Essec Business School

New research by ESSEC Business School’s Kevin André and Arthur Gautier looks at how reward-based crowdfunding platforms are shaking-up the self-Interest vs. altruism dichotomy. From the paper “Beyond the Opposition Between Altruism and Self-Interest: Reciprocal Giving in Reward-Based Crowdfunding”, published in the Journal of Business Ethics.

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Crowdfunding is big business. As of 2015, hopeful entrepreneurs have raised over $34 billion on platforms like Kickstarter, Indiegogo, KissKissBankBank, and Ulule. And by 2025, that sum will likely surpass $300 billion.[1]

From an entrepreneur’s perspective, it’s fairly easy to explain the popularity: unlike many traditional financing options, reward-based crowdfunding lets entrepreneurs raise money to develop their projects without generating debt or relinquishing some control to a shareholder. But perhaps best of all, reward-based crowdfunding helps founders validate their business ideas by getting feedback on prototypes and pricing directly from their future consumers or patrons. 

But, why do people give to crowdfunding campaigns?

Crowdfunding: a hybrid phenomenon

The opposition between self-interest and altruism  in human behavior - in other words, the extent to which the relationships between members of a society are driven by selfish or selfless motives - is a cornerstone of the ethics debate. However, we can escape this dichotomy through the theory of reciprocal giving developed by the French sociologist Marcel Mauss.

According to his famous essay The Gift, “the idea that inspires all economic acts [...] is neither a purely free and gratuitous provision nor a purely interested, utilitarian notion of production and exchange, but a sort of hybrid.”

Many of today’s phenomena are hybrid. On the one hand, for-profit corporations are multiplying their philanthropic and socially responsible activities in order to create shared value. On the other hand, philanthropy is increasingly influenced by values and methods drawn from venture capital. Donors and foundations develop systematic processes to solve social problems, by evaluating the social impact of their donations – sometimes quantifying a “social return on investment”. Meanwhile, hybrid organizations like social enterprises, for example, skillfully combine commercial and social welfare logics.

Crowdfunding is also a hybrid phenomenon, allowing entrepreneurs and founders of a wide array of projects to directly raise relatively small contributions from a large number of individuals. Reward-based crowdfunding platforms like Kickstarter, Indiegogo, and Ulule, accept both nonprofit and for-profit projects, leaving ambiguity around the nature of projects and the underlying intention of their founders. Even the vocabulary used on crowdfunding platforms reflect this ambiguity: users neither “buy” products nor “give” money; they “back” projects and receive “rewards”.

In fact, our analysis of more than 3,000 projects funded on the Ulule platform shows that "hybrid" crowdfunding projects, neither purely commercial nor purely altruistic, are the most successful. In essence, the more contributions exceeding the value of the proposed reward (the “return on investment”), the more likely that project is to achieve and even exceed its fundraising goals.

Crowdfunding to forge relationships

Entrepreneurship is more than an economic process, it’s a practice involving many social ties. First and foremost, entrepreneurs rely on the empathy, feedback and support of their inner circle. Family and friends often help “bootstrap” their business ideas. Young entrepreneurs might use a spare room in their parent’s house as free office space, or borrow money to pay for a new laptop computer.

Crowdfunding helps entrepreneurs extend their inner circle and blend different kinds of relationships: personal acquaintances, social network connections, and commercial interactions. In fact, the results of our analysis show that crowdfunding fosters specific kinds of relationships relying on reciprocity.

We argue that reciprocity is not only based on relationships between users throughout different campaigns, but also within each project. Reciprocity on crowdfunding platforms implies that each campaign is also based on an internal process of giving and receiving, where backers give a pledge (the gift) to founders and receive a reward (the counter-gift). 

Interestingly, we observed three forms of contributions in the crowdfunding space which echo the rationales Mauss described in The Gift a century earlier:

• Transactions corresponds to pledges equalling the amount of the reward, which in fact constitutes a pre-order of a product or service.
• Reciprocal giving corresponds to pledges exceeding the amount of the reward, where the backer voluntarily sends a ‘gift’ beyond the value of the reward.
• Non-reciprocal giving corresponds to backers who “just want to help the project” by giving without anything in return (they refused any reward).

Following Mauss’ insights, reciprocal giving is a way for members of a society to develop and maintain relationships, as giving obliges the recipient to engage in a reciprocal, cyclical relationship, i.e., giving, receiving, and giving back.

Reciprocal giving: the key to entrepreneurial success?

Many research projects underline that the most important drivers for success are related to the founder himself, and especially the founder’s ability to mobilize social capital early in a campaign. Even if close friends and family members are not sufficient to guarantee a successful campaign, they remain critical to initiate a virtuous circle of contributions as they offer a positive signal to the community. Bonds between community members matter.

Our findings show that the remarkable success of the reward-based crowdfunding platforms is based on strong reciprocal relations between contributors and project promoters, within one or more communities. In other words, contributors give, but they also receive something in return, even if that something is uncertain and not equivalent in value. The “return on investment” is often personalized, unique, and may even involve a face-to-face meeting with the entrepreneur. Even in a "virtual" universe, which goes beyond the first circle of family and friends, the link between people seems at least as important as the money or the objects in their hands.

In our analysis, we note that projects that are more clearly altruistic or commercial have a lower success rate than "ambiguous" projects, which more or less intentionally mix philanthropic and market logics.

What should we make of philanthropy's hybrid nature? Should we condemn the cynicism or celebrate the ingenuity? Whatever the answer to that question may be, the evolution being played out on crowdfunding platforms is as exciting as it is complex.

 [1]CFX Alternative Investing Crowdfunding Statistics