Launch on a High Note: How Prefunding Affects Crowdfunding Outcomes

Abstract

In an increasingly competitive crowdfunding market, entrepreneurs are seeking out new ways to improve their likelihood of success. This is one of the reasons for the emergence of prefunding platforms, which help entrepreneurs to raise awareness of their forthcoming fund-raising projects. Using data from an online crowdfunding platform, we show that opting for prefunding prior to fund-raising significantly increases the likelihood of a campaign meeting its fund-raising goal. We also find that prefunding projects transition to the fund-raising stage with a higher number of backers, and a higher contribution size on the first day of funding when compared to non-prefunding projects. This strong head-start on the first day of solicitation then enhances a project’s ability to garner funds over the fund-raising window, thus increasing the likelihood of eventual success. Moreover, when entrepreneurs proactively update information about their projects and actively engage with followers during the prefunding period, their campaigns are more likely to launch with a higher number of backers and higher contribution size. Our study has important implications for both entrepreneurs and crowdfunding platforms.