Choosing the Right Crowdfunding Type for Each Stage of the Startup Life Cycle

This article introduces a typology of crowdfunding, the benefits it offers, and how specific benefits relate to the identified crowdfunding types. On this basis, we present a framework for choosing the right crowdfunding type for each stage in the startup life cycle, in addition to providing practical advice on crowdfunding best practices.

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Choose wisely: Crowdfunding through the stages of the startup life cycle
Article in Business Horizons · December 2016
DOI: 10.1016/j.bushor.2016.11.003
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Choosewisely: Crowdfundingthroughthe
stagesof the startup life cycle
Jeannette Paschen
RoyalInstitute of Technology(KTH), Stockholm,Sweden
1. Startupsand crowdfunding
Startupsrequireresourcesto succeedandoneof the
most importantresourcesis money.Traditionally,
the optionsfor capitalformationavailableto start-
ups were few and comprisedprimarily of FFF
(friends, family, fools), angel investors, venture
capitalists, and seed funding (Startup Explore,
2014). More recently, there has been a surge in
alternative models. Among these, crowdfunding
has emergedas a popularsourceof capital forma-
tion in variousfields–—frompurelyfor-profitto social
causes,technology,performingarts, real estate,
and music.
Crowdfundingdrawsinspirationfromthe ideasof
microfinance(Morduch,1999)andcrowdsourcing.It
encompassesthe outsourcingof an organizational
function (capital formation) to a strategically
definednetworkof actors (crowd) in the form of
an opencall (Kietzmann,2017)via dedicatedweb-
sites(crowdfundingplatforms).And smallamounts
of moneyfrom a largenumberof peopleadd up. In
2010,crowdfundingwas a relativelysmallindustry
BusinessHorizons(2017)60, 179—188
Availableonlineat www.sciencedirect.com
ScienceDirect www.elsevier.com/locate/bushor
KEYWORDS
Crowdfunding;
Startupfunding;
Crowdsourcing;
Crowdcapital;
Information
asymmetry;
Crowdcommunication;
Startupstrategy
Abstract Crowdfundingis attractiveto startupsas an alternativefundingsource
and offers nonmonetaryresourcesthroughorganizationallearning.It encompasses
the outsourcingof an organizationalfunction,throughIT, to a strategicallydefined
networkof actors(i.e., thecrowd)in theformof anopencall–—specifically,requesting
monetarycontributionstowarda commercialor social businessgoal. Nonetheless,
manystartupsarehesitantto considercrowdfundingbecauselittle guidanceexistson
how the varioustypesof crowdfundingadd valuein differentlife cycle stagesand
which type is best suited for which stage. In responseto this gap, this article
introducesa typologyof crowdfunding,the benefitsit offers, and how specific
benefitsrelate to the identifiedcrowdfundingtypes. On this basis, we presenta
frameworkfor choosingthe rightcrowdfundingtypefor eachstagein the startuplife
cycle, in additionto providingpracticaladviceon crowdfundingbestpractices.The
best practicesoutlinedhave showndemonstrablecontributionstoward achieving
fundinggoalsand are likely to provevaluablefor startups.
# 2016KelleySchoolof Business,IndianaUniversity.Publishedby ElsevierInc. All
rightsreserved.
E-mail address:[e-mail]
0007-6813/$— see front matter# 2016KelleySchoolof Business,IndianaUniversity.Publishedby ElsevierInc. All rightsreserved.
http://dx.doi.org/10.1016/j.bushor.2016.11.003

to the tune of $880 million worldwide. In 2015,
estimatesput the global crowdfundingindustryat
$34.4billion (Massolution,2015).
Crowdfundingis especiallysuited for startups
trying to turn an idea into a viable businessand
youngcompaniesaimingto maintainor grow their
venture(Stemler,2013).Bothface challengeswhen
tryingto securefunding.Dueto lack of credit and
operatinghistory,startupfoundersoften havediffi-
cultiesconveyingthevalueof theirproposedventure
to investors.Startups, therefore, have difficulty
accessingtraditionalfundingoptionssuch as bank
loans,venturecapital,or angelinvestments.These
challengesare exacerbatedfor social ventures,
which are drivenby the ambiguousand sometimes
dichotomousgoal to achievea doublebottomline:
to balancesocialandfor-profitgoals(Lehner,2013).
In addition,it is often prohibitivelyexpensivefor
youngbusinessesto accesswidertraditionalcapital
markets(Tunguz,2013).These and other factors,
such as the shortageof capital provokedby the
globalfinancialcrisisand the growthin otherforms
of crowdsourcing,have contributedto the rise of
the crowdfundingphenomenonin recent years
(Giudici,Guerini,& Lamastra,2013).
