Though it has roots in fields like microfinance and peer-to-peer lending, crowdfunding represents a potentially radically new way for budding entrepreneurs to get initial funding for their projects. As a subject that brings together my interest in entrepreneurship and my studies of internet communities, I have been studying the impact of crowdfunding, including how potential entrepreneurs raise money from the crowd, and what causes them to succeed.
A few major points from my research so far:
- Delivery and fraud. Crowdfunding has been remarkably free from fraud, even though over 75% of projects deliver late. In my paper on the subject, I find that less than 1% of the funds in crowdfunding projects in technology and product design go to projects that seem to have little intention of delivering their results. I think this is in large part due to the influence of community on the crowdfunding process. The result is that (as covered in this great CNN piece) project creators almost always try to deliver, often at great cost to themselves.
- How to get funding. Successful projects in crowdfunding seem to have the same characteristics as successful VC-backed projects: they demonstrate plans on how to deliver, show prototypes, indicate outside support by including quotes from journalists, and reference other successful work that the proposers have done in the past.
- The double-edged sword. Crowdfunding makes potential entrepreneurs accountable to early customers or investors in a way that can cause problems, as well as benefits. Crowdfunding creates an obligation to deliver on a particular project, rather than allowing entrepreneurs the flexibility to change direction if they learn new things or find new opportunities.
- Advice. For those seeking crowdfunding, this image shows how various factors affect the chance of success, both in the campaign and the long term (click to expand). More in this paper.
For more on crowdfunding, there are details in my recently published paper