Participation in Crowdfunding can Generate up to 73% in Returns Annually

Backers of projects on crowdfunding platforms can expect rewards from their pledges. For example, funding someone's idea on Kickstarter can result in an average annual return of 11.5%, with design projects known to deliver returns as high as 70%. However, it is important to note that these returns do not come in the form of direct cash payments but rather as savings on the purchase of the product once it hits the market. This has been demonstrated in a study by researchers at the HSE Faculty of Economics published in Economic Analysis Letters.

Crowdfunding is a financing method in which numerous backers pledge small amounts to support projects. Various crowdfunding models exist: in some, investors acquire shares in a startup; in others, backers receive the resulting product as a reward, while still others simply solicit support for causes, like those advocated by NGOs.

The majority of crowdfunding research focuses on investments in the form of purchasing shares in startups, estimating the average returns on such equity-based investments at 7% to 8%. However, previous studies have not specifically examined the potential returns from investing in reward-based crowdfunding projects, which lie at an intermediate position between investments in startups (where participants are financially motivated) and donations (where donors are driven by an altruistic desire to help others).

 

The authors of this study were the first to assess financial returns on reward-based crowdfunding, calculated as the difference between the retail price of a released product and its cost for a backer, expressed as a percentage of the initial pledge. The authors analysed data from nearly 300 projects across categories like video games, technology, and design on Kickstarter , the most prominent crowdfunding platform in operation since 2009, attracting over $7 million per month.

The sample consisted solely of large projects with a funding goal exceeding $250,000, of which 60% failed to reach the required funding amount and were not launched. Kickstarter operates under a model where if a funding goal is not met, the funds are returned to the pledgers, providing a form of investment protection.

The average annualised returns across the three categories of projects were found to be 11.5%. However, when only successful projects—those able to raise the required amount—are considered, the average returns are higher at 26.4%.

Projects in the Design category were found to yield the highest returns, averaging nearly 25%, and reaching up to 73% when only successful projects are taken into account. Projects in the Technology category delivered an average return of 15% to backers, increasing to 36% when only successful projects were considered. Projects in the Games category were the least profitable, yielding investors an average return of 6%, and as little as 14% for successful ventures alone. On the other hand, projects in this category were the most likely to secure the necessary funds for launch. However, there is a caveat: the calculated profitability is not a direct cash flow that investors will receive but instead a form of benefit.

Rather, it presents an opportunity for backers interested in obtaining the product to save money. The point of crowdfunding is that projects raise relatively small amounts from a large number of backers, therefore the return for an individual investor is relatively modest.

Victoria Dobrynskaya
Assistant Professor, Faculty of Economic Sciences

Characteristics such as the number of backers or the stated required amount were not found to statistically influence profitability. Only the project length was significant, with shorter-term projects yielding greater returns. The majority of projects on the platform are short-term, with the average waiting time for the delivery of rewards being 14 months. The Design category boasts the quickest reward delivery, with backers receiving their rewards after just 13 months. Backers of projects in the Games category face the longest wait—nearly three years—for their rewards.

For example, one of the most prominent projects in the Games category is Pillars of Eternity developed by Obsidian Entertainment. With an original funding objective of $1 million, they were able to raise $4 million in just a month. The game was announced in September 2012 and subsequently released in March 2015. Backers could obtain a copy of the game by pledging $20 or more. Following its release on various platforms, the game was priced at $30. This translates to a 50% reward for backers who pledged the minimum amount.

However, the average pledge for this project was $54; thus, some backers actually incurred a financial loss but still obtained the coveted game. According to the study authors, altruism and a desire to support an interesting project are the primary motivations for crowdfunding investors on Kickstarter . However, financial returns are not contingent on the number of projects backed or the amounts pledged.

It is not known in advance which projects will be more profitable. Therefore, one's returns depend on the projects they have chosen to support. Our research has shown that projects in the Design category are more attractive on average. Investing towards the end of a campaign, when the probability of success is already high, is also an effective strategy.

Victoria Dobrynskaya
Assistant Professor, Faculty of Economic Sciences

IQ

June 07