Platform rules: Money-back guarantee in Crowdfunding

Crowdfunding is an interesting example of a platform mediated network. In this case the platform connects people with ideas in need of funding with people that want to fund ideas. There are no winner-take-all dynamics in this industry as multi-homing costs are low and the demand for differentiated features exists.

As there is a demand for differentiated features, the rules that platforms use to govern the exchange between the two user sides are important and offer platform providers means by which they can differentiate themselves. One of the pressing issues in crowdfunding is the problem with product ideas that never materialize. When an idea is funded yet it never materializes, potential funders can quickly lose faith in the platform. In a way it is seller uncertainty fueled market for lemons problem.

Indiegogo – one of the largest crowdfunding platforms – is attempting to find a solution to this problem. They want to answer the question: “How do you get your money back if the product never materializes?”. Indiegogo aims to answer this question by offering an insurance service, called perk insurance. The insurance service is optional and will allow funders to receive a full refund – minus the cost of insurance – if an idea doesn’t materialize before a preset date.

Perk insurance is fairly expensive, the costs run between 10-20 percent of a funding pledge amount. These high premiums could be indicative of fairly high degrees of seller uncertainty, as it would only make sense to purchase such an expensive insurance policy if your faith in the person you are investing in is low.

One of the offerings that offered insurance to funders was Olive – a wearable to manage stress – out of 1447 backers only three made use of the insurance option. These low rates might be indicative that the price of the insurance is too high to overcome the seller uncertainty that some funders experience.



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