(*This entry is based on the research article ‘The Dynamics of Crowdfunding – An Exploratory Study’ by Ethan Mollick)
In order to make something work, one aims to find a recipe for success. This principle holds for crowdfunding, too, in which founders of all sorts of projects request funding from many individuals, often in return for future products or equity (Mollick, 2014). Many crowdfunding projects, however, fail. Therefore, it is of importance to find out the underlying dynamics of success and failure among crowdfunding ventures. This is exactly what Ethan Mollick, Professor of Management at Wharton University of Pennsylvania and author of The Dynamics of Crowdfunding – An Exploratory Study, has done. By analysing a dataset containing 48,500 crowdfunding projects with a combined funding over $237 M, Mollick researches the effects of a fund seeker’s personal network, underlying project quality and geography on successful fundraising. In this post, I will focus attention on the effect of a fund seeker’s personal network through the notion of one’s number of Facebook friends. Then, I’ll show how this looks like in practise on Kickstarter.com. Finally, I suggest a way in which the power of an entrepreneur’s personal network could be even better put to use.
(Professor Ethan Mollick)
Social capital
Social networks have long played an important role in the funding of new ventures (Hsu, 2007; Shane and Cable, 2002). An entrepreneur’s social network influences the succes of raising capital, as it provides (1) connections to funders and resources as well as (2) endorsements of project, its product or service, and the initiator (Shane and Cable, 2002; Sorensen and Fassiotto, 2011; Stam and Elfring, 2008). Actually, an entrepreneur’s social network is the initial source of funding, called friends and family money (Agrawal et al, 2010). As Mollick found, about one in three Kickstarter.com accounts are linked to social network Facebook. Hence, the author looked at Facebook friends of founders (FBF) for the project initiator, as this number is less likely to increase as the project progresses. Here, FBF is a measure of the size of a founder’s social network. Models 2 and 5 in Mollick’s results (see table below) show that social network size predict success. According to the author, the link between social network size and crowdfunding succes could be compared to the following. Having just 10 Facebook friends leads to 9% chance of succes, whereas a 100 Facebook friends lead to 20% of success. With 1000 Facebook friends denoted on Kickstarter.com, a fund seeker has 40% change of success. However, Model 6 in Mollick’s results (see table below) shows that having no Facebook account coupled to Kickstarter.com is yet better than just having few online connections. This suggests that, although larger networks generally lead to more success in fundraising, entrepreneurs yet need to strategize on whether or not linking their social network to their fundraising, based on the number of friends they have on Facebook.
If you are interested in how the number of Facebook friends is depicted on Kickstarter.com, visit:
Here you see the SnapRays project on Kickstarter.com by entrepreneur Jeremy Smith. Click on Jeremy’s photo on the right to view his profile. The number of Facebook friends is depicted on the right.
A suggestion
Could an entrepreneur’s social network be leveraged more as to earn more trust among investors and hence raise more capital? In addition to stating the number of the fund seeker’s Facebook friends, the crowdfunding platform could enable the fund seeker to show the number of steps and the actual relations between him or her and a particular potential funder the way LinkedIn depicts the relations between you and someone else. To get an idea, see the mock-up I made below. To my belief, this would give a potential funder a feeling of being ‘more connected’ to the fund seeker, hence it would raise trust and it might lead to more funding.*
*Note: I e-mailed Professor Ethan Mollick about this suggestion. I’ll update this post if he replies.
Your turn
Now, could you think of other reasons why the number of Facebook friends is a quality signal to potential investors? And could you imagine different ways in which a fund seeker’s personal network could be leveraged more on crowdfunding platforms? Let me know you thoughts in the comments below.
References
- Agrawal, A., Catalini, C., Goldfarb, A., 2010. The geography of crowdfunding. SSRN Electronic Journal.
- Hsu, D., 2007. Experienced entrepreneurial founders, organizational capital, and venture capital funding. Research Policy 36.
- Mollick, E., 2014. The Dynamics of Crowdfunding – An Exploratory Study. Journal of Business Venturing 29, 1-16.
- Shane, S., Cable, D., 2002. Network ties, reputation, and the financing of new ventures. Management Science 48, 364.
- Sørensen, J., Fassiotto, M., 2011. Organizations as fonts of entrepreneurship. Organization Science 22, 1322–1331.
- Stam, W., Elfring, T., 2008. Entrepreneurial orientation and new venture performance: the moderating role of intra-and extra industry social capital. Academy of Management Journal 51, 97–111.
Consumer Value Creation 