Crowdfunding is perceived as a particularly promising source of finance for sustainable initiatives. By undertaking an institutional, rule-based analysis of crowdfunding, this chapter introduces three key mechanisms that may create collective action among crowdfunders, thereby increasing availability of funds for sustainable enterprises. Firstly, the use of social networks can increase collective action, especially in the crucial early stages of a crowdfunding campaign. Existing (strong and weak) ties can decrease fears of moral hazard and increase trust about expected participation of other funders.
Furthermore, smaller group sizes can enhance the feeling that an individual contribution really matters and can also lead to reputational concerns for not participating. Second, crowdfunding allows for heterogeneous contribution and payoff rules, ranging from debt/equity to rewards to impact and combinations of these. This creates new niche funding markets where the payoff is tailored to a specific crowd and also enables an enterprise to engage its value chain as funders in particular users/clients. Third, crowdfund campaigns can lead to conditional cooperation, since campaign websites display who has already funded and provides a threshold (deadline) within a certain amount of funding needs to be reached.
Making the cooperative behavior of others transparent has been shown to be a crucial factor for increasing cooperation levels and can be applied to sustainable entrepreneurial finance. Both entrepreneurs and crowdfunding platforms can use these three mechanisms to increase the success rate of sustainable entrepreneurial finance, which can open up additional sources of funds for a sustainable financial system.
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