Crowdfunding theory under construction – report from Amsterdam’s first academic research seminar

What is certainly true about the relatively new phenomenon of crowdfunding is that theory lacks behind practice. Should you happen to work with the former, it is furthermore difficult to be aware of other academic and research projects on the topic, since many are undergoing and yet to be published.

In this context, the initiative of the Vrije Universiteit (VU), Amsterdam Business School (UvA) and the Crowdfunding Hub to organize an academic research seminar on crowdfunding was more than welcomed.

Crowdfunding Hub

Starting 2014, the Hub has organized monthly crowdfunding meetups but has so far gathered mostly entrepreneurs and crowdfunding platforms. The research seminar is thus a first attempt at connecting another important stakeholder in the industry:  academics and researchers. This, argued Ronald Kleverlaan, founder of the Hub, is essential as the industry is growing quickly and cannot rely solely on “trial and error” wisdom. Data and insights coming from the theoretical perspective are needed to support a truly structural growth.

As a result, 12 presentations were held yesterday, June 5th at the Crowdfunding Hub’s location (the historic Beurs van Berlage, Amsterdam). The seminar’s first edition aims to bring together and connect various academics and researchers engaged with the alternative revenue model and map out current initiatives. It gathered around 20 participants. Together with Robert van Boeschoten, we also presented the latest version of the MoneyLab Crowdfunding Toolkit for Creative Industries as part of the Institute of Network Cultures and Hogeschool van Amsterdam.

The first session of the seminar introduced the current status of scientific research on crowdfunding. Irma Borst from Vrije Universiteit’s Organizational Sciences department offered some context around why this revenue model is popular – namely, the financial crisis that brought with it public and private fund cuts, a failing trust in banks coupled with an increased desire of people to control their investments. In The Netherlands alone, the amount of money raised through various forms of crowdfunding was 14 million euro in 2012, via 29 crowdfunding platforms. 2014 has already raised 60 million euro with a number of 81 active platforms.

While existing literature already sketched the taxonomy of crowdfunding, multi-faceted research is essential and missing, Borst argued. What can we learn about from philanthropic studies, law and policy, linguistics, organizational science, social network analysis or entrepreneurial finance?, asked Borst, as she gave the floor to an eclectic mix of speakers, disciplines, and perspectives.

Rene Bekkers, from the VU Philanthropic Studies, made a succinct case of how crowdfunding employs traditional philanthropy models. He enumerated the seven reasons why which people “give” in the latter: there is a need (an initiative depends on their donation), they are solicited  to do it, they perceive the cost to be reasonable for the benefit it provides, it gives them a chance to be altruistic, it adds to their reputation, rewards them (psychologically), it matches their values, and they see the impact of their donation. This structure is also reflected in the way crowdfunding campaigns are built, particularly when they boost the donors’ reputation and reward their involvement (either with a material reward or just psychologically). Bekkers focused on the role of social influence. People donate to a crowdfunding campaign when they see their close network do the same, and like to share their support of a project. Like in philanthropy, where trends show that people donate less when there is no suggested amount but tend to donate more when there is one, crowfunding tends to work the same way – it suggests different donation amounts (and the more you donate, the more perks you get).

Crowdfunding might also be borrowing from the traditional membership schemes. Joris Ebbers from UvA Business School gave the example of established museums the likes of Stedelijk, Louvre or TATE, which allow people to become continuous donors that have different types of privileges, depending on how much they donate. The interesting pattern here is that those who donate a small amount (such as 50 Euro) tend to be good ambassadors and encourage their networks to become donors as well, while those paying 100-fold that amount never do. Could this pattern also apply in crowdfunding? Are small donators better ambassadors than big donators? Is there such a thing as an exclusivist circle of donators and investors? This might be very interesting to see in the equity crowdfunding. Current legislation proposals  provide a strict limit to the amount that non-accredited investors can pay for a project, while accredited investors invest much more. What will the dynamics be when both groups meet to support the same project? Will this make or break the monopolization of investments in equity crowdfunding?

