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2 Crowdfunding defined: from policy orientations to academic literature

2 Crowdfunding defined: from policy orientations to academic literature

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24 Previati, Galloppo and Salustri

In the same line, in the EU, De Buysere et al. (2012) report that ‘crowdfunding can be defined as a collective effort of many individuals who

network and pool their resources to support efforts initiated by other

people or organizations. This is usually done via or with the help of

the Internet. Individual projects and businesses are financed with small

contributions from a large number of individuals, allowing innovators,

entrepreneurs and business owners to utilize their social networks to raise

capital.’ In this way crowdfunding activity facilitates innovation and

entrepreneurship using the Internet as a platform for raising the funds

that are necessary for the development of an entrepreneurial project.

The subject of the Internet is crucial also for the well-documented home

bias issue. As an example, take the trend that transactions are more

likely to be completed between economic actors that are geographically

located as neighbours, that is, in the same country or state, rather than

outside. The Internet has become an increasingly important source of

financing for social entrepreneurship like click-to-donate sites, online

charity auctions and shopping malls, philanthropy directories or crowdfunding sites (Wei-Skillern et al., 2007).

In the Derev Report (Calveri and Esposito, 2013) we find that ‘Social

Causes’ is the category that has the highest share, 27.4 per cent out of

all crowdfunding categories. The World Bank has launched Crowdfund

Capital Advisors (CCA) to define crowdfunding’s role in the developed world and developing world. The project aims to identify ways to

leverage the new crowdfunding industry, with particular reference to

the theme of Web 3.0, where social media and small investor communities create access to capital and seek funding directly and effective from

their social relationships.

An expert group for the European Commission’s Directorate General

for Enterprise and Industry in 2011 have proposed a framework of best

practices for equity crowdfunding. The framework of best practices

consists of three pillars: Regulation, Education and Research. The former

can help to correct for market failures such as the presence of asymmetric

information and moral hazard. In this light the appropriate amount of

regulation can help to improve transparency and security for financial

transactions in each way they occur. Education is linked to households’

decisions to invest their money in business and social projects. Research,

in the Commission document (European Commission, 2015), is mainly

interpreted as relationship and knowledge exchange process between

the academic and industry sectors.

From an academic point of view, the crowdfunding phenomenon

is recent, multidimensional by nature and analysed by different

‘Wisdom of the Crowd’ as an Antidote to Credit Crunch


perspectives and with different goals: main interests are focused on

entrepreneurship, consumer behaviour and start-up finance (venture

capital, above all). The attention to crowds, otherwise, is quite old, in

modern times: among others, see Le Bon (2009), whose psychological

contribution, first edited in 1895, is cited in De Buysere et al. (2012).

But while Le Bon underlined the many limits of crowds (impulsiveness,

irritability, incapacity to reason, the absence of judgment, of the critical

spirit, the exaggeration of sentiments), in our times we also talk about

the ‘wisdom of crowds’ (Surowiecki, 2004).

Analysing a rich body of academic contributions, we discovered that

the term crowdfunding first appeared in 2006 (cited in Lawton and

Marom, 2010), but it comes from practitioners, as stated by Castrataro

(2011): ‘Michael Sullivan is credited with coining the term crowdfunding

back in 2006 with the launch of fundavlog, a failed attempt at creating

an incubator for videoblog-related projects and events including a

simple funding functionality. This scheme was “based on reciprocity,

transparency, shared interests and, above all, funding from the crowd”,

but the term crowdfunding only really began to be used by the masses a

few years later with the advent of the platform Kickstarter.’

Crowdfunding’s roots are linked to the crowdsourcing concept. This

concept underlines the mix of contributions (services, ideas and content)

from a large group of people to achieve a task, dividing a complex task

into small enough pieces so as to make it more easily achievable: ‘the

act of a company or institution taking a function once performed by

employees and outsourcing it to an undefined (and generally large)

network of people in the form of an open call’ (Howe, 2008). These kinds

of phenomenon are economic in nature, stemming from an industrial

organization view: ‘crowdfunding is an open call, essentially through

the Internet, for the provision of financial resources either in form of

donation or in exchange for some form of reward and/or voting rights

in order to support initiatives for specific purpose’ (Belleflamme et al.,

2010). On the same line of reasoning, Rubinton (2011) defines crowdfunding as ‘the process of one party financing a project by requesting

and receiving small contributions from many parties in exchange for

a form of value to those parties’. The economic view is not the only

relevant in crowdfunding: social and IT perspectives, strictly linked in

social networks, are extremely significant, as legal matters are, too.

