Crowdfunding: Funding Dynamics and Platform Growth

In a recent study (available here), we examine the microeconomic underpinnings of the performance and growth of crowdfunding platforms. Our empirical exercises are conducted on Ulule and KissKissBankBank, two platforms largely dominating the French reward-based crowdfunding market. We study about 2 million contributions made by backers on these reward-based crowdfunding platforms.

Why does reward-based crowdfunding matter?

Reward-based crowdfunding is important to study in its own right as a sizeable channel of raising money for early startups, particularly in creativity-based industries. It also provides an excellent setting since it offers an environment in which a very large population of backers can observe the contributions of other backers for all listed projects. Moreover, reward-based crowdfunding platforms share important characteristics (digitalization, peer-to-peer, wisdom of crowds) with other FinTech platforms, such as marketplace lending platforms or token-based platforms.

What do we find?

We first show the intensity of funding dynamics, within and across listed projects. We document the presence of “within-project” funding dynamics, that is, previous backers’ contributions to a particular project positively influence current backers’ contributions to that project. Besides these within-project dynamics (already shown in the literature), our evidence uncovers non-negligible “cross-project” funding dynamics (an entirely novel result). Specifically, we find that current contributions to some project increase with contributions made on other listed projects. To put some numbers, cross-project funding dynamics imply a 4 to 5% increase in the contributions that projects generate on a daily basis.

Next, we show that recurrent backers (that is, backers contributing repeatedly) act as the main transmission channel of cross-project funding dynamics. We find that recurrent backers are more likely to contribute earlier than other backers to any project; they are also more likely to contribute to successful projects. This evidence suggests that other backers learn from recurrent backers’ contribution decisions. In other words, social learning is initiated by recurrent backers and partly explains how positive funding dynamics spill over from one project to another.  

Last, we show that the evolution of the number of recurrent backers plausibly accounts for the diverging growth trajectories that Ulule and KissKissBankBank have taken in the past years. Specifically, Ulule has been growing faster than KissKissBankBank both in terms of the number of recurrent backers and of volume of contributions.

Bottom line: recurrent backers drive funding dynamics (within and across projects) and, by doing so, are a fundamental driver of the growth of crowdfunding platforms.

So what?

First, from a managerial perspective, our analysis suggests that the performance of a reward-based crowdfunding platform depends not only on the quality and quantity of the projects that are proposed to potential backers, but also on the way these projects are mixed. The existence of positive cross-project funding dynamics indicates that synergies exist between projects. Crowdfunding platforms may thus increase total contributions by choosing the right mix of projects. Another important lesson for platform managers is that recurrent backers behave quite differently from new backers and, in particular, are recognized as ‘social influencers’. We indeed show that projects having a higher fraction of recurrent backers appear to generate more contributions, suggesting that retaining existing backers yields larger returns than acquiring new backers.

Second, from a competition point of view, our analysis suggests that reward-based crowdfunding is a ‘winner-takes-all’ type of market: social learning (coupled with positive network effects) creates positive feedback loops, which tend to make strong platforms stronger and weak platforms weaker. Hence, a crowdfunding platform that manages to grow faster than its rivals may acquire a self-sustaining competitive advantage, leading eventually to market dominance. Our results show that a key driver explaining the growth path of crowdfunding platforms is the share of recurrent backers that they manage to retain. We take as evidence the widening gap between Ulule and KissKissBankBank in the French reward-based crowdfunding market. This also means that the only survival prospects for smaller crowdfunding platforms are to be found in specialization (finding the right niche) or in consolidation (merging with other crowdfunding platforms). These implications for competition among crowdfunding platforms thus resonate with the current policy debate about the dominance of BigTech platforms (see here for example).

This post is co-written with Paul Belleflamme and Armin Schwienbacher and also published in Machine Lawyering.