Last week we introduced the concept of crowdfunding and how it is now being used to get sustainability off the ground. We discussed how crowdfunding involves two parties: the beneficiaries of the campaign and its funders or backers. We explained how millennials are more and more interested in being altruistic and funding sustainability projects and we also explained why someone would ask funding from the crowd in the first place. This is really a no-brainer given that projects need money and it is a common occurrence that campaigners will not have enough resources to execute the projects they want on their own. But we also highlighted how not everything is about money; crowdfunding allows democratization of finance but also democratization of ideas. The crowd provides creative input as well as a network for the campaigner in ways he would never have had access to.
Today we discuss the funders’ motivations for crowdfunding. That is, why would random individuals back projects of people they do not even know and whose risks are very high? And the million-dollar question: what attracts funders to select to fund one project over hundreds of thousands of projects currently available to them?
FUNDERS’ MOTIVATIONS FOR CROWDFUNDING SUSTAINABILITY
We know from Business Ethics research that investors are motivated by both financial and non-financial returns and recent studies of crowdfunding backs this idea. Funders of crowdfunding campaigns choose the type of campaign based on characteristics that matter to them. Some crowdfunders (equity-based or lending-based) are typical investors expecting a financial return in the form of future profits. Rewards-based crowdfunders are motivated by a bargain or the attractiveness of a non-released product. Whereas donations-based crowdfunding essentially attracts philanthropists that want to demonstrate their social awareness or simply contribute to social change.
Research has suggested that having a sustainability orientation may increase a small venture’s legitimacy and have a positive impact on a crowdfunding campaign. This may be related to the fact that recent research developments in sustainability point towards a consensus of a positive relationship between corporate social performance and corporate financial performance. Further it has been found that responsible investing can reduce a portfolio’s risk and some evidence suggests that adopting a sustainability orientation may stimulate creativity. One study argues that a sustainability orientation forces managers to confront the tensions that exist between complex economic, social, and environmental considerations, and that confronting these tensions leads to more creativity. Sustainability may thus appeal to people who are looking for the material benefits of new and innovative products and services. It appears that ceteris paribus, crowdfunders that have an intrinsic financial or material motivation may also be motivated to choose sustainability projects strategically.
The behavioral finance literatures point out that investors are motivated to invest based on non-financial factors such as ethics. Studies argue that individuals may willingly choose immaterial utility such as happiness or satisfaction gained from ethical considerations within their utility maximization. The growth in socially responsible investments is empirical proof of this.
Indeed, some statistics have shown that crowdfunders tend to be young, male, primarily from North America and Europe, and with considerable earning power. This age demographic has indicated preferences for working for employers that are socially or environmentally friendly and they prefer to buy from suppliers of green or socially responsible products. A recent study has provided some evidence in this direction. By studying two categories (technology and film) on the US Kickstarter platform, researchers found that projects with a sustainability orientation (social or environmental) increases funding success and pledged amounts compared to commercial-only projects. It thus appears that regardless of motivation, whether financial or non-financial, sustainability projects may have more appeal to investors than traditional projects.
QUALITY AS A MODERATING FACTOR IN CROWDFUNDING SUCCESS
Funders must simplify their choices. However, the due diligence conducted by crowdfunders is necessarily minimal because available information is limited, many ventures have little history, many entrepreneurs have little experience, and data are typically self-reported. Signals are thus extremely important in campaigns. High quality projects and more prepared entrepreneurs are more likely to succeed such as by using videos, updating constantly, and even spelling errors matter much more in such projects. Just like in other situations of financing, information asymmetry is the largest determinant of risk in a crowdfunding campaign. Signals of project quality thus moderate whether a project will be successfully funded or not.
URGENCY AS A MEDIATOR IN SUSTAINABILITY CROWDFUNDING SUCCESS Finally, decision-makers’ attention and resources are limited, but given the discussion on the need for pragmatic solutions to pressing global concerns, sustainability projects may be considered some of the most urgent today. A sense of urgency can motivate contributions and a spike in activity has been seen in platforms at the beginning and end of each campaign. Indeed, framing a project as urgent may appeal to the crowd and may entice them to financially support a venture.
(To be continued.)
Note: This paper is based on a Masters in Finance thesis at IESEG written by Jade Tissier and supervised by the author. References are available upon request.
Daniela “Danie” Luz Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IÉSEG School of Management in Paris and maintains teaching affiliations at IÉSEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.