NEW RESEARCH | How to reduce uncertainty in crowdfunding – 3 expert tips

Investing in companies through crowdfunding can be risky. A researcher at Blekinge Institute of Technology gives his best advice to minimize the risks.

Over the last 10-12 years, crowdfunding has seen an explosive growth. It is a form of funding where early-stage start-ups can receive several small small amounts of money from the public via digital platforms. And the fastest growing form of crowdfunding is equity-based, where investors, known as ‘backers’, invest money in return for shares in the company. It works much like investing in shares.

– There are always risks in investments, and especially in this type. People who get involved in crowdfunding are generally inexperienced investors, yet they expect returns. This makes it particularly interesting to understand how they deal with the uncertainty in the decision-making process,” says Ola Olsson, Blekinge Institute of Technology, who has studied this in his doctoral thesis.

Communication determines willingness to invest

One reason for the high risk factor is that backers do not meet the entrepreneurs behind the business idea they invest in. Instead, the platforms have discussion forums where investors have the opportunity to ask questions to the entrepreneurs. The forum is open, so anyone who is curious and interested in the business idea can see what kind of interaction and communication is going on.

– We have seen that the clearer the answers investors get to their questions to the entrepreneur, the greater the investment activity. So the way you communicate determines how much investment your company receives.

U-shaped investment window

Previous research has shown that most people invest at the beginning of a crowdfunding campaign. This can also be seen in Ola Olsson’s study, but it also shows that equity-based crowdfunding campaigns have a lot of activity at the end of the campaign.

– Many people wait to invest until they feel they have enough information. Facts seem to create security, says Ola Olsson.

Different types of investors

Most backers only invest on a one-off basis. And those who do so more often build a broad portfolio, the study shows.

– This group is much more aggressive in its investment strategy, preferring to invest in riskier projects, for example in the tech sector. By getting a broader portfolio of investments, you remove some of the uncertainty, says Olsson.

Contact ola.olsson@bth.se

More about the thesis
Ola Olsson recently defended his doctoral thesis at Blekinge Institute of Technology How do backers manage investment uncertainty in equity crowdfunding?

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Crowdfunding: These are the people who invest in your idea