A Short Literature Review on Reward-based

Crowdfunding

Lei GUAN
Department of Management Science and Logistics Management
School of Management and Economics,Beijing Institute of Technology
Beijing, China
guanlei@bit.edu.cn

Abstract-In this short article, we discuss about a popular online
fundraising method, named crowdfunding. One of the most
useful types is reward-based crowdfunding, where the return is
tangible products. We review related researches from three
streams, the conceptual research, the empirical research, and the
modelling research. Some possible research directions are also
discussed in the paper.
Keywords-reward-based crowdfudning; literature review;
research directions
I. INTRODUCTION
Crowdfunding is now a popular fundraising method in the
internet era. As pointed out by some scholars, crowdfunding is
an extension of crowdsourcing (Schwienbacher & Larralde
2012). The core of crowdsourcing is doing tasks, such as
market survey and product trial, by gathering the power of
many individuals. The concept of crowdfunding is similar with
crowdsourcing, while the difference is that crowdfunding
collects money from individuals.
The earliest crowdfunding website is said to appear in
America in 2001, which was called ArtistShare and was used
to support musicians. Nowadays, there are many crowdfunding
websites all around the world, and there are different types of
crowdfunding. According to the opinion of Prof. Belleflamme,
there are four types at present (Belleflamme et al. 2015):
• Equity-based crowdfunding: supporters will gain
shares by investing in certain projects, and they expect
that the creator operations well in the long run.
• Lending-based crowdfunding: also called P2P lending.
Supporters invest in specific projects to earn a certain
interest rate. Risks in lending-based crowdfunding is
quite high, e.g. in China, borrowers may disappear
with the investing money.
• Reward-based crowdfunding: creators will provide
tangible rewards to supporters. Here creators are
usually small entrepreneurs or enterprises who are lack
of money to launch their new products.
• Donation-based crowdfunding: supporters invest in
this kind of crowdfunding without any expectation on
return. Examples may include providing stationary for
students in poor area,and so on.
In this article, we mainly summarize the current literatures
on the reward-based crowdfunding. Reward-based
crowdfunding IS the most common type of online
crowdfunding. There are many famous reward-based
crowdfunding websites, such as Kickstarter and IndieGoGo.
Creators set the crowdfunding projects, including the goal,
pledge levels and rewards, duration time, etc. When a project
begins, supporters select to invest based on their own
preferences. When the project ends, if the total amount reaches
the goal, we say that the project is succeeded. Then creators
will give the rewards to supporters in a given time.
The reason that reward-based crowdfunding is more
important than other crowdfunding is from two aspects.
First, reward-based crowdfunding has developed quickly
these years. As we discussed above, equity-based
crowdfunding and lending-based crowdfunding should be seen
as special financial tools, which means that they need specific
supervision. Thus, the development will be restricted.
Meanwhile, since donation-based crowdfunding is related to
public goods, it is in a niche market. Now reward-based
crowdfunding occupies the largest proportion in online
crowdfunding all over the world.
Second, the returns of reward-based crowdfunding are
usually tangible products, which has a close relationship with
operations management. According to the opinion of
Belleflamme et al. (2014,2015),reward-based crowdfunding is
a mean to gain money for start-up enterprises. Creators select
to invest based on their interests to get specific products. As a
result, these enterprises face similar problems as those in
traditional operations management when setting a
crowdfunding project. For example, creators must decide the
invest level (product price), arrange the production schedule
(crowdfunding is treated as advance selling), and so on. Thus,
there are many problems related to operations management
needed to solve.
With a thorough literature review, we divide the literature
into three streams: conceptual research, empirical research and
modelling research. In the following sections, we will
summarize literatures from these aspects. Based on these
streams of literatures, we will discuss the possible research
directions on reward-based crowdfunding from the perspective
of modelling.

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 11. CONCEPTUAL RESEARCH ON REWARD-BASED
CROWDFUNDING
In this section, we mainly summarize the conceptual
researches. We fmd that some scholars began these researches
earlier than others,and provided useful insights.
Prof. Belleflamme from Louvain School of Management,
Belgium is one of the scholars who started the research on
crowdfunding quite early. His work reviewed existing results
on crowdfunding, and discussed on the four basic forms of
crowdfunding (we mentioned this in Section 1), current status
on crowdfunding and typical cases. Then he summarized
possible research directions for academic research
(Belleflamme & Lambert 2014,Belleflamme et al. 2015).
Prof. Agrawal from University of Toronto is another
scholar who worked on crowdfunding early. In Agrawal et al.
