Crowdfunding Cascades
Crowdfunding is the practice of funding a project using donations from a large number of people, instead of borrowing from banks. Popular websites for crowdfunding include Indiegogo and Kickstarter. The practice has become increasingly popular, especially for individuals who may not have the ability to apply for large loans otherwise. Usually, as an incentive to donate, the creators will offer rewards, like the gaming company RoosterTeeth’s campaign (1) for producing a movie allowed people who donated a certain amount of money; for example, $35 gets a DVD or Blu-Ray of the finished product, and on the other extreme, $10,000 gets the donator an executive producer role in the movie.
In “The Dynamics of Crowdfunding: An Exploratory Study,” (2) Ethan R. Mollick explores the different things that can raise or lower the likelihood of a campaign becoming successful. One of the statistics includes the size of the creator’s network. The study used Facebook profiles linked with the Kickstarter campaign’s creators to measure likelihood of success: “a founder with 10 Facebook friends would have a 9% chance of succeeding, one with 100 friends would have a 20% chance of success, and one with 1000 friends would have a 40% chance of success.” In addition, media exposure and featuring the project on Kickstarter’s homepage also increases the chances of success. On each project it shows the number of backers, the amount pledged, and how far along it is to its goal. This is a great example of the wisdom of crowds.
Admittedly, this does not perfectly follow the model, as people can advertise for the project and explain their reasonings. However, it would be impossible to interview every single backer of a project, and thus it is still secret for a person making the decision. The infamous potato salad Kickstarter (3) gained momentum when it became featured in the media for the ridiculous amount of attention it was getting, and thus began the vicious cycle. As more and more people became aware of this project, more and more people funded it. (4) This is an example of the direct benefit cascade as many backed the project just to say that they had. I do not believe that most people who funded it legitimately thought it was a good idea financially, but donated because it was a funny prank gaining momentum as it went.
On the other hand, other Kickstarters or Indiegogo projects could benefit from the information cascade, as the benefits and costs of funding a project are hard to quantify and success is usually uncertain, so by following the crowd who has already funded a project, not only does it increase the odds of the project being finished, but it also indicates that many backers thought it was a good idea and sends the message that you should too. It also combines the idea of influence in networks, because a person with a lot of connections spreads his or her project more easily and can gain the valuable first backers needed to start a cascade.
Sources:
- https://www.indiegogo.com/projects/lazer-team-by-rooster-teeth
- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088298
- https://www.kickstarter.com/projects/324283889/potato-salad
- http://www.columbusmonthly.com/content/stories/2014/09/potato-salad-guy-and-the-prank-that-raised-55000.html