The Rise of Crowdfunding

Crowdfunding is the process of raising capital online from a large audience. It has emerged since the mid-2000s as a popular funding source for innovative ideas and projects. Crowdfunding encompasses various forms, including reward-based, equity-based, and lending-based models. The key actors in crowdfunding are entrepreneurs seeking capital, contributors constituting the "crowd", and the platform that facilitates the interaction between them. Entrepreneurs primarily resort to crowdfunding because they can raise capital at a lower cost compared to traditional funding sources and acquire valuable information from the crowd. As for the crowd, the appeal of crowdfunding lies in the community benefits and expanded access to economic opportunities compared to those available offline. Platforms play a crucial role in addressing asymmetric information and coordination problems. Asymmetric information gives rise to informational externalities, where contributors attempt to infer project quality from the decisions of other contributors. Coordination problems stem from the interdependence between entrepreneurs' and contributors' decisions, leading to payoff externalities. The interplay between informational and payoff externalities influences campaign dynamics and the growth of crowdfunding platforms. The market for blockchain-based crowdfunding has also developed since the mid-2010s. Platforms can leverage blockchain technology to enhance the transactional efficiency of the crowdfunding process and facilitate the emergence of secondary markets. In addition, early evidence from the United States indicates positive real effects of crowdfunding. Crowdfunding activity is associated with both increased venture capital investment and heightened entrepreneurship.