As crowdfundinghasbeengrowingin popularity,
so has its exposurein academicand practitioner-
orientedliterature. A numberof articles havede-
velopedindependentlyof oneanotherbut withouta
unifyingframeworkto understandcrowdfundingin
the contextof the startuplife cycle. As a result,
startupsconsideringcrowdfundinghavelittle guid-
anceon howto decideamongthe differenttypesof
crowdfundingavailableand the benefitseach type
can offer in different startup stages. This is an
importantconsiderationsince fundingneeds vary
significantlyacrossstages,asdo the typesof returns
and assurancesoffered to a crowd in different
crowdfundingvariants.
Thisarticleclosesthe researchgapbyelucidating
which crowdfundingtype is most appropriatefor
startupsin each life cycle stage.It first lays out a
typologyof crowdfunding,the benefitscrowdfund-
ing offers in terms of financialand nonmonetary
resourceprovision,and how thesetwo aspectsin-
tersect. This leads to a frameworkfor decision
making,enablingthe startupto choosethe crowd-
fundingtype best suited for its specificlife cycle
stage.Once crowdfundingalternativesare consid-
eredanda choicehasbeenmade,startupsface the
next problem:how to attract a crowdand its con-
tributions.This article addressesthis by outlining
bestpracticesfor crowdfundingalternativesat each
stage.
2. Typesof crowdfunding
Crowdfundingasanonlinedistributedfundingmodel
suggeststhat requestingrelativelysmall monetary
contributionsfrom a crowd helps startupsacquire
critical financialresources.In this context,crowd-
fundingis viewedas a homogenousconcept:a gen-
eral requestfor moneyvia an open call. However,
just as the fundingneedsfor startupsvary,crowd-
fundingvaries by the type of rewardsoffered to
supporters.Thefollowingsectionoutlinesa typology
of crowdfunding(see Table1) by consideringif re-
wardsare offeredandwhethertheyare tangibleor
non-tangible(Belleflamme,Lambert, & Schwien-
bacher, 2014; Canada Media Fund, 2016; NCFA,
2012).
2.1. Donationcrowdfunding
In the donationcrowdfundingmodel, the founder
receivesmoneyfrom a crowdwithoutany tangible
return for that contribution(CanadaMedia Fund,
Table 1. Typologyof crowdfunding
180 J. Paschen

2016;NCFA,2012).In the pure donationmodel,no
rewardsat all are offeredto contributors.Thefunds
receivedare essentiallya grantgivenfor a specific
purpose,but withoutthe expectationof a specific
return to the funder.Accordingto a 2015industry
reportby Massolutions,donationcrowdfundinggen-
erates the second-largestfundingvolumeglobally
(NCFA,2015)andthe ideaof donationcrowdfunding
hasbeensuccessfullyutilizedin socialmarketingfor
a numberof years(Lehner& Nicholls,2014).
The rewards-baseddonationmodel employsan
incentivesystemwherebybackersreceivenonmon-
etary rewardsthat includepersonalrecognitionor
experientialrewards, such as the opportunityto
meet the creators,attend specialevents,or even
to participatein the creationof the product.Dona-
tion crowdfundingis morepopularfor projectswith
smaller funding goals; globally, 90%of donation
crowdfundingcampaignsraised less than $10,000
(NCFA,2012).
2.2. Lendingcrowdfunding
Lendingcrowdfunding,oftenreferredto aspeer-to-
business(P2B)or peer-to-peer(P2P)crowdfunding,
raises moneywith the expectationthat founders
will repaysupporters.Lendingcrowdfundingis the
largestcrowdfundingtypebyfundingvolume(NCFA,
2015)andtakesoneof threeforms:(1) the presales
model,(2) thetraditionallendingmodel,and(3) the
forgivableloan (NCFA,2012).The presalesmodel
offersthe finishedproductin returnfor the contrib-
utor’s pledge; the contributionamountrequested
from each crowd memberis determinedby an as-
sessmentof the fair marketvalue of the product.
How many presale copies the founder offers de-
pendson the funder’stotal contributionamount–—
larger contributionstypically mean a supporter
receives more copies (NCFA, 2012). The first-
generationPebble smartwatchis amongthe most
well-known presale campaigns.It raised more
than $10 million from nearly 70,000 funders on
Kickstarter,more than 100 times its fundinggoal,
and Pebble delivered its first round of watches
10 months after the campaignended (Schroter,
2014).Thetraditionallendingagreementusesstan-
dard terms where loans are repaid with interest
determinedpre-campaignlaunch. The forgivable
loan repays contributionsonly if and when the
project beginsto generaterevenueor profit. With
boththe traditionalandforgivableloan,crowdfund-
ing projects are assessedaccordingto their risk
levels–—eitherby the platformitself or by a third-
party evaluator.Lenderschoosethe level of risk
they are preparedto accept and supportprojects
accordingly.
