Crowdfunding discussion

CROWDFUNDING CREATIVE IDEAS: THE DYNAMICS OF PROJECT BACKERS IN KICKSTARTER

We like this definition and basic introduction in many angles crowdfunding has a bit better as the one at wikipedia.

Venkat Kuppuswamy Barry L. Bayus 2018

Entrepreneurs are turning to crowdfunding as a way to finance their creative ideas. Crowdfunding involves relatively small contributions of many consumer-investors over a fixed time limit (generally a few weeks). In online crowdfunding communities, potential donors can see the level of support from other project backers as well as its timing before making their own funding decisions, suggesting that social information (i.e., others’ funding decisions) will play an important role in the ultimate success of a project. Two years of publicly available panel data on successfully and unsuccessfully funded projects listed on Kickstarter is used to empirically study the role of social information in the dynamic behavior of project backers. Building off the well-established social psychology theory around diffusion of responsibility effects, we show that additional backer support is negatively related to its past backer support. Many potential backers do not contribute to a project that has already received a lot of support because they assume that others will provide the necessary funding. Consistent with the deadline effect widely observed in bargaining and online auctions, we also show that the diffusion of responsibility effects diminish as the project funding cycle approaches its closing date. Moreover, as the project deadline draws near, we find that project updates tend to increase as the project creators make a final plea for help to reach their funding goal. Reduced diffusion of responsibility effects, together with the positive influence of project updates, lead to generally increasing project support in the final stages of funding. This is particularly the case for projects that successfully achieve their goals as they are more likely to have an update in the last weeks of funding and generate more excitement from recent backers than projects that fall short.

INTRODUCTION

An important barrier to innovation is the availability of early-stage funding (Cosh, et al. 2009). Given the difficulties that new ventures face in attracting financing from angel investors, banks and venture capital funds, some entrepreneurs are tapping into large, online communities of consumer-investors (Economist 2010; Schwienbacher and Larralde 2012). Called “crowdfunding,” this relatively new form of informal venture financing allows entrepreneurs to directly appeal to the general public (i.e., the “crowd”) for help in getting their innovative ideas off the ground. As defined by Belleflamme, et al. (2012), crowdfunding involves an open call (through the Internet) for the provision of financial resources either in the form of donation or in exchange for some form of reward in order to support initiatives for specific purposes1 . Collecting small amounts of money from a large number of people has a rich history in many domains (Ordanini, et al. 2011). For example, Mozart and Beethoven financed concerts and new music compositions with money from interested patrons, the Statue of Liberty in New York was funded by small donations from the American and French people, a human rights organization is trying to raise money in order to buy a communications satellite to provide Internet access to people in third world countries (http://www.buythissatellite.com, accessed November 2, 2012), and

VIP

President Barak Obama’s 2008 election campaign raised most of its funds from small donations over the Web (Hemer 2011). Today, several hundred global intermediaries with online platforms exist to match up consumer investors with initiatives that they wish to help fund. Prominent examples in the popular press include the narrative movie project by Steve Taylor that got almost 4,500 people to contribute nearly $350,000 and Scott Wilson’s idea to create a wristband that will convert an iPod nano into a watch raised over $940,000 from over 13,500 individuals (Adler 2011). One of the largest crowdfunded projects to date is Eric Migicovsky’s E-Paper Watch that integrates with an Android or iPhone that received donations totaling over $10.2M from well over 65,000 backers. According to one industry report, crowdfunding platforms raised almost $1.5B and successfully funded more than one million projects in 2011 (Massolution 2012). Given the potential dollars involved, crowdfunding has recently garnered attention from policymakers and regulators as evidenced by the Jumpstart Our Business Startups Act (JOBS Act) recently signed into U.S. law (Chasan 2012). Crowdfunding differs from the traditional financing of new ventures in two important ways. First, funding is provided by the relatively small contributions of many individuals over a fixed time limit (generally a few weeks). Second, potential donors can see the level of support from other project backers as well as its timing before making their own funding decisions, suggesting that social information (i.e., others’ funding decisions) will play an important role in the ultimate success of a crowdfunded project. Understanding these effects is important because studies find that social information can lead to “non-rational” behaviors. For example, people often choose music for downloading based on popularity not quality (Salganik, et al. 2006) and bidders tend to herd into online auctions with more bids even though this activity is not a signal of higher quality (Simonsohn and Ariely 2008). Many legal scholars and policy makers believe that this kind of irrational herding behavior increases the chances for fraud in crowdfunded projects since consumer investments are not protected by government regulations or oversight (Bradford 2012; Hazen 2012). To date however, there is very little empirical research to definitively support any position. In general, crowdfunding communities differ in terms of whether the funder’s primary motivation for participating is the expectation of a financial return. For example, crowdfunding communities like SellaBand and Wefunder offer consumer investors an interest in the venture in the form of equity or some sort of profit sharing agreement (Ward and Ramachandran 2010; Agarwal, et al. 2011). Other crowdfunding communities such as Prosper and Zopa involve peer-to-peer lending in which it is expected that the original principal is repaid, along with some fixed interest (Herzenstein, et al. 2011; Zhang and Liu 2012). Research on these types of equity- and lending-based crowdfunding communities finds evidence for herding behavior, i.e., individuals want to contribute to projects that already have a lot of support from other community members. Because consumer investors in these communities expect a financial return, herding behavior is a “rational” way for individuals to reduce their own risk in the face of uncertainty about the proposed new ventures on these websites. Following the literature on information cascades (Bikhchandani, et al. 1992), these studies argue that an initiative with a lot of community support signals that the project is of high quality. Unlike the platforms in which participants expect some sort of financial return, other crowdfunding communities involve no monetary compensation for participation. For example, JustGiving and Spot.us rely on altruistic motivations in which funders voluntarily donate their money with no expectations of any tangible reward (Burtch, et al. 2012; Smith, et al. 2012). Research on these types of donation-based crowdfunding communities draw on the extensive literature involving philanthropy and public goods (Andreoni 2006; Vesterlund 2006). Because the consumption of public goods cannot be withheld from non-contributors, free-riding is a potential issue in which contributions can be crowded-out by the prior funding decisions of others (Bergstrom, et al. 1986). At the same time, there are several models based on social norms that predict a positive effect of others’ funding decisions (Sugden 1984; Bernheim 1994). Depending on the perspective taken, some donation-based crowdfunding studies find positive effects for other community members’ funding decisions on contributions (Smith, et al. 2012), while others find the opposite (Burtch, et al. 2012).

Fast growing plattforms

Unlike existing research that considers crowdfunding communities with tangible financial returns or no tangible rewards at all, our interest is in crowdfunding communities like Kickstarter and Indiegogo in which project backers do receive tangible, but non-financial, benefits for their financial contributions. These rewards often take the form of tokens of appreciation (thank-you message, artist’s autograph, mentioning the crowdfunder’s name in the credits, tee-shirt) or the pre-purchasing of products or services (Hemer 2011). Not surprisingly, qualitative studies find that rewards are one of the most important motivations for participating in crowdfunding communities (de Witt 2012; Gerber, et al. 2012; Steinberg 2012). Reward- 4 based crowdfunding has the largest number of online platforms and is the fastest growing form of crowdfunding (Massolution 2012). With the exception of Mollick’s (2012) cross-sectional study, very little research to date has considered reward-based crowdfunding and none has examined the role of social information.

To be continued…