al. (2017) report that females are more
likely to invest in female-led ventures. However, this is not supported by
other studies: for example, Mohammadi and Shafi (2017) find that women
are more likely to invest in male-led businesses. In terms of demographics,
UK evidence indicates that over-55-year-olds dominate all categories
of crowdfunding platforms except equity, and their share is increasing,
except on equity platforms (CAF, 2017). The majority of funders on all
types of platforms are well educated, but there is participation across all
income levels (CAF, 2017).
Fourth, crowdfunding platforms have not eliminated the effects of
geography. Various commentators, such as Thomas Friedman (2005),

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 Crowdfunding: an introduction  ­9

have predicted that information and communication technologies would

produce a ‘flat world’ in which resources, such as finance, could flow
unimpeded across space. Yet even though crowdfunding platforms
eliminate the friction of distance, connecting entrepreneurs and investors
regardless of location, home bias ‒ in which funders of projects are dispro-
portionately concentrated in near proximity to the location of projects – is
a persistent feature of crowdfunding. This is evident in both lending and
equity platforms (Mingfeng and Viswanathan, 2016; Günther et al.,
2017). Research by Agrawal et al. (2011, 2015) finds that local funders are
more likely to contribute larger amounts, and earlier. There are several
explanations for this home bias effect. Early funders are likely to have
personal connections to the entrepreneur and hence likely to be in close
geographical proximity to each other. More generally, funding outcomes
are shaped by the local nature of social networks and community identity
considerations. The nature of the product or service can also favour local
investing, particularly where the project is focused on a local market.
Even though there is home bias in investing, crowdfunding nevertheless
has the potential to impact on local economic development by facilitat-
ing the flow of finance to places (for example, ‘rustbelt’ regions, remote
regions, rural areas) that are neglected by traditional lenders and inves-
tors. But it also has the potential to impact negatively on places by ena-
bling an outflow of investment from less economically prosperous areas
to more economically prosperous cities and regions. There is very limited
evidence on this topic. However, in the UK it has been shown that in the
case of P2P lending to both consumers and business, lenders are more
geographically concentrated than borrowers: specifically, London has a
higher share of lenders than borrowers, whereas most other regions have
higher shares of borrowers than lenders (CAF, 2017), suggesting that these
forms of crowdfunding are producing some geographical redistribution of
wealth. However, equity crowdfunding platforms have the opposite effect,
with London having a higher shares of investee businesses than investors,
suggesting that their effect is to attract wealth from other regions for
investment in London-based businesses (CAF, 2017), and hence mirroring
the geographies of venture capital investment (Mason and Pierrakis, 2013)
and business angel investing (Harrison et al., 2010).
Another issue concerns whether crowdfunding enables entrepreneurs to
access the wisdom of the crowd. Do they contribute expertise or are they
simply providing ‘dumb money’? Certainly, most investors do not have
expertise to advise or mentor the entrepreneurs that they back, and do not
have the motivation to get involved because of the small amounts that they
are investing. However, crowdfunding platforms do offer to entrepreneurs
the opportunity to engage with external audiences to receive feedback and

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 10  Handbook of research on crowdfunding

