Crowdfunding models: Keep‐It‐All vs. All‐Or‐Nothing

• DOI: http://doi.org/10.1111/fima.12262
• Date: 01 June 2020
• Author: Armin Schwienbacher,Douglas J. Cumming,Gaël Leboeuf
• Published date: 01 June 2020

DOI: 10.1111/fima.12262

ORIGINAL ARTICLE

Crowdfunding models: Keep-It-All vs.

All-Or-Nothing

Douglas J. Cumming1,2 Gaël Leboeuf3Armin Schwienbacher4

1College of Business, Florida Atlantic University,

Boca Raton, FL

2Birmingham Business School, University of

Birmingham, Birmingham, United Kingdom

3Université Lumière Lyon2, UFR Sciences

Economiques et Gestion – COACTIS,Lyon,

France

4SKEMA Business School – Université Côte

d'Azur, SKEMA Business School, Euralille,France

Correspondence

ArminSchwienbacher, SKEMA Business School,

Departmentof Finance and Accounting, Avenue

WillyBrandt, 59777 Euralille, France.

Email:armin.schwienbacher@skema.edu

Abstract

Reward-based crowdfunding campaigns are commonly offered in

one of two models via fundraising goals set by an entrepreneur:

“Keep-It-All”(KIA), where the entrepreneur keeps the entire amount

raised regardless of achieving the goal, and “All-Or-Nothing”(AON),

where the entrepreneur keeps nothing unless the goal is achieved.

We hypothesize that AON forces the entrepreneur to bear greater

risk and encourages crowdfunders to pledge more capital enabling

entrepreneurs to set larger goals. We further hypothesize that

AON is a costly signal of commitment for entrepreneurs yielding

a separate equilibrium with higher quality and more innovative

projects with greater success rates. Empirical tests support both

hypotheses.

1INTRODUCTION

Standardized Internet platforms that act as two-sided markets through the participation of a large crowd have facili-

tatedthe rise of crowdfunding. These platforms enable clear mechanisms through which individuals can provide money

for,or even invest in, early-stage entrepreneurial firms (Belleflamme, Lambert, & Schwienbacher,2014; Mollick, 2014b;

Vismara, 2016). Understanding how crowdfunding works has attracted increasing interest from research scholars

(Burtch, Ghose, & Wattal, 2015; Chemla and Tinn, 2017; Iyer,Khwaja, Luttmer, & Shue, 2016; Kuppuswamy & Bayus,

2018; Roma, Petruzzelli, & Perrone, 2017; Stankoand Henard, 2017; Yu, Johnson, Lai, Cricelli, & Fleming, 2017). How-

ever, most of this research abstractsfrom the fact that platforms differ significantly from each other. Some of these

differences likely affect the capacity of entrepreneurs to attractcrowdfunders and share risk with them. In this paper,

taking the entrepreneurial perspective, we provide new theory and supporting evidence as to how the design of the

crowdfunding mechanism can influence the risks and benefits associated with crowd participation.

Most policies that stimulate entrepreneurial financing are based on tax incentives, friendlier bankruptcy laws,

and publicly funded incubator centers that all lower the risks to entrepreneurs and their investors (Grilli & Murtinu,

2014; Milosevic, 2018). There is comparatively less focus in the literature on whether or not shifting risk between

the entrepreneur and investors facilitates entrepreneurial financing and innovation, particularly at the seed stage of

c

2019 Financial Management Association International

Financial Management. 2020;49:331–360. wileyonlinelibrary.com/journal/fima 331

332 CUMMING ET AL.

development.1On the one hand, less risk for the entrepreneur encourages exploration (Manso, 2011). On the other

hand, less risk for the investor encourages larger capital investment and more capital enables entrepreneurship and

innovation. It is unclear whether enabling an alteration of risk between investors and seed stage entrepreneurs ulti-

mately helps or hinders entrepreneurial financing. In this paper, we shed light on this question by examininga unique

crowdfunding setting where entrepreneurs self-select into higher risk taking.

