Many happy returns, crowdfunding research!

Dr Lambert and his co-authors Prof. Paul Belleflamme at the University of Louvain and Prof. Armin Schwienbacher at Skema Business School found crowdfunding fascinating and were among the first researchers in the world to study the crowdfunding phenomenon when they published Crowdfunding: Tapping the right crowd in the Journal of Business Venturing, an elite academic journal. A decade later, the article has been cited by other academics almost 5,000 times – an enormous number. But their research paper has an even more impressive claim to fame: it has more than 200 ‘highly influential citations’ – these are instances where this paper significantly shaped the narratives of other scholarly works.

“Our work contributed to kick-starting a vibrant new area of multi-disciplinary research about the process of raising capital online from ‘the crowd’ or a large audience,” said Dr Lambert. Ten years later, he is still researching crowdfunding; his most recent paper is from July 2024 Crowdfunding Entrepreneurship: Evidence from Us Counties with RSM Prof. Peter Rosenboom and Aleksandrina Ralcheva of Delft University of Technology. And since that first paper 10 years ago, follow-up research projects have collaborated with crowdfunding platforms like Ulule, Kickstarter, and KissKissBankBank to test some of the researchers’  theoretical predictions using real transaction data.

“Despite crowdfunding’s small market size back in 2014, it had two distinctive features that made it worth studying,” he remembers.

First, crowdfunding has implications that go beyond the financial sphere of companies. Information can easily flow between entrepreneurs and contributors. It also cleverly leverages contributors’ dual motivations: they are doing something because they enjoy being involved, and they are also doing it for reward.

The growing availability and increasing capabilities of the internet enabled crowdfunding’s second distinctive feature: its ability to provide new and inventive ways to match up entrepreneurs and contributors, and to reduce the likelihood of market failures that are down to lack of information. 

“By the early 2010s, we recognised crowdfunding’s potential for transforming the landscape of finance – particularly entrepreneurial finance,” said Dr Lambert. “Over the past decade, crowdfunding has become a key element in the digital revolution of financial services, enabling entrepreneurs to tap into the collective power of the crowd to fund innovative projects and businesses.”

Academic research into crowdfunding has uncovered its inherent multidisciplinary qualities – it sits across the intersections of several disciplines; with strategic entrepreneurship, information systems, marketing, behavioural science, law, and sociology.

“Looking back, we didn’t fully anticipate just how significant crowdfunding would become in both practice and academic research. Our research was motivated by the desire to understand this emerging phenomenon and we were fortunate to be among the first researchers in the world to do so. At the time, crowdfunding was still in its infancy, and our early work allowed us to explore and understand its potential before it became the recognised force it is today.”

In the researchers’ first article about crowdfunding, they developed a theoretical model that highlights the importance of the ‘community benefits’ that people get when they contribute to a crowdfunding project, and focuses on the relationship that entrepreneurs establish with their crowd. This relationship does more than fulfil the project’s funding objective, and the two crowdfunding models each presents a slightly different relationship.

The researchers found that when an entrepreneur chooses which of the two crowdfunding models they will use, they are also selecting what they want to learn about their crowd and what they can expect to extract from them through the pricing of their product.

Both models of crowdfunding give funders something extra that regular consumers don’t get, but the nature of these community benefits varies with the form of crowdfunding. Community benefits are linked to the ‘experience of consumption’ that comes with the reward-based model. In the profit-sharing model, the community benefits come with an ‘investment experience’.

“We found that this difference – in the form of extra benefits – is crucial in shaping the choice entrepreneurs make about the crowdfunding mechanism they’re going to use. Our comparison of the two models revealed that entrepreneurs prefer the reward-based model if their capital requirement is relatively small compared with market size. Otherwise they prefer the profit-sharing model.” 

The reward-based model (that requires funders to pre-order) enables the entrepreneur to discriminate on price between funders and other buyers. Yet, as the enterprise requires more capital, the entrepreneur is forced to distort the pricing scheme to attract more pre-orders than would otherwise be optimal. Above a threshold, the distortion in the price discrimination becomes excessive, such that the profitability of the crowdfunding initiative decreases significantly. 

Conversely, crowdfunding based on profit sharing becomes more beneficial with larger amounts of funding. This is because larger amounts induce the entrepreneur to solicit more individuals to participate in the financing with little effect on the fraction of profits that they would need to give up being able to obtain financing.

The researchers’ conclusions from that first research paper had – and still have – implications for entrepreneurs with companies in the early development stages, and the decisions they make when they need to build a community and interact with its members. “Our model stresses the need for entrepreneurs to build a community that ultimately enjoys additional private benefits from participating in the crowdfunding scheme and to make crowdfunding a viable alternative to traditional, offline sources of funding.”

When choosing a model of crowdfunding, it is critical the entrepreneur understands the crowd and the nature of the community benefits that the crowd derives as this had important implications for the success of the crowdfunding campaign and further prospect of the business or project.