Crowdfunding Models: Keep-it-All vs. All-or-Nothing
Douglas J. Cumming
York University - Schulich School of Business
Univ. Lille Nord de France - Skema Business School
Univ. Lille Nord de France - SKEMA Business School
June 2, 2014
Paris December 2014 Finance Meeting EUROFIDAI - AFFI Paper
Rewards-based crowdfunding campaigns are commonly offered in one of two models: “Keep-it-All” (KIA) where the entrepreneurial firm sets a fundraising goal and keeps the entire amount raised regardless of whether or not they meet their goal, and “All-or-Nothing” (AON) where the entrepreneurial firm sets a fundraising goal and keeps nothing unless the goal is achieved. We provide large sample evidence consistent with the view that the usage of AON is a credible signal to the crowd that the entrepreneur commits not to undertake the project if not enough is raised. This signal reduces the risk to the crowd, thereby enabling the AON entrepreneurial firms to set higher goals, raise more money, and be more likely to reach their stated goals. In contrast, KIA projects tend to be less successful, since the crowd bears the risk that an entrepreneurial firm undertakes a project that is underfunded and hence more likely to fail after the campaign. Entrepreneurs use the KIA model for scalable projects; that is, projects that are still feasible with partial funding. Further, we provide evidence that the crowd is much more sensitive to information provided by AON projects. We show that these findings are robust to a number of robustness checks, including but not limited to use of instrumental variables and propensity score matching.
Number of Pages in PDF File: 33
Keywords: Crowdfunding, Entrepreneurial Finance, Internet, Signaling, Indiegogo
JEL Classification: G21, G24, G32, L26working papers series
Date posted: June 11, 2014
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