Informational Problems in Crowdfunding Models

Crowdfunding, while a powerful tool for fundraising, is not without its challenges, particularly regarding information. The internet's role in crowdfunding can be a double-edged sword: it connects creators and backers globally but also creates informational gaps.

Here's a breakdown of common informational challenges:

1. Information Asymmetry

• Description:
  • Project creators possess more in-depth knowledge about their project than potential backers.
  • Backers rely on the information provided by the creator.
• Issues:
  • Uncertainty about project feasibility, risks, and challenges.
  • Difficulty in assessing the project's true potential.
  • Backer uncertainty about the project's viability and practicality, even if the creator is genuine.
• Explanation: The creator knows all the behind-the-scenes details, while the backer only sees what's presented. This disparity can lead to mistrust.

2. Credibility and Trust

• Description:
  • Backers struggle to evaluate project creators' credibility and trustworthiness.
  • Crowdfunding platforms can be open to projects initiated by unknown individuals or organizations.
• Issues:
  • Lack of information or references to verify the creator's track record.
  • Impact on backers' willingness to contribute.
• Explanation: Without established reputations or institutional backing, it's hard for backers to know if a creator will deliver on their promises.

3. Project Viability and Due Diligence

• Description:
  • Backers may lack the expertise or resources to evaluate the project's technical, market, or financial aspects.
  • Assessing complex projects is difficult.
• Issues:
  • Difficulty in making informed funding decisions.
  • Especially hard when projects involve new technology.
• Explanation: A backer might not have the knowledge to judge if a complex tech project is realistic.

4. Quality of Project Presentation

• Description:
  • Campaign success depends on the effectiveness of the project presentation.
  • Not all creators have strong communication or marketing skills.
• Issues:
  • Lack of interest from potential backers, regardless of the project's quality.
  • Poorly written descriptions, bad videos, and unclear rewards.
• Explanation: A great idea can fail if it's poorly presented.

5. Delivery and Fulfillment Risks

• Description:
  • Creators commit to delivering rewards in reward-based crowdfunding.
  • Risks of delays, unexpected challenges, or project failure.
• Issues:
  • Backers may be disappointed or misled.
  • Difficulty in holding creators accountable after the campaign ends.
• Explanation: Even with good intentions, creators can face unforeseen obstacles.

6. Market Saturation and Competition

• Description:
  • Crowdfunding platforms have many projects seeking funding simultaneously.
  • It is hard to stand out.
• Issues:
  • Difficulty for individual projects to attract attention.
  • Backers may be overwhelmed with choices.
• Explanation: In a crowded marketplace, it's hard to get noticed.