Learning from the Crowd: The Feedback Value of Crowdfunding

Abstract

Can crowdfunding benefit entrepreneurs beyond providing finance? This paper shows that crowdfunding extends early feedback to entrepreneurs about the market demand for their projects, thereby mitigating uncertainty associated with entry. Using Kickstarter data and exploiting a weather-based instrument, I show that more positive feedback (i.e., more initial pledging) from the crowd increases entrepreneurs’ chances to continue and commercialize their projects. The effects are stronger when entrepreneurs face higher uncertainty or when the crowd is more experienced. Consistent with crowdfunding feedback containing real option value, entrepreneurs launch riskier projects when the opportunity cost of crowdfunding increases. A survey of Kickstarter entrepreneurs corroborates these results.

Keywords: entrepreneurship, crowdfunding, FinTech, learning, real option, experimentation, financial market feedback

JEL Classification: D83, G20, L26, M13