From an economic point of view, we find contributions about crowdfunding in the field of entrepreneurship (Agrawal et al., 2010; Belleflamme

et al., 2010 and 2014; Harrison, 2013; Larralde and Schwienbacher,

2012; Lehner, 2013; Ley and Weaven, 2011), of consumer behaviour and

26 Previati, Galloppo and Salustri

marketing (Ordanini et al., 2011) and of financial intermediation, with

special regard to start-up financing venture capital and private equity

(Mollick, 2014; Agrawal et al., 2011).

The main issues addressed by this kind of literature are:

by entrepreneurship scholars, the contributions of crowdfunding to

new ventures, in different business models (donation, reward, lending,

equity based crowdfunding; active and passive role of funders), and

the involved agents’ behaviour1;

by marketing scholars, the use of crowdfunding not only for financing

business, but for supplying other services to enterprises by consumers

and backers;

by banking and finance scholars, the disintermediation of traditional

ways of financial intermediation (banks, other financial institutions,

financial markets); crowdfunding as a complementary or alternative

way to satisfy enterprises’ financing needs; liquidity risk and projects

assessment in different kinds of crowdfunding business models.

Other contributors are more difficult to classify in scholarships or strands

of literature. Together with general books about crowdfunding (Lawton

and Marom, 2010 and 2013), we can find papers with general introduction to crowdfunding and description of crowdfunding platforms

(Giudici et al., 2012), articles describing evolutionary scenarios of capitalism and finance (Shiller, 2013) and of crowd-capitalism in emerging

economies (Beugrè and Das, 2013). To our aims in this paper, very

important are the contributions about the investors’ motives to fund,

above all Gerber et al. (2012) and Harms (2007). Gerber et al. (2012)

underline that financial and not financial reward, together with closeness to funded projects’ values and ideals, are the main determinants of

investors’ behaviour. Harms (2007) identifies different kinds of value,

embedded in projects that influence investors: financial, social, functional and emotional value.

The social and IT perspectives highlight the relevance not only of

individual investors’ motives and behaviour, but the so-called wisdom of

crowds (Surowiecki, 2004) that is analysed and surveyed in social networks

and platforms sustaining some types of crowdfunding, i.e. P2P lending.

Prediction markets for financial variables produce surprisingly accurate

information (Ray, 2006), revealing the wisdom of crowds. This is especially true and evident where you can find peer learning in e-markets,

like P2P platforms (Yuma et al., 2012). Of course, wisdom of crowds is

influenced by cultural profiles of peer learners, especially the country of

‘Wisdom of the Crowd’ as an Antidote to Credit Crunch


origin cultures (Bechter et al., 2011). From a theoretical point of view,

the wisdom of crowds as a form of collective intelligence can emerge

with naïve updating of individual beliefs in social networks (Golub and

Jackson, 2010). ‘Given the relatively high uncertainty in borrower trustworthiness and the lack of lender expertise and information, estimating

borrower trustworthiness is a probabilistic problem. So the online P2P

lending environment appears to meet the conditions that prior theoretical

studies have identified. Thus, we expect the wisdom of crowds approach

to work for the online P2P lending platform, and lenders may be able to

take advantage of the voting results when they make credit decisions with

respect to different borrowers’ (Yuma et al., 2012). Maybe these considerations can be extended to different crowdfunding models.

Summarizing, the academic literature about crowdfunding evolves

fast, putting attention at many sides of the phenomenon. In our paper

we try to offer some contributions about two aspects that seem underrated: on one side the microfoundations of individuals’ (households’)

choices in crowdfunding environments (wisdom of crowds is an evocative word, but we think we need better economic foundations); on

the other side the forecasting, at the macro level, of the crowdfunding

market in different countries.

2.3 Different kinds of crowdfunding and some data

about crowdfunding market

To better understand investors’ decisions it is of the utmost importance

to go in depth on the different kinds of crowdfunding: donation, reward,

lending and equity based.

For donation-based crowdfunding, basically the motivation at the

bottom of the funding is social return, that is, no legally binding financial obligation is incurred by recipient to donor, and this is the most

typical way of funding that NGOs have been using to attract donations.

