Why and When Do Crowdfunding Backers Invest?

Crowdfunding—collecting small donations from a large number of investors—is an increasingly popular way of raising capital, particularly for creative projects. With the rise of crowdfunding platforms such as Kickstarter and Indiegogo, entrepreneurs and small businesses have secured billions of dollars to develop their innovative ideas. However, we still know surprisingly little about why and when backers decide to pledge. To shed light on this issue, HKUST’s Professor Jing Wang and Ph.D. candidate Gen Li took an innovative approach, exploring the relationship between the timing of crowdfunding and investors’ behavior.

The researchers focused on the reward-based model of crowdfunding, which, they explain, “enables entrepreneurs to collect money from backers and compensate them with tangible non-financial rewards such as a copy of the new product.” Many creative ventures, spanning the fields of art, film, music and technology, have taken flight through reward-based crowdfunding. What motivates investors to support such projects by pledging money or sharing information on social media?

Findings in this regard are mixed. Previous studies, the researchers tell us, “have uncovered both the prosocial motivation of pure altruism … and the economic motivation to collect rewards.” To gain a deeper understanding of backers’ motivations, the authors took a novel perspective—focusing on the timing of investment. “Backers who pledge at different stages of achieving the funding threshold,” they suggest, “may possess different motivations.”

Before reaching the threshold, social relationships hold sway. Backers may pledge or share project information at this stage “because they want to help project creators and support causes.” However, they may also be reluctant to contribute financially to a project with no guarantee of success. Nearer the threshold, the risk of failure is reduced. Tipping the scales toward success may increase backers’ prosocial motives by giving them “a great sense of achievement and satisfaction.” Once the project is fully funded, however, backers are certain of its quality. “As a result,” the authors tell us, “the economic motivation to receive rewards is enhanced.”

To test these assumptions, they used data from Kickstarter and Facebook to investigate backers’ pledging and sharing behavior “before, close to, and after the project threshold is reached.” They describe “a dramatic increase in the number of backers and Facebook shares when the project approaches its funding threshold.” Furthermore, backers showed much more support before a project reached its goal than afterward. Both of these two effects are more pronounced in public-good than in private-good project categories. The authors conclude that “backers exhibit a strong prosocial motivation” and “both goal proximity and project prosociality have a positive impact on the prosocial motivation of backers”.

These findings have vital practical implications. Better understanding the motivations of investors will help crowdfunding platforms “design their search and ranking mechanisms to better accommodate the interests of backers and attract more potential backers,” the researchers note. “For project creators,” they add, “our findings can provide guidance on the development of more effective and targeted marketing strategies.” For example, entrepreneurs could post more updates on social media before projects reach their funding thresholds “to exploit the strong prosocial motivation of backers” at this stage. These recommendations are timely and important, as attracting more investment for innovative ideas can only benefit society as a whole.

WANG, Jing

Associate Professor
Information Systems, Business Statistics & Operations Management