Reward-based Crowdfunding for technology-oriented start-ups An empirical investigation along the entrepreneurship process

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1 Technische Universität Ilmenau Department of Economic Sciences and Media Ehrenbergstraße 29 D Ilmenau Germany Submission for G-Forum 2014 Crowdsourcing and Crowdfunding Research Track Reward-based Crowdfunding for technology-oriented start-ups An empirical investigation along the entrepreneurship process Dennis Brüntje / Dieter W. Joenssen Group for Quantitative Methods in Economics dieter.joenssen@tu-ilmenau.de Britta M. Gossel britta.gossel@tu-ilmenau.de Thomas Müllerleile Group for Service Information Systems Engineering thomas.muellerleile@tu-ilmenau.de Maike Brehm maike.brehm@tu-ilmenau.de 1

2 Title: Reward-based Crowdfunding for technology-oriented start-ups An empirical investigation along the entrepreneurship process Keywords: crowdfunding, entrepreneurship, entrepreneurial finance, start-ups Abstract 1 Motivation Four years ago, crowdfunding started to seize the interest of the scientific community. Since then, the phenomenon has been explored from different perspectives in various disciplines, such as social sciences, psychology, information technology and economics (e.g. Dolata & Schrape 2013; Kuppuswamy & Bayus 2013; Leimeister 2012). Research advancement in these fields is accompanied by an increased focus on the subject by entrepreneurship research. Here, papers have been presented at entrepreneurship conferences (G-Forum: Brem & Wassong 2013; Hagedorn & Kortleben 2013; Hagedorn 2012; Müller & Walther 2011; IECER: Beier & Wagner 2014; ICEIRD: Müllerleile et al. 2014) and publications in journals can be observed (e.g. Mollick 2014; Moritz & Block 2014; Schwienbacher & Larralde 2012). Parallel to these developments, scientific work groups at FGF, European and German Crowdfunding Network have been established, which underscores the relevance of crowdfunding for entrepreneurship. These rapid developments offer numerous opportunities for empirical investigations. So far essentially industry reports (Crowdfunding Industry Report), literature investigations (Moritz & Block 2014), overview articles (Hemer 2011), modeltheoretical comparisons (Belleflamme et al. 2012, 2010), and expert interviews exist (Steward & Ramos 2014). Topics investigated predominantly focus on regulatory questions (Germany: Klöhn & Hornuf 2012; USA: Bradford 2012; EU: De Buysere et al. 2012), success factors (Harzer 2012; Müllerleile & Joenssen 2014), capital seeker/provider motivation (Gerber et al. 2012), and the decision behaviour of capital providers (Burtch et al. 2013; Agrawal et al. 2011) in the various types of crowdfunding (i.e. equity-, lending-, reward- or donation-based). However, only few works (Mollick 2014; for an overview see Moritz & Block 2014) analyze data from crowdfunding projects and campaigns. Due to the recency of the crowdfunding phenomenon, studies considering the outcome of campaigns are scarce in the entrepreneurship context. This study contributes in closing this gap, by investigating the 1,500 technology projects launched from on the reward-based crowdfunding platform Kickstarter and conducting interviews with experts on the topic of start-up establishment after a successful campaign. 2 Theoretical basis and research questions Müllerleile and Joenssen (2014) define crowdfunding as [...] a process where commercial or non-commercial projects are initiated in a public announcement by organizations or individuals to receive funding, assess the market potential, and build customer relationships. Pledgers may then contribute individual amounts of monetary or non-monetary resources, during a specified time-frame, using off-line or on-line 2