Kickstarter and Indiegogo are reward-based crowdfunding platforms through which entrepreneurs state capital

raising goals. In exchange,individuals are offered a reward for participating.2In most cases, the reward is the product

that is eventually produced by the entrepreneur with the money raised during the campaign. In practice, two types

of funding models have emerged: “All-Or-Nothing”(AON) and “Keep-It-All” (KIA). In the AON model, entrepreneurial

firms set a capital raising goal below which the entrepreneurial firm does not keep any of the pledged funds and the

crowd does not receive anyreward. In contrast, in the KIA model, the entrepreneurial firm can keep the entire pledged

amount, albeit at higher fees, regardless as to whether or not the stated capital raising goal is reached. In this paper,

we consider whether these two fundraising models are associated with different types of entrepreneurial firms and

projects and whether this choice impacts the likelihoodof campaign success. Moreover, we explore whether the choice

of funding model leads to different sensitivity of crowdfunders to information released by the entrepreneurs.

Most crowdfunding campaigns do not achieve their funding goals.3Thus, choosing the right funding model is a

crucial strategic choice as it not only affects the capacity of the entrepreneur to collect the pledges, but also affects

how the risk of underfunding is allocated between the crowd and the entrepreneur. One critical problem plaguing

these entrepreneurs is the inherent difficulty in conveying the true quality of the project and the capacity of the

entrepreneur to deliver leading to information asymmetry (Ahlers, Cumming, Günther,& Schweizer, 2015; Hildebrand,

Puri, & Rocholl, 2017).

We theorize that entrepreneurs who self-select the AON model do so in order to signal to the crowd that they are

committed to only undertake the project if enough capital is raised reducing the crowd's risk that undercapitalized

projects will be undertaken, as under the KIA model. Thus, crowdfunders are less reluctant to pledge money under the

AON model as they are sure to receivetheir money back if the funding goal is not achieved. As such, AON projects are

expected to attract more backers and be more successful. Entrepreneurs will only bear this risk if they havea highly

valuable project and the signal of choosing AON is credible. Entrepreneurs with less valuable projects do not choose

the same funding model. In contrast, KIA projects are selected by entrepreneurs who have less promising projects, as

AON is too costly a signal. These entrepreneurs may prefer using a more flexible funding model that allows them to

collect small amounts. This may occur if the degree of underfunding is not so excessivethat the crowd avoids bearing

a greater risk of not receiving anything. Conversely,the AON model involves the entrepreneur taking more risk (i.e.,

they have“skin in the game”) and, as such, has a greater chance of successful funding. This makes the choice of funding

model a credible and costly signal (the so-called Spence Condition; Spence, 1973). The KIA model, while offering an

overalllower chance of success, may be optimal for entrepreneurs with less valuable projects or when the signal is not

credible, especially if the higher risk involvedin AON is not compensated by sufficiently higher success rates.

To test these propositions, we extracteda sample of 22,850 fundraising campaigns from the Indiegogo platform

(www.indiegogo.com) from 2011 to 2013. Unlike other major platforms, Indiegogo has offered entrepreneurs the

option of selecting either the AON or the KIA model since December 2011. Thus, Indiegogo offers a unique setting to

investigate our research questions. The data indicate that 94.8% of fundraising campaigns used the KIA model, while

only 5.2% used the AON model. Campaigns using the AON model, on average,sought to raise $31,397 (with a median

of $16,485), while campaign goals for KIA were, on average,$20,478 (with a median of $10,000). AON campaigns had

1Throughout this study, we use the term risk alteration instead of risk sharing or risk transfer.As discussed later, entrepreneurs and investors often bear

differentrisks that cannot be simply transferred like insurance policies or derivative contracts.

2Otherforms of crowdfunding platforms exist, such as equity-, loan-, and donation-based crowdfunding platforms. These platforms attract different types of

crowdfundersas incentives for participation are not based on receiving a product.

3Throughout the analysis, we define “success” as having achievedthe funding goal at the end of the campaign. This definition is consistent with most of the

prior literature. Kickstarter offers a success rateof 36% (source: https://www.kickstarter.com/help/stats), while Indiegogo does not communicate statistics.

Ourpaper indicates a success rate of 18% for Indiegogo.