2.3. Equity crowdfunding
In the equitycrowdfundingmodel,also referredto
as investmentcrowdfunding,the venture raises
moneyfrom a crowdin exchangefor an ownership
stake in the firm. That is, investorsare offered
equity or bond-like shares (Ahlers, Cumming,
Guenther,& Schweizer,2015).Equitycrowdfunding
is the fastest growingcrowdfundingcategoryand
the averagecampaignvalue is high.1 Investor-led
equity crowdfundingtypically involvesaccredited
investors,suchas venturecapitalists,angelinves-
tors, or sector specialistswho negotiatewith the
founderon fundingterms.Theseprojectsare then
promotedto accreditedinvestorsvia platformsthat
are often subscription-only(Wagner, 2014). In
entrepreneur-ledequity crowdfunding,campaigns
are accessibleto all crowd investorsand the cam-
paignproponentsetsthe valuationsanddetermines
the termsof the offering.
3. Benefitsof crowdfundingfor
startups
The previous section introduced a typology of
crowdfundingthat considersthe type of return or
rewardto backers.While this is an importantfirst
aspectto understand,a startupalso needsto con-
sider the specific benefits it aims to achieve in
pursuingcrowdfundingefforts. First, crowdfunding
helps alleviate the capital crunch many startups
face. Manycampaignsaimto raisea relativelysmall
sumof moneyfor a one-timeprojector event(Mollick
& Kuppuswamy,2016).Otherprojectsintendto raise
a substantialamountof moneyfor more complex
andlong-termundertakings,providingfounderswith
the funds to turn an idea into a viable business
(Mollick,2014).Thismethodworks;9 in 10successful
projectsonKickstarterhaveturnedintoongoingfirms
and existed up to 3 years later (Painter,2014).
However,crowdfundingin a startupcontextis not
just aboutfunding;it alsooffersnonmonetarybene-
fits that encompassthe following (Belleflamme,
Lambert,& Schwienbacher,2010;Brown, Boon, &
Pitt, 2017;Gerber& Hui, 2013;Mollick,2014):
Validatingthe overall businessidea–—Doesthe
idea actually solve a consumerproblem(prob-
lem/solutionvalidation)?
Refiningthe product or service with potential
customersby receiving their feedback, likes,
1 About175,000in North America(CanadaMediaFund, 2015)
Choosewisely:Crowdfundingthroughthe stagesof the startuplife cycle 181

and dislikes(productvalidation).In this context,
crowdfunding is a means to support user-
generated innovation and a way to better
understandcustomerpreferences.
Paintinganaccuratepictureof howa newproduct
will perform before officially going to market
(marketvalidation),thusallowingstartupsto fail
early withoutinvestingadditionaltime or money
if they see little interestfrom a crowd.
Marketing,such as promotinga product or a
direct sales channelby providingbackerswith
the finishedproductandensuringa readilyavail-
ablesalespipeline(marketpenetration/growth).
Crowdfundingfurther helps establisha loyal com-
munity of engagedcustomers.The successesof
PebbleandOuya–—avideogameconsole–—ledother
developersto write applicationsfor theseproducts
even before they were released to the market,
helpingto build a competitiveadvantage.
In summary,crowdfundingprovidescritical orga-
nizationalresourcesin the formof moneybut it also
providesnon-financialresources,or crowd capital,
an organizational-levelresourceobtainedfrom a
crowd(Prpic´, Shukla,Kietzmann,& McCarthy,2015).
4. Selectingthe best crowdfunding
type for each stage
As previouslylaid out, crowdfundingprovidesmon-
etary and non-financialresources.However,in the
prevailingview,a startupis oftenviewedasa single
construct:an individualaimingto turnanideainto a
viable businessthat requiresresources.The chal-
lengewith this viewis that it ignoresthe life cyclea
startupundergoes,whereeachlife cycle stagehas
uniquemonetaryandnonmonetaryresourceneeds.
The followingsectionaddressesthis challengeand
suggeststhat a startupcan identify the mostsuit-
able crowdfundingmethodby consideringits life
cycle stagealongwith the resourceneedsat each
stage. Adoptingthe businesslife cycle framework
proposedbyChurchillandLewis(1983),threestages
are differentiated. For each stage, key resource
requirementsare outlined along with the crowd-
funding type best suited to meet these require-
ments.
