Reward-based crowdfunding platforms such as global giants Indiegogo and Kickstarter are wildly popular around the globe. Every year, people use these platforms to transfer billions of pounds/euros/dollars to help artists deliver creative productions and content, and for entrepreneurs to develop new products and services. Though what can explain why and how rewards crowdfunding works, what motivates people to give their money?
The money is not given as charity donations. The backers obtain no financial benefits, there are no legal guarantees that their money will be used as originally described, and there are no reimbursement options. These unfavorable conditions led two American academic authors – Andre F. Maciel (University of Nebraska—Lincoln) and Michelle F. Weinberger (Northwestern University) – to ask why do so many people contribute to crowdfunding. In short, what makes reward-based crowdfunding so successful? The answers are enlightening, and are transferable to equity crowdfunding.
Key findings of why crowdfunding works
The two authors collected qualitative data from crowdfunding consumers, producers, and platforms to reveal the sociocultural underpinnings of this funding model. They found that a major part of why crowdfunding works is that platforms do more than create a technical infrastructure for consumers to transfer money to producers: they also create a mythological foundation.
Through storytelling, platforms cast crowdfunding as a route to create a more democratic society in which ordinary people (rather than banks or wealthy investors) can decide and finance the products that should exist in the market. Consumers then gladly gift their money to entrepreneurs and artists fundraising on these platforms, financing their innovation ideas interest-free. In many instances, they don’t usually receive any tangible return on their investment beyond something like a mug or a T-shirt.
Transactions replaced by social contracts
A second part of why crowdfunding works is that instead of a legal contract, crowdfunding platforms establish with consumers a “social contract” based on noble collective goals and intangible returns.
Backing a crowdfunding project comes with risks, and project backers do not receive the same protections as people buying an item from Amazon, eBay, or anywhere else.
Kickstarter gives a warning to potential project backers: “Unlike sellers on eCommerce sites, creators on Kickstarter do not automatically breach their contract with backers if they do not fulfill their rewards or provide users with a full or partial refund.” Similarly, reward-based crowdfunding backers have no recourse if creators fail to pursue or complete the innovative ideas that were their reason for asking for money.
However, in exchange for their financial gifts to support market democratisation, these project backers derive four unique forms of intangible value.
- They get to express their tastes by selecting the innovations that they deem worthy of existing in the market—an opportunity that stands out from their conventional experiences as mass consumers elsewhere. This opportunity is even more significant because their tastes are often niche, patterning the immaterial value of “individualistic democratisation.”
- As producers provide updates on their projects’ progress, consumers relish peeking behind the scenes of the entrepreneurial journey, acquiring the immaterial value of “insider knowledge” in their oft-niche areas of interest.
- Consumers derive excitement from betting some money on the ideas of typically unknown producers. When these producers fulfill their projects and send their supporters some reward -typically symbolic tokens and an early version of the crowdfunded project – these consumers experience a “reciprocity thrill.”
- Finally, crowdfunding consumers derive the immaterial value of “vicarious success”: the experience of getting a flavour of the glow of successful entrepreneurship while taking on little risk.
Reward-based crowdfunding’s main limitation
Beyond the consumer/project backers risks, the academic authors also articulate another important limitation of reward-based crowdfunding.
For creators, reward-based crowdfunding finances many projects that would not receive bank loans or venture capital for lacking a clear profit potential, a trading history, or due to limited ambition.
Crowdfunding as an alternative means to support the creators tends to attract a specific segment of consumers: well-educated professionals involved in industries focused on producing knowledge, technology, and entertainment. These consumers tend to support projects they deem “cool.” They channel money to innovations that match their tastes, hardly ever picking projects based on the potential to broadly enhance social equality or welfare.
Campaigns in areas such as music, film, publishing and games are more likely to succeed. Crowdfunding does finance many types of projects, but not as democratically as it first seems.
Crowdfunding has become a recognised and accepted branch of the digital economy. It is not used only by upcoming entrepreneurs and artists. Universities, museums, churches, and media organisations (including Wikipedia and The Guardian newspaper) regularly run campaigns to raise money from large numbers of people to create and enhance their market offerings.
As such, this new research on why crowdfunding works is timely in three main ways:
- It sheds light on the consumer appeal of the crowdfunding model;
- it brings into relief the role of platforms in shaping the meanings of the digital economy;
- and it calls into question these businesses’ egalitarian claims.
Fuller research findings were published in the Journal of Consumer Research, and a version of my article first appeared for Crowdsourcing Week, where I began writing content on aspects of crowd finance in 2016.
I am an independent crowdfunding adviser, with no attachments to any specific platforms. Please contact me with an email to [email protected] to find out if I can help you with any ideas you may have of using crowdfunding. To search my blogs for other content you may find useful use the Search facility at the top right of the page.