Discussions became more interesting when philanthropic behavior was viewed from a social network analysis. It has long been a fact that often donation-based crowdfunding relies on one’s strong ties (friends, families and acquaintances), unlike the museum memberships. This is a burning issue, since campaign creators need to set much smaller target amounts than they would when applying to public subsidies, because crowdfunding works on small donations. The question here is how can crowdfunding activate one’s latent ties (those outside the campaigner’s network – the real crowd) and how much are the latter donating compared to strong and weak ties. Irma Borst and Rene Bekkers experimented with 10 Voordekunst projects in order to tentatively answer these questions. Their results showed that successful projects attract much more latent ties, and this is positively associated with Twitter social interaction rather than Facebook. Weak and latent ties donate less than strong ties, however. The research is undergoing and worth checking when it will be published.

Also related to  the donation amount, but this time from a behavioral economics perspective, was Sander Onderstal’s proposal to experiment with different auction models. A recurrent problem is that projects often do not reach their target. Why? The problem seems to be a different value appreciation and an inefficient selling model. Onderstal is currently looking into better selling mechanisms so that creators of campaigns can better determine the value of their own product and adopt the right selling mechanism to maximize their success chance.

Apart from value, do people have different behaviors when they donate as opposed to when they invest? UvA entrepreneurship student Lusine Shakhoyan created a fake crowdfunding platform with a real project that was raising money. Internet users who agreed to participate in her experiment were randomly allocate to either donate, invest or donate for a reward. She hopes that insights from this experiment will help businesses make a more informed decision on what crowdfunding model best suits their idea.

Yet another different angle was offered by Thomas Gallas, VU masters student, who is tackling the field of renewable energy, which seems to be particularly fit to finance via crowdfunding. His research looks into a long term (2014-2020) development of renewable energy in The Netherlands by means of interviews and surveys with various stakeholders. Dutch retail investors are inquired on their interest in investing via crowdfunding, while panel solar creators are inquired on their willingness to crowdfund, so that both parts are drawn together in the effort.

Zooming out of the Dutch context, Ling Zhao, PhD candidate at the Amsterdam Business School (UvA), presented his study on crowdfunding in China. Despite major media outlets like Wall Street Journal reporting on the industry’s growth in the area, Zhao argues for a closer and more critical look. He identifies the state’s formal institutions as major influencers on the type of environment in which entrepreneurship flourishes (“institutions include formal rules and informal influences, like cultural norms”). ‘Western’ institutions strongly support the crowdfunding practice and its philosophy of tapping in strangers’ resources. Chinese institutions are not only more unstable due to an economic transition, but they embed different cultural practices (for example, the act of asking strangers to invest is in itself problematic, because family and friends networks are more important). As a result, Chinese entrepreneurs face more risks and need to rely on informal (relation-based) institutions for their endeavors. Zhao’s aim is to analyze how both formal and informal institutions shape the nascent practice of crowdfunding and to see whether this leads to “a Chinese theory of crowdfunding or theory of Chinese crowdfunding”.

Yang Song (Faculty of Economics and Business, UvA) discussed her exploratory study on how tech startups in the U.S  have been raising their funds in the last ten 10-15 years. She aims to see how funding models have changed in this time and what role their social media management played. For this, she is looking into an impressive database of companies she collected from CrunchBase via open APIs, as well as their number of followers, fans and activity online.  Preliminary results point out the size of the network directly impacts the amount of money start-ups raise, and that a strong social network with various types of fans and followers allow for different funding types, often recurrently.

Finally, we introduced the MoneyLab Crowdfunding Toolkit. The toolkit – which will be launched in July – is a website targeting cultural and creative practitioners who wish to crowdfund their projects. It consists of three pillars. First, a series of 8 interviews with creators who already crowdfunded: a filmmaker, a performing arts group, a social entrepreneur etc. representing the major project categories on any crowdfunding platform. Second, the results of a survey that was also answered by creators who crowdfunded. This includes data on time effort involved, what type of funders are predominant (strong, weak?), average donation, average no. of funders, what help they needed and would they do it again. Third, an interactive visualization where users can explore a database of Dutch and international crowdfunding platforms. By selecting certain filters, the visualization then shows them the most relevant platforms for their project’s characteristics. The toolkit was, I believe, well received by the audience and we got useful feedback, including a suggestion to crowdfund the project in order to take it even further than the website.

The organizers of the seminar hope to host yet another in the near future, and I look forward to also seeing a wider audience (also platform owners and prospective campaigners). Meanwhile, crowdfunding will surely have a chapter of its own in the upcoming MoneyLab Reader, which is expected to be published in early 2015.