Abstract
Crowdfunding is a phenomenon that exists because of interconnectivity. These platforms allow the connection of lenders, donors, and investors with recipients who may be entrepreneurs or beneficiaries. In the entire crowdfunding process, there is a direct involvement of network behaviors namely trust, norms, networking, and so on. In other words, social capital plays a role in crowdfunding. This chapter aims to review the existing literature on crowdfunding platforms and identify the role of online networking in the process and outcome. The chapter would benefit both researchers and various stakeholders who are engaged in crowdfunding or are exploring this platform for financial decisions.
TopConcept Of Crowdfunding
Definitions
(Datta et al., 2019) mention that (Schwienbacher & Benjamin, 2010) provided the first academic definition of the term crowdfunding. They defined crowdfunding as, “an open call for the provision of financial resources, to gather either donation or in exchange of reward and/or voting rights in order to support initiatives for specific purposes”. (Mollick, 2014) refined this definition and stated that, “crowdfunding is a way that collects funds from the public to support enterprises or individuals by drawing on relatively small contributions from a relatively large number of individuals using the Internet, without standard intermediaries”. Another comprehensive definition of crowdfunding given by (De Buysere, K; Gajda, O; Kleverlaan, R; Marom, 2012) state that crowdfunding is “a collective effort of many individuals who network and pool their resources to support efforts initiated by other people or organizations usually via or with the help of the Internet”.
The Rise of Crowdfunding
This method of raising money has seen rapid growth in the recent past. As of 2023 crowdfunding websites have helped in raising US$ 1.1 billion worldwide (Elad, 2023). This financing method is not mere a “trendy buzzword” now but has gained the reputation of a mainstream financing model. One of the top crowdfunding platforms, Kickstarter, attracted five million contributors and about $1 billion in just five years. Its competitor, Indiegogo, was able to manage one campaign that raised $12 million. Other major crowdfunding platforms are GoFundMe, Microventures, YouCaring, Looking at history, it may be noted that crowdfunding did exist in the past in various forms, in book projects, war bonds, cooperatives, movies, software, to name a few. An interesting example of crowdfunding from the recent past is Tesla Model 3 that attracted $1.5 billion from prospective buyers of its cars.
Key Terms in this Chapter
Herd Behavior: The behavior of individuals in a group acting collectively without centralized direction.
Electronic Word of Mouth: Any positive or negative statement made by potential, actual, or former customers about a product or company, which is made available to a multitude of people and institutions via the internet.
Online Social Capital: Online social capital refers to the benefits and resources one can obtain through their online networking.
Non-Equity-Based Crowdfunding: A loan or other form of financing that does not give investors an ownership stake in the company.
Equity-Based Crowdfunding: A method of raising capital online from investors in order to fund a private business.
Crowdfunding: An open call for the provision of financial resources, to gather either donation or in exchange of reward and/or voting rights in order to support initiatives for specific purposes.
Peer-to-Peer Lending: Lending method that enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman.
social networking sites: A social networking site is an online platform that allows users to create a public profile and interact with other users.