Indeed donation-based crowdfunding typically supports cultural and

religious projects, as well as deals in which people are not interested

in business affairs involving reward in terms of money. For this kind

of crowdfunding activity donors also tend to give recurring donations

if the social organizations keep them updated about the progress of

the project and make funders satisfied when they see that a project, in

which they believed, is going to be realized.

Reward-based crowdfunding can involve types of projects similar

to donation-based funding, but most of all include financial aids to

small- and medium-sized enterprises (SMEs), or commercial pre-sales of


Previati, Galloppo and Salustri

products as well as creative and cultural projects. Project owners provide

funders with rewards of a symbolic value. Frequently the reward is the

product itself, in terms of a standard output of entrepreneurship activity

asking to be supported. In fact reward-based crowdfunding is increasingly being used to ramp up new products or improve existing ones, in

partnership with existing or potential customers.

Lending-based crowdfunding can be used for social or business

purposes. In social lending, we are in an interest-free loans environment. In this way of funding typically we have micro-loans to support

development or social aid projects. The motivation from the lender side

is in social change similar to what happened in donation-based crowdfunding, and also the actors are roughly the same. With lending-based

crowdfunding for business purpose, a firm borrows money from a group

of people instead of a bank. Here the main motivation for the funder is

a financial return according to the specific risk-factors of the company

funded. This market segment does exist when lenders hope to receive

a higher interest payment than they would receive from an alternative

investment, while for borrowers who are looking for a loan at better

conditions than those they can get from a bank (or even in those cases

in which the bank is not going to fund them). Borrowers typically are

both companies looking for small business loans of for project finance

activity and households looking for consumer lending.

Equity crowdfunding is when an entrepreneur wants to attract an

investment from a group of people, with the purpose of dividing future

earnings, exactly as it happens in every entrepreneurial business. Usually

originators of projects supported are small- and medium-sized enterprises offering the same benefits and rights as shares, and the investee is

a creditor who has a contractual right to receive that payoff.

In the middle, that is among funders and actors taking money, there

are crowdfunding platforms generally exercising a basic due diligence

and business plan screening, when projects involve reward in terms of

money, or simply presenting, at a glance, business ideas when main

motivations are for social purposes.

At present, a large part of data pertinent to crowdfunding business

(e.g. number of platforms, geographical distribution of participants

and number of successful campaigns) are proprietary. This evidence

limits further efforts on the research, and in this work we can’t apply

econometrics due to lack of data, but we deal with descriptive analysis.

Nevertheless, we consider our effort useful because it can provide a good

starting point for further analysis when public data will be available for

the academic community.

‘Wisdom of the Crowd’ as an Antidote to Credit Crunch


About market size we have to mention that there is a substantial lack of

data, making a market analysis quite difficult and incomplete. However,

at present day Massolution’s ‘Crowdfunding Industry Report’ provides

estimates and extrapolations based on surveys on the most important

market players. According to the Report’s content we find that worldwide, 452 active crowdfunding platforms raised 1.5 billion USD in

2011, in 2012 that number jumped to 2.7 billion, and Massolution’s

2013 ‘Crowdfunding Industry Report’ predicts for 2013 the remarkable

amount of 5.1 billion USD. This indicates a significant growth near to

100 per cent year on year. This increase is due in particular to the rise

in total value of campaigns while the survey data suggests that the total

volume of successful campaigns has remained relatively unchanged.

North America was the largest market for fundraising (over 1.6 billion

USD in 2012), however Europe is gaining percentage share within the

market in aggregate, reaching almost 1 billion USD of total amount in

raising activity. Both continents together account for the vast majority

of the market, reaching more than 95 per cent of the total, where South

American and African countries are just in the beginning.

In 2012 the majority of these campaigns were in the donation-based

category; indeed, donations and reward-based funds reached an 85 per

cent year on year growth corresponding, in value, to an amount of 1.4

billion USD. Equity campaigns were, on average, much larger in size

in terms of funds raised (there are also a small number of cases where

reward-based models have reached multi-million USD or euro amounts),

while the lending-based category is the smallest in terms of the number

of platforms.