insight into the firm’s products and business model, test demand, build
brand awareness and make advance sales. But there are downsides to this
engagement. First, entrepreneurs are often unprepared for the flood of
feedback from these audiences. Second, it is time-consuming to maintain
positive social engagement (Hui et al., 2014). Third, social engagement
is likely to generate conflicting or even erroneous advice from audience
members. Moreover, the increasing use of automated lending, particularly
on P2P platforms in which software is used to allocate the funds of lenders
based on their specified lending criteria with the available investments
(CAF, 2017), is removing the direct connection between the investor and
the investee business.
An emerging concern is that it is no longer just the crowd who are par-
ticipating on crowdfunding platforms. Financial institutions are becoming
increasingly involved on both debt and equity crowdfunding platforms
which, as Salomon (Chapter 13 in this book) notes, is ‘crowdinvesting
without a crowd’. P2P platforms are attracting investment from traditional
banks, mutual funds, pension funds, hedge funds and asset management
firms (CAF, 2017). For example, the peer-to-peer lender Funding Circle
now secures most of its funding from institutions (Financial Times, 2018a).
Some French banks have launched their own crowdfunding platforms,
others have developed affiliations with existing platforms, while yet others
have acquired existing platforms (Attuel-Mendès, 2017). Professional
investors, including venture capital (VC) funds, corporate finance houses
and business angels, also have a growing presence on equity crowdfunding
websites (Financial Times, 2017b) for example, co-investing alongside
individual investors.
At least one major crowdfunding platform, Syndicate Room, only
features deals that have attracted backing from professional investors
(Financial Times, 2017b). Large corporations are also recognizing the
benefits of working with crowdfunding platforms. For example, General
Electric, toymaker Hasbro and brewer Anheuser-Busch have worked
with Indiegogo to aid their product development. GE Appliances
successfully crowdfunded Opal, an ice maker, and Paragon, a cook-
ing device. The benefits from this collaboration include a significant
shortening of the time taken to go from concept to production (just four
months) and a reduction in upfront costs compared with a traditional
product roll-out (one-twentieth of what would be expected) (Financial
Times, 2017c). Chinese Internet giants (for example, Alibaba) have
entered the equity crowdfunding industry by setting up their own
crowdinvesting platforms that serve the various needs of these firms.
Meanwhile, Zopa, the world’s oldest P2P lender, is expanding into
traditional banking. This is seen as a way for Zopa to broaden its

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 Crowdfunding: an introduction  ­11

funding base with ‘sticky’ retail deposits, with the motivation for the
move interpreted as a response to anticipated regulatory crackdown on
crowdfunding (Financial Times, 2018b).
The consequences of these developments remain to be seen. The
participation of institutional investors in the funding process can give
retail investors a positive signal about the creditworthiness and repayment
ability of borrowers (Lin et al., 2017). Similarly, the involvement of profes-
sional investors, such as venture capital firms and business angels, plays
an important role in legitimating deal sourcing and the start-up evaluation
process and leveraging the fundraising (Salomon, 2018). However, there is
evidence of a shift towards ‘growth stage’ rather than smaller ‘seed stage’
investments on UK equity crowdfunding platforms, which is consistent
with the preference of institutional investors such as venture capital funds
for such businesses (Financial Times, 2017b). More generally, the entry
of big institutional investors may cause crowding-out effects for small
­investors (Lin et al., 2017).
A final concern is the level of risk that investors are exposed to on
crowdfunding platforms. This has three dimensions. First is the lack of
regulation, especially on reward crowdfunding platforms. Equity crowd-
funding platforms have greater regulation, although this varies between
countries (see Tenca and Franzoni, Chapter 12 in this book). Regulators
in several countries are increasingly expressing concerns that crowd-
funding platforms are giving a misleading or unrealistically optimistic
impression of the investment while attracting retail customers with little
experience of investing. The UK’s Financial Conduct Authority (FCA)
has raised concerns that some investors are overexposed to P2P lending,
putting more than 10 per cent of their net investible wealth and retirement
savings into P2P lending (FCA, 2018).
Second is that crowdfunding platforms lack governance mechanisms.
The consequence of enabling entrepreneurial ventures to raise finance
from numerous individuals, each making small financial investments, is
that there is no incentive for anyone to pay for the costs of monitoring
risk. It also means that there are no mechanisms in place that address
the problems associated with moral hazard, adverse selection and overall
shirking that arise from the lack of alignment of goals and the difficul-
ties created by asymmetric information that occur when ownership and
control are separated (for example, investment instruments, independent
boards, chief executive officer dismissals, and direct and active monitoring
of the entrepreneur). The most obvious risk to investors is fraud. There
have been cases of fraudulent crowdfunding platforms (for example, in
China where the P2P crowdfunding has been ‘routinely described by
analysts and investors as the “wild west” of online lending’; Financial

