Research Outlines Keys to Success in Three Fundraising Phases
Want to have more successful crowdfunding campaigns? Researchers from the University of Maryland’s Robert H. Smith School of Business have figured out the three phases of crowdfunding and the critical factors during each to drive effective campaigns and yield the best results.
With the research findings, fundraisers can maximize their success and the amount of money they raise, and crowdfunding platforms can better target users and investors in promotions campaigns, and better predict which projects are likely to be successful.
Maryland Smith marketing professors P.K. Kannan and Michael Trusov worked with two co-authors to study the growing trend of crowdfunding – raising money from a crowd of investors through an online platform in order to make a new product or offer a new service. With popular platforms such as Kickstarter, the practice has been touted as a means to funding for entrepreneurs and startups who might have challenges getting investments through more traditional sources, like banks or angel investors. An individual or organization creates a page on a crowdfunding platform to lay out the details of their project and set a fundraising goal. Once the project reaches its goal, the investors who put money in begin to receive returns on their investments.
The researchers define the three phases of fundraising: “friend-funding,” where family and friends contribute money; the “getting crowded phase,” where momentum builds to investors beyond friends and family; and the “race to the goal phase,” the final push to achieve the funding goal. Kannan, Trusov and their co-authors studied the process and identified the challenges and opportunities at each phase.
The research, published in the INFORMS journal Marketing Science, lays out the three major drivers in crowdfunding success: investors’ forward-looking strategic behavior, social interactions among individual investors, and fundraisers’ expectations on the crowd’s behavior.
The researchers say it’s important to keep potential funders motivated at each phase of the crowdfunding process in order to build momentum and meet funding goals. To do that, those seeking to raise funds should do these things:
- In the early stage of crowdfunding, encourage individual participation through example. A crowdfunder can get the things started off by throwing in their own money first. That will seed participation from friends and family to join in, says Kannan.
- As the fundraising campaign moves to the middle stage, where most crowdfunding projects are likely to stall or peter out altogether, say the researchers, it’s critical to light a fire in the crowdfunding process through social interactions. "In the end, once the crowdfunding project gains momentum, investors sitting on the sides waiting for the opportunistic moment will jump in and follow," say the researchers.
- Better understanding these crowdfunding dynamics can help fundraisers meet their goals and raise the maximum amount of money.
The researchers’ findings also have implications for the crowdfunding platforms. They offer ways to optimize targeting the right investors and identify the ones that have the potential to contribute the most to the campaign’s success. They also found ways to more accurately predict whether a crowdfunding campaign will succeed at all and when it will succeed by looking at early investment patterns.
Read more: "Modeling Dynamics in Crowdfunding," is featured in Marketing Science. Kannan and Trusov worked with Chul Kim of the City University of New York and Andrea Ordanini of Bocconi University in Milan, Italy.