The European Commission’s ‘Consultation Document: Crowdfunding

in the EU’ (2013), on the whole, confirms evidence for the EU, stating that

in 2012 crowdfunding in Europe reached 65 per cent growth compared

to 2011 and reached a total amount of funds raised equal to 735 million

euro. This figure is promising compared to the limited supply to innovation projects funding given from European venture capital markets, that

is 3 billion euro, although it stays modest if compared to the European

IPO markets (in the range of 16.5 billion euro). Results drawn from the

‘Crowdfunding Industry Report’ in the UK (Baeck et al.,, 2014) show

that for UK SMEs in 2013, the alternative finance market (peer-to-business lending, equity-based crowdfunding, invoice trading and revenue/

profit-sharing crowdfunding) has supplied 332 million pounds to SMEs

in the UK – a more than 12-fold increase in just three years. The number

of SMEs that have used these alternative financing mechanisms in the

UK between 2011 and 2013 amounts to more than 5,000.

30 Previati, Galloppo and Salustri


Crowdfunding drivers

Crowdfunding appears as a mix of innovation, technology and entrepreneurship to create opportunities for job creation and poverty reduction.

Specifically, crowdfunding is a function of all of these socio–economic

trends, and we want to define an indicator of crowdfunding activity

which takes account of these drivers.

About the centrality of technology, Crowdfunding Industry Report in

UK (Baeck et al, 2014) states that crowdfunding platforms are themselves technology start-ups. In their survey 80 per cent of the platforms

mention that they had created and developed the technology used on

their platforms and 60 per cent indicated that they would continue to

develop their platform technical features. Another 10 per cent of all platforms surveyed aim at the development of new or complementary services to increase or extend the capacity or functionality of their existing

service. In the Derev Report (Calveri and Esposito, 2013) communication and technology projects count for 14.9 per cent of total equity

crowdfunding. Definitely advancement and availability of web- and

mobile-based applications facilitated the access to this new form of business funding.

Moreover, exploiting another crucial component of the crowdfunding

world, there is no question that the rise of the crowdfunding industry

in recent years is directly linked to the failure of the financial services

industry to answer demand for small business and project financing,

since banks’ lending activity is reduced and access to finance is more

difficult (credit crunch rationed). The latest ‘Survey on the Access to

Finance of Small and Medium-Sized Enterprises in the Euro Area’ (ECB,

2013), realized in the period from April to September 2013, reports

that in Euro Area level, on balance, five per cent of the SMEs reported

an increase in their need (demand) for bank loans. SMEs in Italy and

France contributed most to the net increase in the need for bank loans.

In the same period, the net percentage of Euro Area SMEs reporting

deterioration in the availability of bank loans increased marginally.

This mainly resulted from the strong deterioration signalled by Italian

SMEs. Regarding the success of bank loan applications increased in most

Euro Area countries, except in the Netherlands, France and Italy. The

percentage of SMEs reporting a fully successful application was highest

in Germany (87 per cent) and Finland (81 per cent) and lowest in Greece

(33 per cent) and the Netherlands (32 per cent). Regarding the cost of

funding in the Euro Area, mainly SMEs in Spain and Italy reported an

increase in interest rates. In the lights of this critical financing scenario,

‘Wisdom of the Crowd’ as an Antidote to Credit Crunch


crowdfunding could represent a new fundamental chance for access to

funding for a wide range of entrepreneurship activities, ranging from

innovative and creative micro-enterprises to small- and medium-sized


Consequently, we propose an index to measure the attractiveness

of different European countries for the development of crowdfunding

procedures. In our opinion, this is the first step to understand the

complexity of the real-world situations in Europe with regard to crowdfunding. In the concluding remarks, we offer some suggestions for

further research steps and for positive action, at micro and macro levels,

to sustain crowdfunding procedures all over Europe.


Crowdfunding Attractiveness Index

The Crowdfunding Attractiveness Index (CFA) should be interpreted as

a fundamental indicator of the criteria that affect crowdfunding activity.

According to Groh and Wich (2012) the ability of countries to attract

business activity is a function of many criteria, basically socio-economic

country characteristics, combined together with some weighting and

aggregation techniques. We have decided to focus on a little group of

euro countries, to easily understand the impact of our basic measures via

graphic and table inspection. Indeed we concentrate our analysis on 11

countries that made up the Euro Area when the euro was introduced in

1999, plus the UK because of the influence of this country as an international crowdfunding player.

