The Secret Art of Crowdfunding
Crowdfunding makes it easy to collect many small sums from multiple sources rather than counting on just a few large investments. Thanks to online platforms and social networks, these funding efforts can secure contributions from strangers thousands of miles away, making this type of campaign very different from traditional fundraising.
In a new research paper, Professor Chul Kim of Baruch College and co-authors identified three main drivers of crowdfunding campaigns. Specifically, they analyzed campaigns in which investors receive payoffs when the campaign reaches its goal.
The study, published in Marketing Science, is based on data from the now-defunct website Sellaband, which helped musicians raise money for new albums.
There are three main stages to these campaigns. In the beginning, most donations are made by family and friends. But then things can stagnate, the researchers say. Individuals who don’t personally know the fundraisers might not want to let their money sit in a project that they’re not sure will pay off in the end.
Eventually, there is a gradual increase in payments again as the crowd’s momentum builds on itself. Individuals watch the crowd to help them decide what to do, so every contribution encourages more contributions.
The last phase in a successful campaign is powered by expectations. People reason that their investment pushes the project closer to its goal, making the campaign more attractive to potential investors. Thus, the idea that their own contribution will help push the campaign towards success motivates that person to give, the authors say.
In light of these insights, Chul and colleagues advise fundraisers to set a reasonable goal. While it’s tempting to go for large sums, a goal that’s too high might look unreasonable to crowdfunders and discourage their investments.
The researchers also created a model that fundraisers can use to predict whether their campaign will be successful, using data from the campaign once it has reached 50% of its goal.