4.1. Pre-startup stage:Donation
crowdfunding
In the pre-startupstage of the crowdfundinglife
cycle, the founder has an idea and exploresthe
feasibilityof buildinga businessbasedon this idea
(Majoran,2014;MaRS,2009a).Pre-startupefforts
focuson developinga viableofferingthat solvesa
significantcustomerproblemas well as identifying
the targetmarket,partners,distributors,andcom-
petitors. In this formativephase, achievingprob-
lem/solutionfit and creatinga viablebusinessplan
are of key importance.Fundingneedsare primarily
for pre-startupR&D,producttesting,generatingthe
businessplan, and preparingto launchthe venture
(MaRS,2009a).
Donationcrowdfundingis the mostsuitabletype
to meettheseneedsfor threereasons.First, it does
not offer a tangiblerewardto a crowd. At the pre-
startupstage,whenthe venturehasnot yet gener-
atedrevenuefromthe offering,it is still developing
the businessplanandgenerallyhasno financialplan
and no track record. The risk of project failure is
highestat thisstage;therefore,the founderis not in
a positionto promisetangibleor monetaryrewards.
Second,donationcrowdfundingtypicallyallowsfor
more operational flexibility compared to other
forms of crowdfundingthat have more conditions
attached to the financial contributionsmade by
a crowd. Third, the common characteristicsof
donation-basedcrowdfundingprojects help keep
the risk of disappointingcrowdmemberslow. Over-
all fundinggoals and individualcontributionsare
usuallysmall.For example,a successfulKickstarter
project raisesan averageof $6,000,while the aver-
age individualcontributionis just $25 (Heyman,
2015).Donationcrowdfundingcan feasiblyprovide
the necessarycapital to movethe ventureto the
next stagein the startuplife cycle, at whichpoint
foundersshouldreevaluatefundraisingapproaches.
4.2. Startup stage:Lendingcrowdfunding
As the ventureentersthe startupstage,it hasascer-
tainedthefeasibilityof theideaandthecredibilityof
the businessmodel to deliver the offering to an
attractive target market (Majoran, 2014; MaRS,
2009b).Effortsnowfocuson refiningthe solutionor
prototypeintoa minimumviableproductandadvanc-
ing the initial revenuemodelinto a viablebusiness
plan(Moogk,2012).Keyconcernsin thestartupstage
arevalidatingproduct/marketfit. Doestheproductor
servicedeliveron customers’needs(productvalida-
tion)? Are prospectivecustomersand distribution
partnerswilling to purchasethe productwhenit is
ready for commercialoffering and at what price
(marketvalidation)?Howcanthestartupexpandfrom
that one key customersegmentto a broaderand
sustainablesalesbase?(Churchill& Lewis,1983).
Resourcesin the startup phaseare requiredto
build productsfor prospectivecustomersto test,
182 J. Paschen

hire employees,manageoperations,establishthe
productin the market,and executethe marketing
planfor commerciallaunch(Hofstrand,2013;MaRS,
2009b). Lending crowdfundingis best suited for
venturesin this stage.Havingbuilt a viableproduct
that has gone througha few iteration cycles and
having generated some initial revenue demon-
stratesearlytraction,puttingthe startupin a stron-
ger position to credibly offer tangible rewards
such as monetaryinterest or a presalesproduct.
In addition, a key goal in the startupstageis to
validateproduct/marketfit. Thelendingmodelhelps
to achievethis goalby providinga real-lifeestimate
of demandandcustomers’willingnessto pay,partic-
ularlyin the caseof the presalesmodel.It alsobuilds
an initial group of excited early adopters,which
createsa competitiveadvantagefor the business.
Finally,the startupstagerequiressubstantiallymore
fundingthanthepre-startupstage(Hofstrand,2013).
P2P or P2Blendingplatformsoften requirea higher
minimumloan amountfrom eachbacker.The mini-
mumloanamountonLendingClub,a P2Pplatform,is
$5,000and FundingCircle requiresan even higher
minimuminvestmentof $25,000(Herrick, 2016).
Lendingcrowdfundingalignswell with this needfor
highercapitalamounts.
4.3. Growth stage:Equity crowdfunding
The growthstagetypicallybeginswhenthe startup
hasbecomean efficient,profitableentity.The ven-
ture is financiallyhealthy,has sufficientsize and
marketpenetration,and hasachievedproductand
marketvalidation.Startupactivitiesfocuson scal-
ing operations,processes,and systemsto, at a
minimum,remainprofitablebut preferablyto grow
and earnan above-averageeconomicreturnon the
resourcesemployed(Churchill& Lewis, 1983;Ma-
joran, 2014).As the startuptransitionsinto expan-
sion, it has demonstratedstrong growth that is
expectedto continue. Funds raised at this stage
areusedto supportfurthergrowthandmayhelpthe
startup acquire another companyas a way to
achievescale or to provide liquidity and an exit
for the founder(MaRS,2013).