The index structure, as proposed in Table 2.1, is based on two levels.

The first is the level of the five key driving forces. The criteria of lowest

orders are grouped and aggregated to the next superior level. Overall

these key driving forces include 53 variables.

We considered annual data from Eurostat, European Central Bank

and World Bank databases with yearly data ranging from 2003 to

2013; in most cases we refer to the average value of the last three

years (specifically, 2010–13) or, due to impossibility to compute a

mean value, to the last data record. The rationale behind the choice

to consider just these three data providers is related to the willingness

to provide all readers and researchers with a very sound and easy to

run dataset. Not all data series are raw data, but represent sometimes a

ready-made index (see the Table 2.1, where we report comprehensive

definitions and descriptions of the data series that we have used to

calculate our index, their units and sources), e.g. the Strength of legal

rights index.

32 Previati, Galloppo and Salustri

Table 2.1

Raw data sample and sources






Enterprises – level of Internet


1.2 Enterprises – computers: devices

and communication systems

Internet Turnover

1.3 Digital single market –

promoting e-Commerce for


1.4 Internet purchases by individuals

1.5 Share of enterprises’ turnover on


1.6 Enterprises sending and/or

receiving e-invoices

1.7 Enterprises having received

orders online (at least 1%)

1.8 Enterprises’ turnover from


1.9 Enterprises purchasing via

Internet and/or networks other

than Internet

1.10 Enterprises having purchased

online (at least 1%)

Social Economy

1.11 Purpose of social media use










Percentage of enterprises


Percentage of enterprises


Percentage of enterprises


Percentage of individuals




Percentage of enterprises


Percentage of enterprises


Percentage of turnover


Percentage of enterprises


Percentage of enterprises


Percentage of enterprises


Percentage of the ICT

sector value added

Percentage change of

value added of the ICT


Euro per inhabitant


Percentage of the ICT

personnel on total


Head count


Innovation Environment

R&D Activity

Percentage of the ICT sector on


Percentage change of value

added by ICT sector at current


Total intramural R&D



Percentage of the ICT personnel

on total employment

Total researchers, by sectors of






‘Wisdom of the Crowd’ as an Antidote to Credit Crunch 33

Table 2.1







Doctorate students in science

and technology fields – Total

Total R&D personnel and

researchers as % of total labour


Self-employment head count

Macroeconomic Factor

High-tech exports – Exports of

high technology products as a

share of total exports

Share of government budget

appropriations or outlays on

research and development

Turnover from innovation

Venture capital investments

Patent Activity

High-tech patent applications to

the EPO

Community design (CD)


% of the population aged

20–29 years

Percentage of active













% of total general


government expenditure

% of total turnover

% of GDP







World Bank


World Bank


World Bank


World Bank


World Bank


World Bank


World Bank


World Bank


World Bank


World Bank


World Bank



Legal Environment


Time to import



Time required to enforce a


Procedures to register property


Start-up procedures to register a


Procedures to enforce a contract


(% of GNI per capita)


Cost of business start-up


Time to resolve insolvency


Time to prepare and pay taxes



Strength of legal rights index

(0=weak to 10=strong)





3.10 Time required to register


3.11 Time required to start a business









Previati, Galloppo and Salustri

Table 2.1





Household & Internet Skill














Households with access to the

Internet at home

Skill for Job

Way of obtaining e-skills

Skill for Web Interactivity

Individuals using the Internet

for finding information about

goods and services

Individuals using the Internet

for downloading software

Skill for Social Economy

Individuals using the Internet

for uploading self-created


Individuals using the Internet

for participating in social


Individuals using the Internet

for selling goods or services

Individuals using the Internet to

buy or order online content



Percentage of households


Percentage of individuals


% of individuals aged 16

to 74


% of individuals aged 16

to 74


% of individuals aged 16

to 74


% of individuals aged 16

to 74


% of individuals aged 16

to 74

% of individuals aged 16

to 74


Eur billion – current


ECB Euro



ECB Euro




Credit Market


Short-term loans to

non-financial corporations

Long-term loans to non-financial Eur billion – current




Short-term loans to

non-financial corporations

Eur billion – current



Long-term loans to non-financial Eur billion – current




Short-term loans to households

Eur billion – current



Long-term loans to households

Eur billion – current


ECB Euro



ECB Euro



ECB Euro



ECB Euro



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