Crowdfunding in Sweden - Institutional Limits and Endogenous Possibilities.

A new source of funding for promising ideas and inventors has recently surfaced: crowdfunding. Crowdfunding may be defined as the financing of a project or venture by a group of people, “the crowd”, instead of professional actors. This operation is performed through the Internet and with the help of social networks, in the forms of donations, equity or loans.

Crowdfunding supporters believe that the “wisdom” or “collective intelligence” of the crowd helps both to make sense of the potential of a project and to weed out the risks of frauds. This sense-making is usually achieved by the involved actors through communication (in chats and blogs on crowdfunding platforms and social media) and against the disadvantage of asymmetric information. In fact, information about the inventor’s background, as well as details about the business plan, is often only partially disclosed in the beginning of a crowdfunding. At the same time, many national platforms have not yet developed reputational systems capable of providing a safety-net for all parties.

Sweden started to build national crowdfunding platforms in 2011 and their use to date has been cautious The few recent national investigations point at the fact that the Swedish crowds, in order to use their wisdom, need first to overcome some endogenous and institutional barriers. Among the endogenous ones is emphasized that complicated projects and specific forms of returns are not suitable for crowds (because of their non-professional backgrounds and high number of participants). As a matter of fact, IT-projects and equity funding are the forms most avoided by the Swedish crowdfunders, despite the fact that Swedes are IT-enthusiasts and avid Internet users, and that IT-innovation is one of the driving economic motors of the country. However, these non-choices could be related to institutional, more than endogenous, barriers as the inadequacy of the national legal system (limiting among other things the way in which information is displayed on a platform or the number of investors per project) or the lack of a critical mass of repeat funders legitimating good projects.

The paper has two main aims. The first is to investigate the endogenous possibilities of the “wisdom of the crowd” when making sense of risks and opportunities that the financing of a project or venture may implicate. The second is to investigate the institutional (legal, normative, cognitive) preconditions in which Swedish crowdfunding is embedded so as to assess their role in limiting and empowering this funding system. The paper draws on in-depth interviews conducted with Swedish crowdfunding actors (inventors, funders and platform owners) as well as on the monitoring of chats and blogs on national crowdfunding platforms and social media where the involved parties exchange their ideas over a project and its potential. The data are analyzed in light of the Swedish institutional environment in which crowdfunding platforms and actors are embedded. The study is part of a larger project focusing on professional and non-professional forms of financing IT-innovation in Sweden.