Equity crowdfunding,which offers a financial
return to backers,is the most appropriatecrowd-
funding type for the growth stage. The capital
necessaryto scaleandgrowthe businessis typically
high and often unattainableby the donation or
lendingcrowdfundingmodels.The averagefunding
amount for an equity crowdfundingcampaignis
higher,makingthis type more suitablethan other
models(Sandlund,2013).At this stage,the venture
is able to demonstratesuccess and can pitch
its funding requeststo prospectivebackerswith
objectivelyverifiableinformation,suchas financial
data or informationabout its customerbase. The
risk of failure for the ventureis lower than at its
beginningand the startupis, in turn, able to offer
monetaryrewardsmore credibly.This crowdfund-
ing model fits well at this stageas growth means
an opportunityfor organizationalchange and a
shift of power.The founderand the businesshave
becomereasonablyseparate;the startupis decen-
tralized and often organized by key functions
(Churchill & Lewis, 1983). Thus, the founder is
typicallymore open to the idea of givingup some
ownershipandcontrolof the business–—aninherent
requirementof equity crowdfunding–—duringthe
growthphase.
5. Best practiceson how to attract a
crowd and its contributions
Aslaid out in the previoussection,startupsare able
to identifythe mostsuitablecrowdfundingtype by
consideringtheir specificlife cycle stage and re-
source requirements.Once the choice of crowd-
fundingtype is made, campaignproponentsface
the next challenge,whichis how to attract people
and their contributions.Crowdfundingis a transac-
tionalrelationshipbetweenfounderandfunder.The
informationasymmetrybetweenthesetwo parties
makesthis relationshipimbalancedand inefficient,
likelyimpedingthe outcome(McCarthy,Silvestre,&
Kietzmann,2013).Usingcue utilizationas a theo-
reticallens,thissectionprovidespracticalguidance
on howstartupscancommunicatethe valueof their
proposedendeavorto crowdmembers.
Cue utilizationtheory(Olson,1972)positsthat,
whenfaced with ambiguityaboutthe qualityof an
entity(person,product,firm, institution),individu-
als use surrogateinformationto make inferences
about the entity’s quality (Bahadir,DeKinder,&
Kohli, 2014). Firms can influencethis assessment
processby sendingsignalsor cuesthat conveythe
quality desiredby the firm. Signalsare definedas
the informationunder the direct control of the
entity, such as its own publishedinformationor
certificationsto acceptedstandards.Cues, on the
other hand, consist of informationthat includes
signalsas well as additionalinformationavailable
throughthirdpartiesor the generalenvironment.As
such,cuesare not alwaysdirectlyunderthe control
of the entity.A youngfirmin aninitial publicoffering
(IPO) may staff its board with a diversegroup of
esteemeddirectorsto conveyits legitimacyto in-
vestors. This, along with audited and regulated
statementsthat are part of the IPO process,encom-
passesthe signals.If news outlets or social media
Choosewisely:Crowdfundingthroughthe stagesof the startuplife cycle 183

pickedup on the compositionof the boardand the
past successesof its members,interestedparties
could receivecues.
5.1. Harnessingcues and signalsfor
donationcrowdfunding
5.1.1. Choosea specializedplatform and all-
or-nothingpayout model
The centraltenetof donationcrowdfundingis thatit
does not offer tangiblerewardsto backers.This
meansthe founderneedsto communicatethe value
of theprojectin nonmonetaryterms.Crowdmembers
mustbe convincedthatthecausetheyarecontribut-
ingto isworthyof theirsupport.Inthiscontext,dueto
the fact that the ventureis in the pre-startupphase,
there are few objectivelyverifiablesignalsat the
founder’sdisposal.The choiceof platformis one of
the strongest,signalinga specializationandaddress-
ing a particularcrowdthat is drawnto the chosen
platform.CrowdfundingonQuirkyindicatesa product
focus(e.g., a collapsibleyogamat)andan invitation
to participatein theactualdevelopmentof theprod-
uct. UsingStartsomegood,on the otherhand,signals
that the projectendeavorsto contributetowardthe
social goodof society(e.g., a campaignto fund a
WorldPeaceandPrayerDay).
In addition,employingthe all-or-nothingmodel
signalsto a crowdthatthestartupis committedto the
projectandwill onlyproceedif the requiredthresh-
old is met (Cumming,Leboeuf, & Schwienbacher,
2014).In the all-or-nothing(or fixedfunding)payout
model,the creatoronlyreceivesfundsif the funding
goalis met or surpassedduringthe campaignperiod
(Kickstarter,2016), while in the keep-what-you-
earned(orflexiblefunding)model,thefounderkeeps
all funds raised. Empiricalevidencesuggeststhat
campaignsemployingthe all-or-nothingmodel are
moresuccessfulin achievingtheir fundinggoaland
outperformprojectsusingtheflexiblefundingmodel
withrespectto thenumberof supportersattractedto
their campaigns(Kolenda,2016).
