Entrepreneurial Crowdfunding without Private Claims

Abstract

The bulk of today’s (“preorder-,” “reward-,” “gift-,” and “donation-based”) crowdfunding raises funds for tiny, private entrepreneurial ventures without granting funders private claims to a project’s future value. Rather than “investments,” these are “contributions.”

We theorize and show empirically that crowdfunding has a payoff structure akin to public goods and associated free-riding. This implies that the tangible value of main project outputs per se should have little bearing on funds raised.

We build on the vast public goods literature to explore the role of non-pecuniary motivations in funding— and how these motivations may differ where the project is by a small profit-seeking entrepreneur (as opposed to a charitable organization).

Drawing together theory, detailed analysis of fine-grained survey evidence, along with observational data on contributions, announcements, product usage, new version releases, and campaign changes from a representative project we pinpoint three specific sources of non-pecuniary motivations in cases of entrepreneurial crowdfunding: (i) empathy, in the sense of experiencing a “common cause” with the project, (ii) reciprocity, in the sense of paying back for one’s own consumption, (iii) and signaling motivations, in the sense of encouraging others to contribute.

The findings hold important implications for crowdfunding strategies, platform design, the kinds of ventures that choose this funding approach, and our understanding of how this funding institution works.

Keywords: crowdfunding, entrepreneurship, public goods, motivations, online community

JEL Classification: G2, G02, H41