How Trust Influences the Flow of Capital In Crowdfunding

With our role in starting this industry and our work in 34 countries over the last 4 years on all types of crowdfunding (debt, equity, rewards), we have deep understanding of the social and psychological dynamics of the process of raising capital online. One of these that is important to understand is the correlation between the speed of capital flows (efficiency), the amount of capital flows, and the trust individuals have with crowdfunding campaign sponsors.  Or:  how does the degree of connection to a potential investor change their willingness to invest?

So we set out to talk to as many people who have backed campaigns as possible[1].  We asked them about the kinds of campaigns they backed, the degree of affiliation with the campaign sponsor, and the size of their investment.  The chart below graphs some of the directional findings (a full report will be published shortly).  For the image below we normalized the data so we could chart it.

The short answer is, as one might expect, the greater the degree of affiliation between a campaign sponsor and his donor/investor the more likely that the donor/investor will part with more money and the campaign will have more individual donations/investments.  As this affiliation diminishes so does the amount of investments in both quantity of investors/contributors as well as the amount per investor.

An even more interesting findings from the data is that depending on the type of business (nonprofit, startup that is only proof of concept, startup that is at product stage, or an established business), the curves for each move differently.  For instance, companies that were already established and hence had customers (and most likely cash flow from sales), were able to raise the most money particularly from those closest to them.

This likely has a lot to do with the trust these individuals have in the business and the business owner’s ability to execute.  On the other hand, non-profits that had a lot of trust were also able to raise more money faster but usually at much smaller amounts.  Both the size of the donations and the quantity of them were smaller for nonprofits at the 1^st degree connectivity than they were for the established business.  However the converse seems to be true at the opposite end of the scale where nonprofits were able to raise more money from people they weren’t closely affiliated to over established businesses because at this end unaffiliated individuals were probably backing the cause of the nonprofit which was harder it seems for unaffiliated people to do with established businesses.