How Wise Are Crowds on Crowdfunding Platforms?

Abstract

While firms have obtained outside financing from large numbers of investors on financial markets for centuries, online crowdfunding platforms have only emerged as a major source of funding for start-ups and new projects for a decade. The information available to backers on crowdfunding platforms is generally coarse. This paper surveys the existing literature on the extent to which crowdfunding harnesses the wisdom of crowds. We discuss two broad categories of crowdfunding. Reward-based crowdfunding platforms such as Kickstarter, where backers typically have private and independent valuations, appear to offer environments favorable to the wisdom of crowds. In contrast, initial coin offerings (ICOs) offering services with network externalities and security-based platforms with common values appear to exhibit some results eliciting valuable information, but several results appear to point to informational cascades.

Keywords: crowdfunding, backers, reward-based, securities-based, ICOs, informational cascades, wisdom of crowds

JEL Classification: D82, G14, G23, G32, G5, L26, L86, M13, M21, M31