What factors influence a funder’s decision-making process?

By: Jack Harris

How do funders make decisions about which projects, organizations, or people to fund? Melina Moleskis, Ines Alegre, and Miguel Angel Canela in Crowdfunding Entrepreneurial or Humanitarian Needs: The Influence of Signals and Biases on Decisions provide some guidance and data on how funders on the crowdfunding platform, Kiva, make funding and lending decisions. A key takeaway from their research is that the type of project, “home bias” and gender all play a role in which projects get funded.

This study investigated three factors: risk propensity, proximity between funder and lender, or “home bias,” and gender. Each of these three factors were then compared against a specific project type. The projects analyzed were classified as either entrepreneurial or humanitarian. Humanitarian projects included projects like health, education, or housing while entrepreneurial projects include loans for revenue-generating projects such as starting a small business or building out the capacity or reach of an existing business. In this study, project classification, entrepreneurial or humanitarian, makes a significant difference in the types of factors that play a role in a funder’s decision-making process.

Funders are motivated by different things when they consider entrepreneurial and humanitarian projects. First, some funders look to fund businesses or other entrepreneurial ventures, while other funders are mainly interested in funding humanitarian initiatives. Gender plays a significant role in this, with male borrowers 49% less likely to receive funding for entrepreneurial projects than female borrowers.

Second, funders are more likely to accept risk for humanitarian projects than they are for entrepreneurial projects. The authors found that the larger asks for funding by entrepreneurial projects had a much lower probability of funding (32%) than smaller entrepreneurial asks. Requests for longer repayment terms on entrepreneurial projects also had a much lower probability of funding success (41%). More regular repayment schedules such as month-to-month payments are much more likely to see funding success than those funding requests which seek to repay at the end of the project or on more “irregular” terms.

Regardless of project type, “home bias” plays a role in funding decisions. “Home bias” refers to the proximity between funder and borrower, with funders more likely to fund projects that are geographically proximate and/or share other cultural or demographic similarities with the potential funder. This creates a lopsided distribution of loans with the volume of funding heavily skewed towards particular geographies where the most funders congregate.

On Kiva, the platform analyzed for this project, most lenders are from North America which creates a higher likelihood of projects from North America being funded than projects from other regions. The study found that an Asian entrepreneurial project has a 72% lower chance of success than one from North America, and that an Asian humanitarian project has a 95% less chance of being funded then a similar project from North America. These findings point to the importance of building capacity and platforms across regions and in ways that connect them to the people, organizations, and communities seeking funding for projects to improve individual and collective well-being.