(2014), the authors discussed the development and features of
crowdfunding,such as the geography of crowdfunding,herding
effect in crowdfunding, etc. They demonstrated the incentives
and interferes to attend crowdfunding from the perspective of
creators, supporters and platforms. They also illustrated a
number of unsolved problems in crowdfunding.
Other scholars studied the concept of crowdfunding from
different perspectives. Schwienbacher & Larralde (2012)
treated crowdfunding as a means of financing for small and
medium enterprises, and discussed about the incentives,
features, and types of crowdfunding. They summarized
significant problems by illustrating a real case. Another paper
by Gerber & Hui (2013) used interviews to gather the
motivations and deterrents of creators and supporters on
whether to attend crowdfunding, which provided useful
insights for understanding crowdfunding. Beaulieu et al. (2015)
established a framework to study the concept and participants
of crowdfunding. The authors divided crowdfunding into six
types, and discussed about the basic features and IT
applications of each type.
There are also some papers and books which surmnarized
the concept of crowdfunding and illustrateed successful
business applications. For example, Bruntje & Gajda (2016)
introduced the development and current situation of
crowdfunding in Europe, which they also provided some real
cases on crowdfunding.
This stream of literatures provides basic insights on
crowdfunding, which gives us some possible directions on
academic research of crowdfunding.
TIT. EMPIRICAL RESEARCH ON REWARD-BASED
CROWDFUNDING
Most literatures on reward-based crowdfunding are in the
stream of empirical research. Scholars focus on the issues of
success factors, supporters' behaviors, money collecting
mechanisms,and so on.
Prof. Belleflamme and Prof. Agrawal we mentioned before
also worked on this area. Belleflamme et al. (2013) focused on
a special type of crowdfunding, i.e. individual crowdfunding,
which indicated that creators didn't use online platforms to
collect money. The authors found that nonprofit organizations
were more probable to reach their crowdfunding goals than
other organizational forms. Agrawal et al. (2015) discussed
about the relationship between artists and supporters. Though
the development of Internet had weakened the influence of
distance, the behaviors of local supporters and distant
supporters still had some differences. The authors shown that
the information in crowdfunding projects played a more
significant role for distant supporters than for local supporters,
where "friends and family" was a key determinant for distant
supporters.
Besides, Prof. Mollick from Wharton Business School has
done several empirical papers on reward-based crowdfunding.
Most of his researches are from the perspective of
entrepreneurship. With a huge amount of data from Kickstarter,
Mollick (2014) discussed on basic features of reward-based
crowdfunding. He shown that the social relations of creators
and the quality of projects had direct impacts on the success of
crowdfunding. Besides, only part of creators could deliver
rewards to supporters after the goal is reached, which was
depending on the total money creators collected. A recent
paper written by Mollick & Nanda (2015) focused on art
projects in Kickstarter to compare the funding decisions
between normal supporters and art experts. The authors found
significant agreement between the funding decisions of
supporters and experts. If supporters and experts disagreed, it
was probable to be the case where supporters were willing to
fund projects that experts might not. This paper indicated that
crowdfunding was a useful method to select funding projects.
Other papers such as Greenberg & Mollick (2014) and
Kuppuswamy & Mollick (2015) concerned about the influence
by the basic features of creators (e.g. gender) in crowdfunding,
which are related closely to the researches of entrepreneurship.
So we omit these papers here.
Other scholars also have done a lot of researches on
reward-based crowdfunding using empirical methods. Li &
Duan (2014) focused on the dynamic behavior of supporters in
the crowdfunding process. They showed that the current
funding status and time progress would influenced the
decisions of creators. Based on these results, they studied the
impact of the valuations of creator using simulation, and
discussed how to make promotions. With data from
Kickstarter, Kim et al. (2015) analyzed the role of observable
information and the impact of All-or-Nothing mechanism in
crowdfunding. The authors shown that there was no significant
relation between the number of supporters and the quality of
the project. Meanwhile, the observable information and the
All-or-Nothing mechanism had positive effect on the success
of the projects. Robertson & Wooster (2015) also used data
from Kickstarter to do empirical research. However, they got a
counter-intuitive conclusion: the number of supporters in the
first day of crowdfunding had a negative effect on the success
of the project. Besides, the authors discussed the impact of
social network. They found that the number of shares in
Facebook played a more important role than the number of
friends in Facebook of creators. Boudreau et al. (2015) chose a
special group of data, which was the supporters' funding
actions for a video game called "Nature Selection". The
authors focused on the comparison between tangible rewards
and intangible motivations. They proved that the influence of
tangible rewards was not significant, while intangible
motivations played a more important role. Cumming et al.