5.1.2. Be transparentand accountable
The secondsuggestedbest practiceincludesa de-
tailedbreakdownof whatthe investedfundswill be
used for. This reducesthe informationasymmetry
betweenfoundersand crowdmembersby signaling
that contributionsareindeedmakinga differencein
the project being supported.In the case of pure
donationcrowdfunding,the necessityof sendinga
strongsignalof accountabilityhasbeenrecognized
in scientificliteratureon charitablegiving(Murphy,
n.d.). There is a strongconsensusthat by keeping
donorsinformedabouttheir contribution’simpact,
organizationsimprovetheir fundraisingoutcomes
(Blackbaud,2012),especiallyif they demonstrate
that donationsgo to the core cause rather than
towardoverheadcosts(Prior,2014).The bandPro-
testthe HerocrowdfundedanalbumviaIndiegogoin
2013.Not onlydid the bandincludean itemizedlist
of expensesin its pitch, but alsomemberswerevery
explicit about their motivationto do so in their
campaigndescription (Protest the Hero, 2013).
Thecampaignendedwith a total of $341,146raised,
exceedingthe target by 173%.
5.1.3. Publicize backer information
Anotherbestpracticeis the publicationof supporter
details. This practice makes the project appear
more relatable (Kolenda, 2016), which has been
shownas a successfactor in charitablegivingand
donations(Karlan & List, 2007;Leonhardt,2008).
The charity:water crowdfundingcampaign pro-
motessupporterswith elaborateeditorial content
and illustrates the importanceof being able to
relate. In a prominentexample,RachelBeckwith,
a girl from Washingtonstate, set out to raise $300
for charity:waterby foregoinggifts for her ninth
birthday(Beckwith,2011).While her initial cam-
paignfell shortof her goal,her tragicdeathin a car
accidentled to a revivalof her campaignthat has
raisedmorethan $1.2 million to date.
This examplealso illustratesthe opportunityto
trigger herd behavior,which is the tendencyfor
individualsto mimic the actionsof a larger group
(Phung, 2007). Herd behaviormay be causedby
social pressureof conformityor by the common
rationale that it is unlikely such a large group
could be wrong.Herd behaviorrepresentsan indi-
rectly controllablecue for the startupthat is con-
tributingsignificantlyto a crowdfundingcampaign’s
success.It is estimatedthat four investorscontrib-
uting $1 each will trigger anotherthree investors
to do the same, for no other reasonthan having
seen others engagedwith the project (Estrin &
Khavul,2016).
5.2. Harnessingcues and signalsfor
lendingcrowdfunding
5.2.1. Offer tangiblerewards
Lendingcrowdfundingrequiresthestartupto signala
reliable ability to compensatean investingcrowd.
Oneof the potentialrewardformshereis monetary
interest.Thisis a slightvariationof traditionaldebt
fundingwhereestablishedmeasurescanbe brought
to bear.The DutchplatformTailWindCrowd,for ex-
ample,publishestheriskprofilescoreandthird-party
assessmentsunderlyingthe fair interest that the
founderoffers to a crowd (TailwindCrowd, 2016).
The startup founder can use this score and the
184 J. Paschen

associatedinterestset by the platformto signalthe
qualityof the proposedcampaign.
Inherentto the presalemodelof lendingcrowd-
fundingis rewardingcrowdmemberswith a tangible
productfrom the project. Pebblehasraisedrecord-
breakingamountsin both of its productreleasesby
offeringpresalesof smartwatchesthat were still in
the developmentstages(Dredge,2015).The reward
to the crowdwastwofold:(1) assuredandpreferred
access–—thefirst 100 funderscontributing$235or
morewere guaranteedworkingprototypes,and (2)
a discountedprice–—anyonecontributing$115was
assureda productionwatch,whichcomparedfavor-
ablywith the $150marketpricetag(Pape& Imbesi,
2014).The extra incentivefor early backerswas a
signalintendedto triggerthe herdeffect mentioned
earlier.
