Crowdfunding doesn’t garner the same headlines as it did a few years ago, when you could scarcely move for the latest innovation gathering funds on Kickstarter. The flood of money into more traditional venture capital has somewhat reduced the need for companies to turn to future customers for financial support.
Nonetheless, for those who do still go down this route, new research from the University of Maryland suggests some tips for how your crowdfunding can succeed. The research identifies three phases of crowdfunding: a friends and family phase, where most funds are raised by (you guessed it), friends and family; a ‘getting crowded phase’, where funds trickle in from a broader range of sources; and the final ‘race to the goal’ phase, where momentum builds and the goal is achieved.
“In our research, we suggest three major drivers that lead to the dynamics in crowdfunding process: investors’ forward-looking strategic behavior, social interactions among individual investors, and their expectations on the crowd’s behavior” the researchers explain. “We found strong evidence for all three mechanisms and confirmed how they contribute to the dynamic patterns of crowdfunding.”
Stages of growth
For instance, in the friends and family phase, the primary goal of funding isn’t to support development, but to provide the signalling required to attract subsequent backers. This is the main motivation for those early backers.
The second phase often sees projects stagnate, so the researchers urge entrepreneurs to utilize social interactions to try and build up momentum and attract a critical mass of people.
“Based on these understandings on the crowdfunding dynamics, we identified for fundraisers the optimal goals that ensure intended results while raising the maximum capital,” the researchers conclude. “For the crowdfunding platforms, we arrived at ways to optimize targeting of the right investors, identifying those crowdfunders who have the potential to contribute the most to the program’s success. And, we have found ways to more accurately predict whether a crowdfunding campaign will succeed, and when it will succeed by observing early investment patterns.”