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Times, 2017d3) in which investors have lost their money. These issues are
being addressed by tighter regulation (Financial Times, 2017d, 2018c).
At the individual project scale the evidence suggests that although fraud
occurs, it is rare (Mollick, 2014). However, Hainz (2018) raises the concern
that the fact that we observe a limited amount of fraud in crowdfunding
may be due to the low incentive to detect them in the first place. Since
funders contribute only small amounts and so are unable to coordinate
their efforts to detect frauds, this may result in the true dimension of the
problem being underestimated.
Third, and of greater concern, is the risk of adverse selection: that
entrepreneurs will fail to deliver the projects. This may be a particular
risk on crowdfunding platforms if – as has been suggested – they are
dominated by projects that have been rejected by conventional financi-
ers or have been discouraged from seeking finance from these sources.
However, investors may lack the skills to do their own due diligence.
More significantly, because of the small investments that investors are
making, they have no economic incentive to undertake due diligence.
Indeed, most investors are reported to spend less than 20 minutes per
week on selecting investments (CAF, 2017). This is likely to encourage
herding behaviour. In the absence of information about a venture, an
investor often looks at the actions of other investors as a way of making
their decision (see Dushnitsky and Zunino, Chapter 3 in this book).
Meanwhile, automated lending removes the possibility of doing personal
due diligence. Concern has also been expressed that investors on equity
crowdfunding platforms are paying a much higher price for the shares
that they buy in start-ups than professional investors do, and receive
B-class shares that have no voting rights or contractual protection against
dilution (Financial Times, 2017c, 2018d).
There is very little evidence on the financial outcomes of businesses
that have raised debt or equity finance from crowdfunding platforms.
One recent study in the UK by AltFi Data and law firm Nabarro found
that one in five companies that raised money on equity crowdfunding
platforms between 2011 and 2013 had gone bankrupt (Financial Times,
2017b). However, such concerns may be irrelevant. Townsend and Hunt
(Chapter 6 in this book) argue that the dominant ethos of crowdfunding is
shared commitment rather than investment. Backers are not motivated by
financial return even on lending and equity platforms. They suggest that
crowdfunding is not a diffuse version of traditional debt and equity mar-
kets, but is an entirely different model of funding. However, such attitudes
may vary by type of investor and type of investment. For example, the
different motivations of investors in film projects and theatre projects have
been highlighted, with investors in film being investment-focused whereas

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 Crowdfunding: an introduction  ­13

theatre investors are motivated by their general passion for the theatre and
‘first night experiences’ (Financial Times, 2017e).
A further emerging concern about the risk to investors is that the vast
majority of crowdfunding platforms have been established since the
Global Financial Crisis and so have not been through a full economic
cycle. The UK’s Financial Conduct Authority has commented that ‘it is
important to recognise that the sector is still relatively new and has not
been through a full economic cycle. When economic conditions tighten,
losses on loans and investments may increase’ (FCA, 2018). This is a
particular issue for P2P platforms, where the concern is that a rise in
interest rates could trigger a spate of defaults on loans. These concerns
prompted Lord Adair Turner, the chairman of the UK’s former financial
regulation body, the Financial Services Authority, to predict that ‘the
losses which will emerge from peer-to-peer lending over the next five to
ten years will make the bankers look like lending geniuses’ (Financial
Times, 2016).

1.4 THE CONTENTS OF THE BOOK AND FUTURE

DIRECTIONS OF CROWDFUNDING RESEARCH

In this fourth volume of the Edward Elgar Publishing book series of

Handbooks of Research on Venture Capital we focus on crowdfunding.
Our aims are to provide a state-of-the-art knowledge of the field, and
provide suggestions for future research directions. The book is divided
into five parts: ‘The Characteristics of Crowdfunding’ (Chapters 2‒3),
‘Crowdfunding Platforms’ (Chapters 4‒6), ‘The Crowdfunding Process’
(Chapters 7‒8), ‘Specific Aspects of Crowdfunding’ (Chapters 9‒12) and
‘The Future of Crowdfunding’ (Chapter 13).

1.4.1  The Characteristics of Crowdfunding

The first contribution in Part I, Chapter 2, is by Claire Ingram Bogusz

who discusses the multidisciplinary nature of crowdfunding research. In
this chapter she examines the knowledge that we have on crowdfunding in
fields such as entrepreneurial finance, entrepreneurship and information
systems. In Chapter 3, Gary Dushnitsky and Diego Zunino provide a
broad overview of our knowledge on crowdfunding, particularly bridging
two important issues in contemporary crowdfunding research: the ‘prob-
lem of riches’, that is, crowdfunding has been popular across scholarly
disciplines and knowledge is embedded in disciplinary silos; and the
‘dearth of evidence’ in crowdfunding research, that is, although there exist

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 14  Handbook of research on crowdfunding

thousands of platforms, most studies analyse funding patterns using data

from a single platform.
The authors of these chapters that comprise Part I propose several areas
for future research, for example:

● We need a more nuanced understanding of the phenomenon, and

as crowdfunding is a heterogenous and complex phenomenon, we
also need knowledge on niche areas of funding and niche funding
methods.
● There is a lot of empirical work within the field, and it is timely to
synthesize our knowledge, and identify surprising or conflicting
results in this knowledge.
● The theoretical frameworks used to understand crowdfunding need
to be deepened, and new theoretical frameworks are required.
● There is a need to more strongly integrate our knowledge on crowd-
funding with the broader literature in entrepreneurial finance.

