Entrepreneurs these days heavily rely on internet crowdfunding — the use of online platforms to raise money from multiple contributors. In terms of scale, crowdfunding has become a viable alternative to venture capital and angel investment. It is reported that active global crowdfunding platforms generated more than US$34.4 billion in 2015. The World Bank estimates that the crowdfunding industry will reach US$90 billion by 2020.
Most entrepreneurs today seek funding from family and friends to round up their initial capital for business as these are the people who are more likely to believe in their ability, according to a Media OutReach statement Wednesday.
However, questions have arisen whether there any downside of this source of funding. Will early contributions from family and friends be a good signal for other potential funders?
A study conducted by Assistant Professor Tingting Fan and Associate Professor Leilei Gao from Department of Marketing at The Chinese University of Hong Kong (CUHK) Business School, and their collaborator Yael Steinhart, Professor and Head of Marketing Department of Coller School of Management at Tel Aviv University in Israel, sheds some light on the subject.
The study aims to explore the role of friends and family contribution by considering consumers' reactions to potential seeding behavior at the early stage of a crowdfunding campaign launch.
After conducting five studies including a field study, the researchers have come up with several important findings: Firstly, friends and family of entrepreneurs contributed more money in the early stage of a crowdfunding campaign as compared to strangers; secondly, a potential funder is more likely to contribute to a newly-launched crowdfunding campaign when the majority of the existing contributions are relatively small amounts; thirdly, this positive effect of small prior contributions on prospective funders' likelihood to contribute to a crowdfunding campaign will be weakened at the later stage of the campaign.