5.2.2. Detail the startupfounder’scredentials
The secondbestpracticefor lendingcrowdfundingis
the publicationof details regardingthe founder’s
background.A fundingcrowd is not only investing
in a productor an idea, but alsoin the personwhois
shepherdingthis idea fromthe pre-startupphaseto
success.With propereducationalcredentialsand a
successfultrackrecord,foundersprovetheircompe-
tency.This increasesthe probabilityof fundingsuc-
cessand is commonwith more-traditionalventure
capital funding(Hsu, 2007).This best practicehas
been widely employedby successfulcrowdfunding
campaignsin ways that are appropriatefor their
circumstances–—rangingfrom the board members
publicizedby Elio Motors(2016)as an ‘‘impressive
roster of industryicons’’in their questto build an
affordable,fuel efficientvehicleto the decadesof
beekeepingexperienceof the Flow Hive team(An-
derson,2015).
5.2.3. Frequently update a funding crowd
The third best practice involvesfrequentupdates
and communicationwith a fundingcrowd. One of
the key learningsthat the founderof the successful
Goldiebloxcampaignremarkson in her final update
on Kickstarteris that membersof a fundingcrowd
‘‘deserveto hear from us more’’ (Sterling,2013).
Goldiebloxhad developedThe EngineeringToy for
Girls and receivedfundingfrom manybackerswho
were promisedthe finishedproduct. Whendelays
occurred,communicationto supporterswas a key
tool usedto ensurethat the supportbaseremained
committedto the project. Commentsposted to
Goldieblox’supdatesindicatethat the transparency
and accountabilitywere viewed positively,or at
least as mitigatingfactorsin negativeexperiences,
thus helping keep the crucial cues of the online
communityengagedand supportingthe project.
5.3. Harnessingcues and signalsfor
equity crowdfunding
5.3.1. Provide third-party verifiable reports
Thefirstbestpracticefor equitycrowdfundingis the
useof third-partyverifiableinformation.Regulatory
requirementsfor equitycrowdfunding,suchas im-
plementationguidelinesfor the U.S. JOBS Act and
regulationsin Canada,mandatedifferent levelsof
financialdisclosurefor companiesof differentsizes
(Rose,2012;Thompson,2016).The releaseof finan-
cial and other information reduces information
asymmetrybetween the startup and investors.
Startupsshould be careful, though, not to limit
the signalsto the government-mandatedminimum
disclosurestandards.Verifiableanddigestibleinfor-
mationonthecompanyandits keyprojectshasbeen
identifiedas a contributingfactor to equitycrowd-
funding success(Millard, 2016). One exampleof
successis Mouth(https://angel.co/mouth),an on-
line storefor U.S.-madeindiefoodandspirits,which
raised$1.1million in equityfunding.It proactively
informedsupportersof its vision,strategies,team,
andevenproductto clarifyits valuepropositionand
mitigateperceivedrisksfor potentialinvestors.
5.3.2. Attract reputable early investors
Incidentally,Mouthhas also employedthe second
bestpracticethat sendsa strongsignalto potential
investors.By publishingdata on early, reputable
investors,startupsbenefitfromthe informationcas-
cadingto subsequentpotentialinvestors.Theequity
crowdfundingplatformCrowdfunderhas embraced
this idea so thoroughlythat it displaysa featured
investoron the homepagefor eachcampaign.Fur-
thermore, some campaignsprovide significantly
more informationin investorprofiles than in the
biographiesof the startupteam. Digitzs,for exam-
ple, is a facilitator of payment processingfor
e-commercecompaniesandits campaignwasunder-
way at the time of this writing.Investorsare listed
withvaryinglevelsof detail,butprominentinvestors,
like KevinHarringtonfromthe ABCshowSharkTank,
get visibleplacementwith shortbiographiesdetail-
ing their experience(Crowdfunder,n.d.).
5.3.3. Targeta crowd that can empathize
The third best practice for equity crowdfunding
is to target a crowd that can empathizewith the
founder’snetwork,geographicalproximity,or busi-
nessaim.A founder’sindividualsocialcapital–—their
personaland businessnetwork–—hasshownto cor-
relate positivelywith successin a crowdfunding
campaign(Giudici et al., 2013). This findingwas
supportedby a studyof approximately48,500proj-
ects, whichfoundthat geographicproximityto the
Choosewisely:Crowdfundingthroughthe stagesof the startuplife cycle 185

founderis positivelylinkedto venturecapitalfund-
ing (Mollick,2014).The closenessto the aim of the
project can be seen in a numberof venturesthat
targeta specificcrowd,suchasFarmHill, a delivery
service for healthy lunch food operatingin the
Silicon Valley area. It raised $1 million in equity
crowdfunding,with a numberof the investorsiden-
tified as ‘foodies’ or previousinvestorsin similar
ventures(FarmHill, n.d.). Anotherexampleis Plum
(2015),whichdevelopeda wi-fi-enabledsmartlight
switchanddrewfunderswhohadextensiveprevious
experiencein successfulsmart home networking
companies.Plum exceededits $5 million equity
crowdfundinggoal.