(2015) compared two mechanisms, i.e. All-or-Nothing and
Keep-it-AII. Under All-or-Nothing mechanism, the creator
must pay back all money if the project fails. However, under
Keep-it-AII mechanism, the creator can keep all money he has
collected even if the project fails. By investigating the data
from TndieGoGo, the authors shown that under All-or-Nothing
mechanism, the goal was usually higher, while the success rate
was also larger. In contrast, the goal was lower and the success
rate was smaller under Keep-it-AII mechanism.
There are also other papers that focus on the reward-based
crowdfunding using empirical methods. See Wei & Lin (2015),
Song & van Boeschoten (2015), Thies et al. (2015) for
example. These literatures study different problems in reward­
based crowdfunding, which gives us some new ideas on future
research.
IV. MODELLING RESEARCH ON REWARD-BASED
CROWDFUNDING
Now modelling research on reward-based crowdfunding is
quite rare. Here we list four papers of modelling researches that
we find.
Belleflamme et al. (2014) compared creators' decisions
under two mechanisms: pre-order and profit sharing. The
authors proved that when the startup cost was small,the creator
should choose pre-order mechanism; otherwise, the creator
should choose profit sharing mechanism. The model in this
paper is from the perspective of microeconomics, which is
simple and omits some details in real business.
Ellman & Hurkens (2014) optimized the goal and the
investing level for supporters. They first studied the case of two
supporters, and then extended to the case of multiple
supporters. Besides, the authors also analyzed the case that the
creator might pretend to be creators and invest some money to
attract more supporters.
Hu et al. (2015) studied a two-period problem on the
optimal crowdfunding decisions for the creator from the
perspective of marketing. Tn the model, the authors compared
four different pricing mechanisms, and gave the condition on
when to use these mechanisms. They also extended the model
to many situations, such as the valuation of supporters might
vary according to time or the number of supporters was
uncertain. This paper provides a useful framework to model the
reward-based crowdfunding. The shortcoming of this research
is that the authors mainly focused on the pricing mechanism,
which makes the model simple to solve and cannot answer
more detailed operation questions.
According to the problem that some creators cannot deliver
rewards to supporters, Strausz (2015) used mechanism design
method to optimize the crowdfunding project in order to avoid
this problem.
From these literatures, we find that most models are simple
to solve though they can explain some phenomena in reality.
Meanwhile, few models focus on the operations management
including production and inventory management. So there are a
lot of possible directions to do further study.
V. FUTURE RESEARCH DIRECTIONS ON REWARD-BASED
CROWDFUNDING
From the discussions in the sections above,we fmd that the
reward-based crowdfunding has attracted a lot of attentions
from scholars in different academic area. However, most
literatures use empirical methods to investigate the features of
crowdfunding and behaviors of creators and supporters. There
is lack of researches that focus on operations problems and use
modelling methods. Here we will discuss some possible
directions on operations management.
First, the influence of different mechanisms should be
studied. Tn Cumming et al. (2015), they pointed out that AII-or­
Nothing mechanism and Keep-it-All mechanism are quite
different for creators. Clearly, these mechanisms can be
analyzed with suitable models. When the product of the creator
has different cost structure (the fixed cost versus the variable
cost),the creator may select different mechanisms.
Second, more pledging levels should be included in
models. Tn current modelling researches, scholars usually
assume that there is only one pledging level (see Belleflamme
et al. 2014, Hu et al. 2015 for example). However, in reality,
supporters will face multiple pledging levels, and they must
choose one level. Thus, the behavior of supporters and the
optimal setting of investing levels should be studied.
Besides, there are plenty of possible research directions.
For example, we can optimize the crowdfunding price and the
following production process jointly, since the price will
influence the production quantities. And we can also optimize
the pricing scheme of crowdfunding platforms. From some
investigations, crowdfunding platforms have different price
schemes which may impact the choice of creators. This
question can be also discussed.
VI. CONCLUDING REMARKS
At present, crowdfunding is widely used all around the
world as a tool to collect funds and promote products. Reward­
based crowdfunding is one of the most popular crowdfunding
types,and has attracted the attention from many scholars.
Tn this short article, we summarize current literatures on
reward-based crowdfunding to show the trends of academic
area. It is clear that more papers focus on empirical models,but
there are plenty of possibilities to do modelling research. So we
list some possible directions.
Now more and more scholars are becoming interested in
this area. We believe that there will be larger amount of
researches in the near future.
ACKNOWLEDGMENT
This work is supported by the National Science Foundation
of China (No. 71401013).
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