Is Crowdfunding Still on the Rise?
Crowdfunding is the process of raising capital online from a large audience. It began developing in the mid-2000s with the launch of peer-to-peer (P2P) lending platforms like Zopa in the UK and Prosper in the US. Reward-based crowdfunding quickly followed, especially gaining traction in the arts and creative industries through platforms like Kickstarter and Ulule. Equity-based crowdfunding was slower to emerge—partly due to a lack of suitable regulatory frameworks—but is now catching up, while blockchain technology has led to intriguing developments since the late 2010s. Today, crowdfunding has become a real alternative to traditional funding sources, finding a place in Entrepreneurial Finance textbooks (see here and here for example).
A decade after publishing my co-authored article, Crowdfunding: Tapping the Right Crowd,” I had the opportunity to survey the economic literature on crowdfunding. This survey, published in the Oxford Research Encyclopedia of Economics and Finance (an ungated version is available here), explores the incentives of actors involved, funding dynamics, platform and market development, and the real effects across the main crowdfunding models: that is, reward-based, equity-based, lending-based, and blockchain-based models.
Crowdfunding arose on the premise of disintermediation from banks and specialized investors: the crowd can directly fund small businesses, startups, and projects based on information shared online by the entrepreneurs.[1] The latter can rely on the four different models to get funded. Their choice of the model depends not only on their funding needs but also on what they would like to obtain from or share with the crowd. The appeal for crowds (of either backers, investors, or lenders) to engage in crowdfunding is to access more economic opportunities than what they can access offline but also to enjoy a community-based experience. The role of crowdfunding platforms is crucial in this respect as they facilitate through various mechanisms the interactions between the crowd and entrepreneurs.
Importantly, the rise of crowdfunding stimulates economic activity. In particular, crowdfunding appears to foster the rate of entrepreneurship directly by channeling outside capital to entrepreneurs typically underserved by traditional sources of early-stage funding (especially women and minorities), but also indirectly by enabling follow-on funding by banks and specialized investors.
In this selected survey, I cover approximately 175 contributions, reflecting on the rapid growth of the crowdfunding literature over the last decade. But there’s much more ground to cover in this inherently multidisciplinary field. Looking forward, I believe three important strands of the literature are especially in need of further exploration:
- Industrial and Platform Economics: Evaluating the various strategies platforms use or could use to mitigate asymmetric information and coordination problems is key to understanding how they shape the structure and competitive dynamics of crowdfunding markets.
- Tokenomics: The tokenization of crowdfunding on blockchains introduces a whole new layer of flexibility and transactional efficiency. It may represent the next major stage in the evolution of crowdfunding, especially given the ongoing challenge of limited secondary markets.
- Entrepreneurship: Surprisingly little empirical work has evaluated the causal impact of crowdfunding on entrepreneurs, business formation and innovation. This strand holds exciting potential for understanding crowdfunding’s broader economic consequences.
In sum, this new survey explores these themes and more, combining early insights with recent research. While this isn’t the first survey on crowdfunding, it reflects my perspective on the economic significance of crowdfunding in its various forms, from P2P to blockchain-based models. I hope this survey offers readers both a unified and valuable insight into the crowdfunding phenomenon and its potential to reshape (entrepreneurial) finance.
[1] Obviously, entrepreneurs can rely on crowdfunding to start and further develop their businesses. However, many other actors (individuals, businesses, and organizations) can also resort to crowdfunding for a variety of purposes. For instance, musicians can use crowdfunding to promote their album, students to cover their tuition, consumers to buy a car or make home improvement, households to cover medical expenses or retire credit card debt, corporations to purchase equipment, scientists to fund their research, journalists to launch their reporting project, charities to organize an event, or politicians to raise money for their campaign.
