How Democratic is Crowdfunding?

Before reading this blog post I recommend you check out this short video on what crowdfunding is and maybe read my earlier post “Crowdfunding for Sustainability”.

The knowledge relevant for innovation is increasingly understood as being multifaceted and widely dispersed and hence often falls outside the respective realm of any one firm or organisation. Consequently the literature within innovation studies is increasingly moving away from its producer-centric focus and is instead also seeking to explore the role of other actors within this process. The resulting research has led some scholars to suggest that innovation has increasingly become ‘democratised’ as more actors become drivers of innovation in their own right (an interesting book on this topic, called “Decomratizing Innovation” by Eric von Hippel, can be found here). The innovative capabilities of online communities has, for example, attracted increased scholarly attention, including the potentially “disruptive force” of crowdfunding in driving and financing innovation. Especially, as it is seen to potentially reduce the geographical constraints of traditional funding, empower both entrepreneurs and end-users to steer the direction of innovation, and increase funding opportunities for both a broader range of user innovators and entrepreneurs alike. Crowdfunding specifically has also been characterized as democratizing innovation finance as it allows you and I a direct say in selecting the product and service innovations we would like to see happen through our direct support. This “open call” for finance via platforms, e.g. IndieGoGo, has by some therefore been hailed as an alternative avenue finance for business ventures that is less restrictive than traditional finance. The question, however, remains how democratic the crowdfunding process truly is both in terms of geographic distribution of resources and the individuals benefiting from this new source of finance. With this expressed goal Caleb Gallemore, Kristjan Jespersen, and I set out to follow the money and identify exactly where and who benefits from this new source of finance.

 How do we follow the money?

To some extent crowdfunding can be characterised as a web-enabled tool designed to facilitate contact between the crowdfounder (‘the person or group seeking the money’) and a prospective large group of crowdfunders (‘the people with the money i.e. you and I’). Given this web-enabled nature a ‘data scraping’ approach was identified as a useful method for studying crowdfunding as it allowed for an very effective way of collecting data. Data scraping works by programming a so-called web-crawler – a computer program – to extract a specified set of data from an indicated website. One can of course also do this manually by checking each campaign website, but as you can imagine this would get tedious very fast! Utilizing this approach, we gained access to data about all hosted, past and ongoing, projects on platform IndieGoGo – one of the largest reward-based crowdfunding platforms. And it based on this, that we have conducted our analyses.

What have we found, so far?

Firstly, and perhaps not surprisingly, it appears that it is the already affluent regions that benefit the most from crowdfunding activities, while less well-off areas still receive the short end of the stick. Clearly, while crowdfunding may offer an extra opportunity for achieving financing, this does not offset other factors that play an important role in entrepreneurial success e.g. background, education, and social network that favour areas already affluent. More surprisingly we also found that increased competition – i.e. more campaigns – actually increase the likelihood of funding success. For each percentage increase in the number of campaigns in the same neighborhood, we estimate a decrease of about 11% in the odds that each of those campaigns will receive no funding pledges. Indicating the increased competition actually results in a net positive outcome where campaigns rather than leeching of one another, generate momentum for further success. This may be because of increased levels of visibility of crowdfunding activities as a whole at the local level. In other words, people living in areas with more crowdfunding activities might be more aware of the practice, increasing the pool of potential investors. Another possibility is that areas with high levels of crowdfunding activities might generate local communities that can share knowledge and advice about the process, improving the quality of local ventures. Finally, we increasingly find that certain people are – naturally – more successful then others at achieving crowdfunding success. Witnessing that for each successful campaign launched by an individual or group the likelihood for future success increases dramatically – hence after five successful campaigns launched by a given person or group they have a near 100% chance of future success. We are perhaps witnessing the birth of the professional crowdfunder.

Early conclusions – To those who have more shall be given

As money seems to coalesce around certain regions and individuals we have to wonder whether this trend will continue. Will we increasingly see certain regions and individuals benefitting while other less well-off or professional lose out? And what does this mean for crowdfunding as the democratizing agent of innovation? It offers opportunity for you and I to drive innovation, but that innovation process itself perhaps unsurprisingly still seems to cluster around certain regions and persons. While this is by no means the final word – this is still early day research of only one sample – these observations nevertheless complicate the idea of relying on crowdfunding as a new mechanism for economic development, poverty reduction, or social action. While crowdfunding certainly provides a new way to access capital, it may not provide such access equitably.

by Kristian Roed Nielsen 


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