The guiding research question was ‘how does the type of information used by crowdfunders vary with the strength of their ties to project creators?’ Overcoming information asymmetries, prevalent in the relationship between financier and entrepreneur, especially for young and innovative firms, has traditionally been a role of venture capitalists that screen, select and monitor potential targets and syndicate with other investors through social networks to pool resources, exchange information and spread the risks (Alexy et al.
2012; Gompers and Lerner
2001; Manigart and Wright
2011; Shane and Cable
2002; Ter Wal et al.
2016). Our research adds to the informal investor and crowdfunding literature on overcoming information asymmetries in social networks by disentangling quality signals used by crowdfunders to judge project quality (Audretsch et al.
2012; Becker-Blease and Sohl
2015).
First, researchers stressed the role of internal social capital (early backers) as signals for funding success (Ahlers et al.
2015; Colombo et al.
2015; Cumming et al.
2015a; Vismara
2016a,
2016b). We add to this line of research by differentiating types of information required by potential investors, based on their relationship with the project creator. Whereas in-crowd funders rely on information about the person behind the campaign and previous projects, there is no increased use of information about financials and associated risks. These results are in line with previous research on crowdfunding motivation (Cholakova and Clarysse
2015). Our results show that in-crowd funders are not just involved out of sympathy or relationship building (we control for instrumental motivation) but also search for information that signals project quality or behavioural intentions thereby complementing earlier work that found a positive relationship between strength of ties and altruistic investment behaviour (Klyver et al.
2016). The inclusion of the entrepreneurs’ social network informs the funding decision in a similar way to the VC-entrepreneur relationship (Huang and Knight
2015; Manigart and Wright
2011; Shane and Cable
2002).
We extend previous work on the ‘wisdom of the crowd’ in collective funding decisions (Mollick and Nanda
2015; Surowiecki
2005) with regards to the use of information about the project and the project creator. Our research confirms the notion that relationships between investors and project creators facilitate the exchange of information about the entrepreneur and their track record, a mechanism prevalent in VC/angel investor-relationships (Bernstein et al.
2016b; Vismara
2016a). Our findings suggest that the in-crowd gathers (soft) information about the management of the venture (Ahlers et al.
2015; Cholakova and Clarysse
2015; Cumming et al.
2015a).
Second, we find no consistent evidence for our hypothesis that out-crowd funders rely more on information about the project and its objectives in decision making than in-crowd funders. This in contrast to predictions from previous studies (Ahlers et al.
2015; Hornuf and Schwienbacher
2015). Even though they do rely significantly less on information about the person than in-crowd investors, this is not being compensated by a greater reliance on information about the project. It raises concerns with regard to the quality of decision making of out-crowd funders contrary to findings in previous studies (Mollick and Nanda
2015).
Third, we hypothesised that out-crowd funders investigate information about financial planning and risk more thoroughly to search for quality signals and commitment (Ahlers et al.
2015; Blumberg and Letterie
2007; Busenitz et al.
2005; Hornuf and Schwienbacher
2015). We find that this hypothesis holds for financial crowdfunding. In our full model, we find no support for this notion and also find that funders in general—with or without ties—attach a lower importance to this type of information.
Crowdfunding decision making can thus be characterised as relationship-driven (Bernstein et al.
2016b; Colombo et al.
2015). In this regard, crowdfunders, when aggregated across all types, apparently behave differently to professional (VC) investors who rely also on financial due diligence and an alignment of goals between venture and investor (Audretsch et al.
2012; Bernstein et al.
2016b; Busenitz et al.
2005). This study also reveals interesting differences regarding the use of information of distinct types of campaigns, which adds to the understanding of funding dynamics (Belleflamme et al.
2014; Calic and Mosakowski
2016; Hornuf and Schwienbacher
2015; Mollick
2014). For-profit project funders are significantly less interested in information about the projects and its objectives than others, particularly compared to ecological project funders who attach a significantly higher importance to the objective of a project. This could be explained by either warm-glow or impact motivations (Andreoni
1990; Maas and Liket
2010). These effects are strongest in donation-based crowdfunding. Our findings corroborate recent studies on crowdfunding social and environmental enterprises and projects reporting mixed evidence of funding success to sustainability orientation and goals (Calic and Mosakowski
2016; Hörisch
2015).
