Crowdfunding: Are All Crowds Created Equal?

According to a brand new research from three among the most influential experts on crowdfunding, Linag Chen, Zihong Huang, and De Liu, different ways in which a crowd is organized lead to different impacts on the outcome of a project.

Crowdfunding Process. (Source: Pure and Hybrid Crowds in Crowdfunding Markets).
Pure and Hybrid Crowds in Crowdfunding Markets. (Source: Spinger).

In their study, they compared two crowd designs for crowdfunding namely a popular pure crowd design

where all crowd members participate as equals

and an emerging hybrid crowd design

where crowd members are led by an expert investor.

In distinguishing between the two, they argued that

whether a crowdfunding project could benefit from a pure or hybrid crowd design depends on the transaction costs and degree of information asymmetry at the different stages of crowdfunding as well as on whether adequate remedies are in place to overcome such challenges.

A Framework for Choosing between Pure and Hybrid Crowds. (Source: Pure and Hybrid Crowds in Crowdfunding Markets).

Based on the application of agency theory in crowdfunding, observations of industry practices, and the roles of crowds in crowdfunding platforms, they concluded that

pure crowds must be operated cautiously so that shortcomings including ineffectiveness in providing heavy-duty due diligence, distortion in the wisdom of the crowds due to herding, social influence, and home bias, and high management costs associated with a lack of a single voice may be remedied.

By contrast, they discovered that when it comes to hybrid crowds, lead investors have a great impact on crowd investors, project creators, and crowdfunding platform. For instance,

the quality of jobs such as due diligence and risk disclosure conducted by lead investors has a direct impact on crowd investors’ investment judgement.

However, findings suggest that lead investors must be qualified and properly trained for their job through the use of selection and qualification mechanism in order to reward or penalize them through disciplinary mechanisms, thing which still represents a major issue in the industry as

platforms have no framework for imposing such a penalty.

Find out more here.