‘All-or-nothing’ is the funding model of choice for the vast majority of creatively-based crowdfunding platforms. An overwhelming 75% of those founded in the last two years have opted for this model. Requiring that a project reaches its full target before any money is taken from backers, this funding ecosystem has proved highly stimulating. By contrast, socially-focused platforms employ ‘keep what you raise’ funding models in greater proportion. In addition, new platforms are currently exploring hybridisation - one of many ways in which crowdfunding structures and ecosystems continue to evolve.

In the second post of a short editorial series exploring crowdfunding data (read #1 here), we discuss the two predominant funding models employed by project-based crowdfunding platforms.

Popularised by US-based platform Kickstarter, the ‘all-or-nothing’ model involves backers pledging varying levels of support based on a tiered rewards system. Under this model no funds are released until the full target amount is reached. On the other hand, employing a ‘keep what you raise’ model will release all funds raised regardless of the proportion of funding which was successful.

Both models have enthused and empowered global communities, both have spawned numerous successful platforms, and both have shown themselves to be effective mechanisms for raising and sharing funds. Facilitating simple transactional solutions accessible to anyone with internet access, they reduce the friction and costs associated with earlier methods of raising funds. With their transformative power to break down barriers these models offer an open-source and organic approach - a far cry from the closed doors of traditional financing and investment.

Supporters of the efficient ‘all-or-nothing’ funding structure are continuing to grow exponentially. With no risk and full control you can raise money and awareness whilst also gauging demand and gaining traction. But why has the ‘all-or-nothing’ model dominated with a three-quarter share in the recent explosion of creative crowdfunding space? Which psychological insights can we deduce from creative innovators’ preference for an ‘all-or-nothing’ model and the corresponding choice for ‘keep what you raise’ within the social sphere?

By making the 100% target an absolute requirement before funds raised can be released, not only are ‘all-or-nothing’ project owners offered a strong incentive to post projects of a certain quality, they are also encouraged to promote vigorously in order to maximise their chance of return. Whilst engaging in promotion, project owners simultaneously publicise their host platform. In turn this draws more potential backers to the platform and enlarges the size of the crowd which is participating. Such positive feedback mechanisms on social media are one of the cornerstones crowdfunding is built on.

It is also clear that by framing collective funding as a high-stakes game there are a variety of psychological factors which have been drawn into play. One of the key implications is that it gives backers the confidence that they will only pay for projects which achieve a critical amount of support. In addition, it is evident that once a certain point is reached, said to be around 40% funded, the crowd responds to this display of confidence in the credibility of the project owner and is thus more likely to help reach the full target.

Fundamentally an empowering process, one of the key psychological drivers behind crowdfunding is that it is a meaningful engagement from the crowd. With an ‘all-or-nothing’ model the crowd transparently has the power to determine whether a project succeeds or fails, thus offering a further incentive to participate. It is this collective power and imagination that crowdfunding for creative projects so successfully draws on. This crowd power is of course also a major factor for ‘keep what you raise’ models, although it is perhaps a lesser behavioural determinant in this situation.

Social platforms have a strong argument that when funds raised are for a philanthropic cause, every penny raised should be awarded, as even a small amount can make a difference. As rewards for the crowdfunder are usually less personally tangible, the ‘keep what you raise’ model is more emotionally viable for social platforms. Currently, 55% of social platforms employ this model, while only 15% utilise ‘all-or-nothing’.

The popularity of the ‘all-or-nothing’ model continues to grow and there has been a 10% increase in the number of new platforms choosing it over two years ago. In addition, the number of new creatively-based platforms founded with the ‘keep what you raise’ model have correspondingly dropped by around the same amount. Despite IndieGoGo’s continuing success and growth as the pioneer of this model, the choice has been overwhelmingly for ‘all-or-nothing’. However, with 33% of all crowdfunding platforms currently employing the ‘keep what you raise’ model, it still retains a sizeable share of the crowd.

Development of hybrid platforms and their associated funding structures is another way evolution of crowdfunding is manifest. An interesting and unique application of this type is the platform HelpersUnite, which aligns charities with a creative project’s crowdfunding, and employs the ‘keep what you raise’ model. It is the result of a forward-thinking hybridisation between a creative and a social platform. The funding structure employed marries the use of a tiered rewards system with the ability to collect whatever is raised plus a percentage earmarked for a philanthropic cause. Thus it meets the needs of both creative and social innovators. The requirement that at least one reward level should always be redeemed regardless of the amount raised, offers reassurance to backers that their money is still being implemented for good use. With on-going transformation in the crowdfunding space, we will continue to see exciting hybridisation augmented by further innovation.

An interesting area for further study, and no doubt one which will materialise in more depth as crowdfunding matures as a discipline, is to consider the funding structures and ecosystems through the lens of behavioural economics.

Powered by the movement towards organic funding structures and ecosystems - networked, dynamic, characterised by positive feedback mechanisms, low in friction and costs, and driven in real-time by innovators across all sectors - crowdfunding models are continuing to develop and mature.

By Dorothy Sanders, Crowdsourcing.org Editorial Contributor and Co-founder of Sandfishdesign.co.uk.

Read the first post in the series here.