This is a review of the paper “The Role of Customer Investor Involvement in Crowdfunding Success” by Philipp B. Cornelius and Bilal Gokpinar (2018).

Introduction

One of the greatest challenges for entrepreneurs is securing outside funding for their ventures. So nowadays, an increasing number of entrepreneurs turn to novel sources of funding for their projects. One of the most prevalent alternative ways of raising money is reward-based crowdfunding, where the project is financed by a vast number of small donations (Kraus et al., 2016). In return for their pledge, funders receive a reward which differs among projects and the size of the backer’s donation – for instance, the reward can be receiving the product before it enters the market, purchasing it at a discounted price, or even an exclusive dinner with the project creators themselves (Mollick, 2014).

The obtaining of funds through crowdfunding is usually done via platforms such as Kickstarter. Kickstarter is the largest reward-based crowdfunding site, and since its launch in 2009, almost 160,000 projects have been successfully funded with the help of over 16 million backers (Kickstarter, 2019). In addition to collecting funds, project creators are drawn to crowdfunding platforms to get access to potential customers, gain an initial impression of demand, sell their goods and gain feedback from funders. Funders on the other hand, in addition to accessing an investment opportunity, gain early access to new or exclusive products, and may feel as though they belong to a community or philanthropic cause (Tsekouras, 2019).

Theoretical Background

Reward-based crowdfunding is characterised by a unique role of customers co-financing the project. In a traditional buyer-seller context, customers purchase a finished product, and the only information asymmetry they need to take into account is an inaccurate or misleading product description. However, when participating in a crowdfunding campaign, as funders, customers support the production of a product that is usually in a prototype phase or does not exist yet. They take on the risk of a product being different than promised, or not produced at all, for a promise of a future reward. As a result, they turn into customer investors – as they invest in a product in order to receive benefit at a later stage – and a buyer-seller relationship transforms into a principal-agent relationship where customers act as principals, and project creators as their agents (Cornelius & Gokpinar, 2018). In this case, it is possible that customer investors actually provide some of the benefits and support received from institutional investors.   However, the effect of this relationship shift remains unclear: do customers, as investors, really impact funding success apart from backing it financially? Can project creators actually benefit from customer inputs?

The Study

This paper has attempted to answer these questions by conducting a study based on 21,491 crowdfunding projects on Kickstarter, both successful and unsuccessful, over a 7 month period. The authors investigate the effects of customer input (measured in number of comments provided in the comments section of the project) on the success of crowdfunding campaigns – i.e. whether or not the funding goal was reached. They also investigate the moderating roles of a project’s team composition and backer’s distant funding experience, as well as the mediating role of the number of project revisions. To account for potential confounders, the authors also included the following antecedents of success as control variables: number of videos in the project description, the project’s riskiness, whether or not the project is run by an incorporated organisation, a project’s funding goal, previous user engagement and project category.

The authors found that customer involvement, measured in number of comments submitted in the comments section, indeed increases a project’s probability of funding success (seen in Figure 1). In fact, they found that as few as 3 messages from customers increase the average likelihood of funding from 8% to 58%. One of the explanations for this may be the fact that incorporating customer suggestions make the product more customer-adapted, therefore pulling more backers to the project.

Surprisingly, this paper also demonstrates that the input of donors with distant funding experience – that is, backers that have also supported projects from different categories – is particularly beneficial for the success of the project (seen in Figure 1). Intuitively, it would be expected that the feedback of experts in a particular area is more insightful; however, this result may stem from the fact that the donor’s novel, out-of-the-box thinking can suggest solutions that experts from the field may not have ever considered.

The authors also found that individual project creators benefit more from backers’ suggestions than teams project creators, because individual entrepreneurs rely more heavily on mitigating agency costs through customer involvement. Lastly, it was found that the positive influence of customer input on project success is greater when the project creator updates the projects description while the campaign is active (seen in Figure 2). Indeed every project revision was found to increase the likelihood of funding success by 40%.

Strengths

A strength of this study lies in its large, comprehensive and unique data set from Kickstarter. This data set includes 21,491 projects, from 138 countries and all 13 project categories. Furthermore, whereas most other studies in innovation have researched only successful projects, this paper uses a balanced set of both successful and unsuccessful projects, thus reducing selection bias (Singh & Fleming 2010; Chatterji & Fabrizio 2011). A dataset such as this one, increases the generalisability of this study’s findings to a diverse set of industries and entrepreneurs.