We find more support for our hypotheses when we separate distinct types of crowdfunding. The mechanisms through which we expect social networks to affect informational needs (motivation, intention of the project owner and quality of the project) seem to lead to different information needs for donation, reward, and financial (debt and equity) crowdfunding decisions. Donation-based crowdfunding is often associated with non-financial motivations and non-profit organisations, whereas reward-based and financial crowdfunding are more commonly associated with for-profit or social entrepreneurs and financial motivation (Ahlers et al.
2015; Cholakova and Clarysse
2015; Mollick and Nanda
2015). In financial - debt or equity - crowdfunding, return for funders depends on the ability of the venture to generate enough profit to pay back a loan (debt) or create an exit scenario (equity). These crowdfunders rank the support to family, friends or local business very low as a motivation to invest (Nesta
2014; Vismara
2016b). Others distinguish between equity and reward-based crowdfunding and find that both are driven by financial motives, whether in-kind or financial (Cholakova and Clarysse
2015).
Before accounting for relationship strength, we find significant differences in information needs between crowdfunding types. In general, financial return (debt and equity) funders have higher information needs about the entrepreneur than reward funders. This is in line with VC literature predictions (Alexy et al.
2012; Bernstein et al.
2016b; Busenitz et al.
2005; Shane and Cable
2002) as well as Ahlers et al. (
2015) who indicate that financial return crowdfunding leads to higher concerns of moral hazard and a greater need for quality signals compared to reward and donation crowdfunding due to the long-term commitment to the enterprise, higher risk and expected returns. Low fears of moral hazard and a focus on product information render all types of reward crowdfunders less interested in information about the project owner.
Our granular models, in which we account for the effect of relationship strength per type of crowdfunding, show that in both reward and financial return crowdfunding, in-crowd funders have a significantly higher information need about the person behind the project than out-crowd funders. This suggests that even at the lower level of informational need within reward-based crowdfunding, relationship strength plays a role, thus adding a novel insight to the literature on the role of social networks in crowdfunding.
Interestingly, donation-based funders show significantly higher levels of information need about the person behind the project than reward-based funders, at similar levels as financial return crowdfunding. This is counter to expectations of Belleflamme et al. (
2014) and Ahlers (
2015), who argue that in donation-based crowdfunding the degree of asymmetric information is of little importance because other intangible factors increase the funders’ utility. We explain this from a motivation perspective. Donation crowdfunding can be likened to philanthropy, where ‘returns’ can be in the form of ‘warm glow’ (Andreoni
1990), societal impact (Maas and Liket
2010) or community benefits (Belleflamme et al.
2014). Donation funders interested in the (social, cultural or ecological) impact of their donation are more likely to be motivated to look for quality signals, indicating that their money will be well spent, before pledging their funds.
When we look at the effect of strength of ties on information needs in donation-based crowdfunding, we find no increased demand for information on either the project creator or financial planning and risks. However, for out-crowd donation-based crowdfunding, we find a significantly higher information need about the project and its objectives than for in-crowd funders. This is driven by a negative effect of weak ties in particular. This lower interest of weak tie funders in information about the project may point to a (weak) relationship motivation to donate instead of interest in the project and its impact. This is in contrast to, on the one hand, strong tie funders who may display interest in the project due to their strong relationship and, on the other hand, due to out-crowd funders who donate primarily out of interest in the project, without a social relationship.
We also find that compared to reward-based and donation crowdfunding, financial return funders, with and without ties, are significantly more interested in information about financial planning and risks. The risk profile of reward-based crowdfunding is lower than debt or equity crowdfunding since they can be seen as early adopting consumers (Hornuf and Schwienbacher
2015; Vismara
2016a) and their return does not depend on the long-term profitability of the enterprise, only on the ability to deliver the promised product. Non-delivery rates on the largest reward-based platform Kickstarter are approximately 9% (Mollick
2015), which points to a much lower risk than average venture failure rates (Aldrich and Ruef
2006). Within the subset of financial return crowdfunding, we find that out-crowd funders have a higher need for information about finance and risk than in-crowd funders. Our results indicate that a strong relationship appears to substitute financial due diligence and complements the importance of teams quality signals as financial return funders with strong ties are less interested in information about finance and risk (Ahlers et al.
2015; Bernstein et al.
2016b; Uzzi
1999).