While crowdfunding doesn’t attract quite the attention that it used to, it remains an important way for entrepreneurs to raise money. Indeed, the various crowdfunding platforms generated around $65 billion in revenue in 2020. Research from the University of Kansas explores the best way for entrepreneurs to succeed in their fundraising ambitions.
Raising funds
The researchers explain that a typical crowdfunding campaign can last a couple of months, with a lot of activity at the beginning, not least as family, friends, colleagues et al contribute, before a slowdown in activity in the middle and then a surge towards the end as the deadline approaches.
“Previously, people thought this surge happens because the contributors of the pledges are altruistic and want to see the creator and the campaign succeed,” the researchers say. “But we found it might not always be the case. This last-minute surge can happen due to people strategically withholding because they want to see if it’s going to get funded.”
The study found that seemingly small hurdles can play a significant role in whether an individual contributor backs a campaign or not. For instance, even something as seemingly inevitable as filling in credit card details can dissuade someone from contributing. The researchers devised a number of ways entrepreneurs can overcome these obstacles.
Overcoming hurdles
“One way of doing that is using menus, where you have the same product but you charge different prices depending on when people are getting in,” they explain. “So there could be the same product sold at, say, $100. The first few individuals who decide to contribute will get this lower price. Anyone who decides to wait will have to get the same product at a higher price.”
The team developed a mathematical model to gauge what game theorists call the “equilibrium” so that everyone is acting in their own best interest. They then tested their model on real-world data. The research highlighted the binary nature of the process, with projects often either proving wildly successful or stinking the place out.
“Crowdfunding campaigns either fail miserably or they do well and succeed. But it almost never happens that the creator raises 80% of the target and then loses,” the researchers conclude. “It’s either only 20% of the target is raised or it’s fully funded. This in-between scenario is very rare. Our model can explain this observed quirk.”