Another strength of this study is their inclusion of several control variables and an instrumental variable – the release of the Kickstarter mobile app – to improve the validity of their findings. Nine control variables are deployed to account for confounding factors, which cause spurious associations between independent and dependent variables, to ensure that the effect on funding success is likely due to changes in customer investor input (Skelly, Dettori & Brodt, 2012). Furthermore, the instrumental variable reduces the effect of possible endogenous variables, and helps account for unexpected behaviour between the variables creator ability and project quality (Lousdal, 2018).

Managerial Implications

This study not only contributes to earlier academic literature on crowdfunding, but also has direct implications for entrepreneurs, as the findings demonstrate that customer investors can provide some of the support usually received from venture capitalists or angel investors.

Firstly, given the findings that customer investor involvement and input can improve a projects chances of success, entrepreneurs should be open to customer investor’s feedback and actively listen to their suggestions – as this could be the difference between project success or failure. Additionally, as projects have been found to get better as more customer input is incorporated, entrepreneurs should actively change their product descriptions in response to them. When a funding goal has been reached, campaign descriptions can no longer be updated, so it is imperative that project creators incorporate relevant inputs as soon as they are suggested.

Furthermore, although perhaps slightly counterintuitive, entrepreneurs should value the inputs of customer investors with experience in distant categories, as their heterogenous insights could bring considerable value to the project. Lastly, the findings suggest that individual (as opposed to team) project creators may actually reap more benefit from customer investor input and thus should be more open to inputs when interacting with customer investors on the platform.

Chatterji, A.K. & Fabrizio, K., 2011. How Do Product Users Influence Corporate Invention? Organization Science, 23(4), pp.971–987.

Cornelius, P. and Gokpinar, B., 2018. The Role of Customer Investor Involvement in Crowdfunding Success. Management Science, Forthcoming.

Kickstarter (2019). About — Kickstarter. [online] Kickstarter.com. Available at: https://www.kickstarter.com/about?ref=global-footer [Accessed 1 Mar. 2019].

Kraus, S., Richter, C., Brem, A., Cheng, C.F. and Chang, M.L., 2016. Strategies for reward-based crowdfunding campaigns. Journal of Innovation & Knowledge, 1(1), pp.13-23.

Lousdal, M.L., 2018. An introduction to instrumental variable assumptions, validation and estimation. Emerging themes in epidemiology, 15(1), p.1.

Mollick, E., 2014. The dynamics of crowdfunding: An exploratory study. Journal of business venturing, 29(1), pp.1-16.

Singh, J. & Fleming, L., 2010. Lone Inventors as Sources of Breakthroughs: Myth or Reality? Management Science, 56(1), pp.41–56.

Skelly, A.C., Dettori, J.R. and Brodt, E.D., 2012. Assessing bias: the importance of considering confounding. Evidence-based spine-care journal, 3(01), pp.9-12.

Tsekouras, D., 2019. Customer centric digital commerce: Crowdfunding & Consumer-Driven Pricing [PowerPoint slide]. Retrieved from Blackboard.

Introduction

Online crowdfunding platforms disrupted the funding industry by allowing multiple individual investors to contribute small amounts of money to fund campaigns and entrepreneurs. The collection of money happens unbureaucratically, transparently and is fully location independent. While the first crowdfunding website was already created in 2001 with ArtistShare.com,  crowdfunding still does not show any signs of decreasing attraction and is still on the rise (Medium, 2017; Galuszka et al., 2014).

As crowdfunding appears to be  a method for fundraising that is here-to-stay, the accessibility to the platform from both entrepreneurs and backers is crucial. In light of exploring the democratization of access, Barzilay et al. (2018) examined the role of crowdfunding platform policies on the dynamics between players and investment outcomes in their article: “Equal Opportunity for All? The Long Tail of Crowdfunding: Evidence from Kickstarter”. While previous literature on the distribution of online purchases mainly focused on online retailers, Brazilay et al. (2018) investigated a broad range of industries within the crowdfunding context.

Research Question and Hypotheses

More specifically, they inquired the effects of removing entry barriers for investors on the demand for popular and niche offers. As a first step, the authors measured the distribution of the most and least pledged campaigns before any platform policy changes were made. The resulting distribution can be displayed by plotting the popularity of a campaign. The result is a downward sloping curve that reveals that there is a small number of campaigns which receive the majority  of funding and many campaigns which receive relatively small amounts, also known as the “long-tail effect” that was first discovered by Anderson (2006) and is illustrated in figure 1.

In order to find out how entry barriers affect the dynamic between demand and supply on online platforms, Barzilay et al. (2018)  examined the changes that happened after a policy change in 2014 on the Kickstarter platform. This change constituted of the abandonment of the manual evaluation of each campaign request by the company’s employees. The platform became accessible for a wider range of entrepreneurs since the entry requirements were now drastically lowered.