1.4.2  Crowdfunding Platforms

Part II of the book focuses attention on crowdfunding platforms, the crowd-

funders (the supply side), and the ventures searching for crowdfunding (the
demand side). In Chapter 4, Michael Ciuchta, Roberto Santos, Peiyi Jia
and Amy Yacus focus on crowdfunding platforms, addressing the issue
of how crowdfunding platforms may create and capture value in solving
particular problems for the crowdfunders and the ventures. In the follow-
ing chapter (Chapter 5) Stefan Katzenmeier, David Bendig, Steffen Strese
and Malte Brettel take a supply perspective on crowdfunding, providing a
review of what is known about the characteristics of the crowdfunders, and
explore what influences the decisions they make to invest in crowdfunding
campaigns. In the final chapter in Part II, Chapter 6, David Townsend and
Richard Hunt focus on the demand perspective of crowdfunding. In this
chapter the authors examine the different options for early-stage financing,
addressing the issue of crowdfunding as a democratizing power to resolve
the funding gap that many young ventures experience.
Some of the suggestions for future research identified by the authors of
the chapters in Part II are as follows:

● It is important that future research quantifies the different forms of

value creation made by the crowdfunding platforms, and examines
the sustainability of the platforms over time.
● A more nuanced understanding is required of the motives of
­crowdfunders across different types of crowdfunding.

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 Crowdfunding: an introduction  ­15

● Crowdfunding might democratize the access to finance, but democ-

ratization comes at a cost ‒ for example, as regards the agency
risks  ‒ and there is a need to explore how these governance
mechanisms are incorporated within the platforms and the costs of
deploying such governance mechanisms.
● New methodological approaches could advance our knowledge
significantly ‒ for example, using machine learning, eye tracking and
quasi-experiments ‒ having the potential to provide further insights
into decision influences of crowdfunders.

1.4.3  The Crowdfunding Process

Part III of the book synthesizes our knowledge on the crowdfunding pro-
cess. In Chapter 7, Chandresh Baid and Thomas Allison ask the question:
Why are some crowdfunding campaigns successful while others are not?
In order to answer the question, the authors make use of signalling theory,
communication and social capital to show how each of these theoretical
lenses can help us to understand whether, and how, crowdfunding deals get
done. Chapter 8 by Tom Vanacker, Silvio Vismara and Xavier Walthoff-
Borm asks the question: What happens after a crowdfunding campaign? The
authors argue that ‘success’ in the crowdfunding context is often defined as
raising funds in a crowdfunding campaign, but although this is an important
milestone, it only represents a beginning of building a viable business. This
chapter reviews what is known about firms and projects after they have suc-
cessfully raised funds (or failed to raise funds) on crowdfunding platforms.
Some of the suggestions that the authors in Part III identify for future
research are as follows:

● Seen from the perspective of the crowdfunding entrepreneurs, we

still know very little about their decision-making and behaviour. For
example, what drives their selection of one crowdfunding mode and
platform over another? What is the behaviour of the crowdfunding
entrepreneurs when interacting with potential crowdfunders? Future
research on crowdfunding should seek to expand our understanding
of the underlying mechanisms behind the decision-making and
behaviours of fund seekers and funders.
● More detailed insight is required into the potential selection effects
in crowdfunding. Are outcomes in the ventures primarily driven
by selection effects or value-added effects? Crowdfunding may
also bring extra-financial benefits to the venture, such as access to
employees, increased media visibility and expertise. Exploring these
impacts is also a research priority.

