Share this article

print logo

Crowds make rational funding decisions, studies show

One company wants to raise $34,000 for the Hug, an app that uses a sensor band wrapped around a water bottle to track hydration. A Dutch engineer is trying to raise about $200,000 for the Be.e, an eco-friendly electric scooter made mostly of hemp fibers. Another company is seeking $196,000 for the PetPhone, a personal music player for dogs and cats.

A catchy idea, no matter how irrelevant, is seemingly all an aspiring entrepreneur needs these days to raise money on sites like Kickstarter.

Do crowds – driven by a herd mentality, euphoria or sheer silliness – gravitate toward funding seemingly irrelevant ideas? Or do crowds make rational funding decisions that can identify promising projects better than venture capital investors and other traditional gatekeepers? Researchers are examining a growing body of data about crowdfunding to try to answer these questions.

In a recent academic study, researchers tracked 120 theater-related campaigns that aimed to raise at least $10,000 on Kickstarter between May 2009 and June 2012. The researchers also asked 30 professionals with experience in evaluating applications for grant-making organizations like the National Endowment for the Arts to evaluate those campaigns.

They found that crowds and experts mostly agreed on what made promising theater. When they disagreed, crowds were generally more willing to fund projects. Yet projects picked only by the crowd were as likely to deliver on budget – and achieve commercial success and positive critical acclaim – as projects favored by experts. The crowd, in effect, chose strong projects that experts might not have recognized.

“The crowd is often thought as being crazy. There was a sense that they would back musicals about Internet cats, and experts would back serious work,” said Ethan Mollick, an assistant professor of management at the Wharton School of the University of Pennsylvania. “It turns out the crowd does consider the quality of projects and outcomes pretty well.”

One reason crowds might do as well, or even better, at choosing projects is that they tend to be diverse and might avoid, for example, gender biases.

Two recent studies of Kickstarter projects have found that crowdfunding is indeed opening entrepreneurship and investing to more women. A recent study of 16,000 Kickstarter projects, by researchers at the University of California, Berkeley, and the Hebrew University of Jerusalem, found that female investors were more likely to invest in female entrepreneurs and that those female entrepreneurs had higher rates of success in reaching their funding goals.

Another study, by Professor Jason Greenberg at the New York University Stern School of Business and Mollick, also found that women who had higher proportions of female funders were more successful in raising capital.