Crowdfunding as a screener for collective investment

Crowdfunding uses a small amount of money from many people to fund a new venture. It is essentially a collective investment characterized by diversified investors, crowd-based decision-making, and consensus threshold. The sustainability of these markets heavily depends on the screening performance of the crowd. Although empirical studies suggest crowd-based funding decisions can be wise, little is known about the underlying rationale. This paper fills this void. We employ a computational experiment to investigate the impacts of investors’ attributes, i.e. ability and heterogeneity, and the threshold mechanisms on screening performance. We firstly identify the filtering effect of the consensus threshold. The high threshold screens out most of the unattractive projects and leads to less waste of capital, which makes All-Or-Nothing always outperform Keep-It-All. Further, we find a substitution effect of heterogeneity. When the group size is big enough, heterogeneous unsophisticated groups trump same-sized well-chosen ones. Lastly, the substitution effect of heterogeneity is moderated by the effectiveness of signals. In a crowdfunding environment of low predictability, investors’ heterogeneity contributes little to the collective accuracy, while investors’ expertise remains critical. In contrast to popular perceptions of crowdfunding markets as a new financing tool or marketing tool for entrepreneurs, our research indicates that crowdfunding is also an effective screener for collective investment.