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1.4.4  Specific Aspects of Crowdfunding

Part IV of the book focuses on some specific aspects of crowdfunding. In

Chapter 9, Maija Renko, Todd Moss and Anna Lloyd discuss the emer-
gence of crowdfunding as a promising financing option for non-profit and
social ventures – ventures that have limited access to finance ‒ reviewing
the main ways in which these organizations participate in crowdfunding.
The following chapter (Chapter 10) by Jann Tosatto, Joe Cox and Thang
Nguyen takes a closer look at another sector: creative and cultural indus-
tries. The authors explore the drivers behind the growth of crowdfunding
as a source of finance for ventures in the creative and cultural industries,
and its impact. The focus of Chapter 11 is on the impact of crowdfund-
ing as a solution to different kinds of inequality in access to finance (for
example, gender, ethnicity, and geography). Jason Greenberg reviews the
evidence on the extent to which groups that are marginalized in terms
of access to finance from traditional sources ‒ for example, on account
of gender, race or location ‒ are able to raise finance from the crowd.
Finally, in Chapter 12, Francesca Tenca and Chiara Franzoni discuss the
risks associated with crowdfunding, notably fraud, and the ways in which
policy-makers have sought to address these challenges through regulation.
The authors of Part IV offer some suggestions for future research on
these different aspects of crowdfunding:

● Most research focuses on large general crowdfunding platforms;

future research needs to go beyond these widely used platforms,
and give greater attention to platforms that specifically cater for the
needs of non-profits and social ventures.
● There are many unexplored and underdeveloped research questions
on crowdfunding that relate to ventures in the creative and cultural
industries. For example, how do their campaigns differ from other
types of ventures? Do the platforms undertake the same signal-
ling and intermediation functions for the campaigns of ventures
in the creative and cultural industries? And what influences the
­performance of the campaigns of such ventures?
● Few studies have focused on the negative side of crowdfunding,
hence there are many research opportunities to add to our knowl-
edge of risks and fraud in the crowdfunding process, how entre-
preneurs and crowdfunders involved in crowdfunding campaigns
could protect themselves from these risks and, more broadly, the
distribution of risk and return in equity crowdfunding.

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 Crowdfunding: an introduction  ­17

1.4.5  The Future of Crowdfunding

In Chapter 13, Victoriya Salomon explores the emerging trends in crowd-

funding in the age of the ‘FinTech Revolution’, discussing the implications
that these trends have for the main stakeholders in crowdfunding: the
platforms, the crowdfunders and the ventures. She identifies the need
for more research, for example, to better understand innovative forms
of crowdfunding in the context of existing regulatory and institutional
frameworks. Future research should also examine the issue of strategic
partnerships and collaborations between fintechs and traditional financial
players.

1.4.6  Summary

Crowdfunding has emerged in the past 15 years, quickly becoming a ‘hot’

topic for research which has generated considerable knowledge. Our
aim for the book is to synthesize this knowledge. Many of the existing
crowdfunding studies are rather descriptive, reflecting the fact that at the
early stage of a research topic, before the phenomenon can be theorized, a
detailed empirical understanding is required, and that such understanding
will strengthen the validity and power of the concepts and theories that
are developed (Ghoshal, 2005). The contributors to this book emphasize
that crowdfunding is still an open field with many research opportunities.
However, in order to take the next step in our knowledge development it is
necessary to summarize, synthesize and consolidate the knowledge that we
already have. We hope that this book will achieve this purpose.

NOTES

1. Three types of platform models have been identified by the FCA (2018): (a) the conduit
platform in which the investor picks the investment opportunity (loan or security) and
the platform administers the investment arrangements; (b) the pricing platform in which
the platform sets the price but the investor picks the underlying loan; and (c) the discre-
tionary platform in which the platform sets the price and chooses the investor’s portfolio
to generate a target rate of return.
2. For example, the chief executive officer of equity crowdfunding platform Seedrs said
that it gives individuals the chance to buy shares in high growth firms at an early stage, ‘a
privilege once restricted to institutions and private equity firms’ (Financial Times, 2017a).
3. In China many investors have lost money investing in P2P platforms, some of which
were fraudulent Ponzi schemes, while others have closed down either because of liquidity
problems resulting from high risk lending or because of tougher regulation (Bloomberg,
2018; Reuters, 2018). This has resulted in a decline from 6000 to less than 2000 P2P
platforms (Financial Times, 2018c).

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 18  Handbook of research on crowdfunding

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