5.4. Best practicesmini-summary
In summary,a startup should develop, maintain,
and use its personal and professionalnetworks
extensivelyin the lead up to and duringan equity
crowdfundingcampaign.Thiscontributespositively
to oneof the keysuccessfactorsfor a crowdfunding
campaign: achieving and sustainingmomentum
behindthe campaign,especiallyin the early post-
launchdays.Evidenceshowsthat oncea campaign
hits30%of its fundinggoalthe successrateclimbsto
90%,comparedto only50%after a campaignreaches
the 5%mark.Andthefasterthemomentumis gained
the better; campaignsthat reach the 30%mark
within the first week are more likely to achieve
their fundinggoals(CanadaMediaFund, 2016).
6. Final thoughtson crowdfundingfor
startups
This article offers contributionsto both the practi-
tioner and researchcommunities.For startups,it
demonstratesthat crowdfundingcan generatea
valuable organizationalresource base, primarily
throughthe acquisitionof funds, but also through
nonmonetaryresourcesin the form of learning,the
formationof crowd capital, and marketing(Brown
et al., 2017; McCarthyet al., 2013;Prpic´ et al.,
2015).But not all crowdfundingtypes are equally
suitedto supportthe variousresourcerequirements
in different life cycle stages, and neither are
all crowdfundingtypes a feasible option. When
choosingamongthe different crowdfundingtypes,
a startup needs to considerits specific lifecycle
stage, alongwith intendedcrowdfundingbenefits
like resource provision and constraintsin terms
of the type of reward it is able to offer credibly.
This article providesa frameworkto guidestartup
decisionsin this context, which is illustrated in
Figure 1.
In the pre-startupphase,organizationalresources
focus on validatingthe idea and a crowd provides
Figure 1. Frameworkfor startup crowdfunding
Startup Stage
Resources needed to
achieve…
GrowthStartupPre-startup
Problem/Solution
Fit
Product
Validation
Market
Validation
Market
Penetration
Market
Expansion
Verifiability of
Information
Optimal Type of
Crowdfunding Donation Lending Equity
Reward Offered No (tangible) return Interest ($), Product Securities, Profit
Sharing
Best Practices 1. Choose a
specialized
platform and all-
or-nothingpayout
model
2. Be transparent
and accountable
3. Publicize backer
information
1. Offer tangible
rewards
2. Detail thestartup
founder’s
credentials
3. Frequently
updatea funding
crowd
1. Provide third-
party verifiable
reports
2. Attract reputable
early investors
3. Target a crowd
that can
empathize
Yes No Yes No Yes No
186 J. Paschen

valuableresourcesthroughfundingandfeedbackon
a proposedsolution.Venturesin this stageneither
havea developedproductto offer as a reward,nor
aretheyableto offer financialor equity-likereturns;
donation crowdfundingis optimal to meet their
resourceneedswithin these constraints.Similarly,
resourcesin the growthstagearerequiredto market
the offering and scale the venture’soperations.
Equitycrowdfundingis bestsuitedto meetthehigher
capitalneedsin this phase,in additionto providing
criticalnonmonetaryresourcesin theformof product
promotion,sales,andmarketing.
Oncea choiceonthetypeof crowdfundingis made,
startupsface the next problem:how to convince
potentialbackersto fundtheirventure.Asa solution,
this article offers a numberof best practicesas
guidelinesthat havebeenshownto havea measur-
able effect on the successrates of crowdfunding
initiativesandarelikelyto provevaluablefor startups
(seeFigure1). Thisleadsto anotherkeyfinding.The
circumstancesfor differentcrowdfundingendeavors
are so diversethat it canbe arguedthat eachcrowd
hasto be constructedandaddressedin a uniqueway.
Cueutilizationtheory,anestablishedtheoryin social
sciences,hasprovideda valuabletheoreticallensin
this context.Eachstartuplife cyclestageis charac-
terizedby differenttypesand levelsof information
asymmetrybetweena founderandcrowdmembers.
Cues and signalscan help reducethe information
asymmetrybetweenthe two partiesand makethe
outcomemoreefficientfor both.
Thefindingsof thisarticlepromptpossiblefuture
research.Oneexamplewouldbe to dig deeperinto
the recommendationsby empiricallyvalidatingthe
proposedbestpractices.Whilethisarticlehasmain-
ly focusedon for-profitstartups,this workmayalso
sparkresearchin the field of socialenterprise,such
as an investigationinto the differencesbetween
startupswith purely for-profit aims and startups
focusingon a double-bottomline. In conclusion,
I hopethat thisarticleconvincesstartupsandschol-
ars that crowdfundingcan play a significantrole in
creatinga critical resourcebase.
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188 J. Paschen
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