The authors expected the changes on the demand (campaign) side of the long-tail distribution to either be characterized by the super star- or the long-tail effect (H1). In the setting of our example of Kickstarter, the superstar effect would manifest itself in more funds for the campaigns at the head of the tail and in less funds for the niche campaigns. A long-tail effect, on the other hand, would be observed if the funds for the top campaigns decreased because of a shift to niche campaigns. Both effects are illustrated in figure 2:

F

Moreover, the authors expected an increased concentration of the funds, which means that the majority of backers would be drawn to a smaller number of campaigns (H2).

Methodology and Data

To test hypothesis 1, the authors measured the changes of the sum of pledges and the number of backers before and after the opening of the platform. The campaign rank and the share of total sum of pledges were used as independent variables. To measure the changes, the economic concepts: Gini coefficient, Lorenz curve and Pareto curve were used.

For hypothesis 2, the researchers looked at both the campaign- and the backer level. On the campaign level, the  share of pledges, the sum of pledges and the number of campaigns were analyzed. For this purpose mainly descriptive statistics for analyzing the number of backers and the amount funded were used. On the backer level, the top campaign investment rates were tested against the number of previous campaign backings using descriptive statics and a paired t-test.

Findings               

A long-tail effect, which would manifest itself in a shifted demand from popular to niche offers could not be observed. Instead, the study found that platform openness leads to a superstar effect (Elberse, 2008) with increased fundings of top campaigns and an overall reduction of the amount of successful campaigns. This leads to a less equitable access to funds. Paradoxically, the presence of more equal opportunities for entrepreneurs had a negative effect on the number of funded ventures. Even though the backers had a greater selection of options, a smaller number of fundings was now granted.

Practical implications

The findings suggest an adjustment of the governance of online marketplaces. The authors mention changes in recommendation systems, word-of-mouth and filtering mechanisms to be useful tools for mitigating the superstar effect.

Furthermore, platform providers might want to rethink their policies if the goal is to achieve more equally distributed demand. The study has shown that more equal opportunities led to a less equal outcome. Therefore, certain entry barriers that work as a filter for the more promising projects might be used as a useful method.

Strengths

Firstly, the paper examines the effects of a natural extension of platform openness observed on the crowdfunding platform Kickstarter. Not only had the theories of the longtail- and the superstar effect not yet been covered in that particular context. It is also worthwhile to mention that the field of research has a high relevance in today’s day and age since these platforms are still growing in popularity (Galuszka, 2014)

Another major strength of the paper was the fact that a natural experiment was conducted. To ensure generalizability to other similar cases, many variables were checked on potential confounding effects and missing predictability, This resulted in a realistic setting: the participants were real investors and entrepreneurs and the transactions were made with real money & projects. The variable that changed were the entry requirements that were now loosened.

Weaknesses

Regarding the weaknesses of the paper, it is important to mention the generalizability for other forms of crowdfunding. One example in this context would be donation based crowdfunding for charitable causes. In this setting, performance and the quality of a project is less of an issue. This leads to a less pronounced effect due to the more altruistic motivation of the platform’s participants (André et al., 2017).

Another weakness is that the presentation of the campaigns, including recommendation tools, was not taken into account. The algorithms that are being used for recommendations might have led the majority of backers to the most successful ventures, which would only strengthen their position. Further research in that field should not forget about this technology that highly influences consumer decision making.

References

Anderson, C. (2006). The long tail: Why the future of business is selling less of more / Chris Anderson, 1st ed. (Hyperion, New York).

André, K., Bureau, S., Gautier, A., & Rubel, O. (2017). Beyond the opposition between altruism and self-interest: Reciprocal giving in reward-based crowdfunding. Journal of Business Ethics, 146(2), 313-332.

Barzilay, O., Geva, H., Goldstein, A., & Oestreicher-Singer, G. (2018). Equal Opportunity for All? The Long Tail of Crowdfunding: Evidence From Kickstarter.

Elberse, A. (2008). Should you invest in the long tail? Harvard Business Review, 86(7/8), 88-97.

Galuszka, P., & Bystrov, V. (2014). The rise of fanvestors: A study of a crowdfunding community. First Monday, 19(5).

Medium (2017). 12 Key Moments in the History of Crowdfunding (so far). [online] Available at: https://medium.com/@ImpactGuru/12-key-moments-in-the-history-of-crowdfunding-so-far-3f614273d95 [Accessed 20 Feb. 2019].