3 campaign platforms that utilize different pay-out schemes, in exchange for a product specific or unspecific, material or immaterial reward. Thus, crowdfunding s utility is clear. Campaign goals can be to secure funding, or to assess product demand, when no market exists. Due to these uses, crowdfunding holds special utility for start-ups, which usually lack funds for market research. Considering the positioning in the context of entrepreneurial finance, crowdfunding s primary potential lies in the ability to close the early-stage-gap in financing ventures during the seed- and start-up phase (Hemer 2011:31; Moritz & Block 2014:3) and to assist in the expansion stage (Beck 2014:37; Hagedorn & Kortleben 2013:4). However, these statements are theoretical deductions. Empirical investigations on which phases can be supported are completely lacking in literature. Therefore, we pose the question: [1] In which phase of the entrepreneurial process can crowdfunding be relevant for financing start-ups? All entrepreneurs struggle, at least in the start-up phase, to instill confidence in potential clients and investors. Investors or project supporters may be discouraged from contributing to a project when the initiators fail to exhibit a reasonable level of sincerity. Undoubtedly, certain organizational structures and a sound company history facilitate communicating this sincerity to stakeholders, and hence reduce the level of perceived risk (Mollick 2014:14). Thus, it seems these variables influence the ability of project initiators to crowdfund their ideas, making the companyestablishment before project initiation an influential factor in guaranteeing crowdfunding success. Contrary to this, data show that the most projects are rather small. Reputation and trust may not significantly influence projects at or below $5,000, the median project size. This leads to the following question: [2] Are crowdfunding projects, which are proposed either by project initiators not explicitly organized in a legal entity or by recently founded companies, less likely to be funded? A different question on the entrepreneurial struggle can be raised about the time after the campaign. Since crowdfunding may be used to not only achieve funding directly, but also to assess market potential, crowdfunding may act as a catalyst for company establishment. Even if funding failed, information gathered during the campaign may fuel the resolve of project initiators to realize the project by different means. Therefore, the following research question can be formulated: [3] What factors that characterize the crowdfunding campaign influence whether the project initiators found a company after the campaign? 3 Methodology and results To answer the posed questions, this paper discusses not only the theoretical implications of crowdfunding in the entrepreneurship context. Additionally, answers are sought empirically by analyzing the 1,500 technology projects, launched during on Kickstarter, with quantitative methods (data collection and analysis already completed). The analysis is restricted to this category because, in comparison to other categories (e.g. politics or dance), projects are more likely to be 3

4 monetized (Kickstarter 2014). Further, in-depth interviews with German start-ups, which utilized Kickstarter, are used to assess the quantitative findings and to gain insights into decision-making processes (completion in August 2014). 4 Implications for research and practice Our study contributes to the scientific discourse on crowdfunding in the context of entrepreneurship in several ways. First, we respond to the call for more research that analyzes the relevance of crowdfunding for entrepreneurship (Mollick 2014). Second, we respond to the call for more empirical studies (Moritz & Block 2014), by combining quantitative and qualitative research to analyze in which phase crowdfunding successfully supports the entrepreneurship process. Third, we examine the relevance of reward-based crowdfunding for financing technology-oriented projects. Finally, we offer a reflection on crowdfunding beyond the borders of the platform by considering the post-crowdfunding phase. In doing so, we open a new dimension of research for crowdfunding: success and relevance of crowdfunding for entrepreneurs over time. 5 References Agrawal, A.; Catalini, C. & Goldfarb, A. (2011). The geography of crowdfunding. NBER Working Paper Series No Beck, R. (2014). Crowdinvesting Die Investition der Vielen. 2 nd edition. Leipzig: Amazon. Beier, M. & Wagner, K. (2014). Getting money from the crowd: Drivers of fundraising success. Paper IECER 2014, Chur. Belleflamme, P.; Lambert, T. & Schwienbacher, A. (2010). Crowdfunding: An Industrial Organization Perspective, SSRN Working Paper Belleflamme, P.; Lambert, T. & Schwienbacher, A. (2012). Crowdfunding: Tapping the Right Crowd. CORE Discussion Paper No / 32, SSRN Working Paper Bradford, C. (2012). Crowdfunding and the Federal Securities Laws. Columbia Business Law Review, 2012(1), Brem, A. & Wassong, N. (2013). Wer investiert warum? Ergebnisse zu individuellen Investmententscheidungen in Crowdfunding-Projekten. Paper G-Forum 2013, Koblenz. Burtch, G.; Ghose, A. & Wattal, S. (2013). Cultural Differences and Geography as Determinants of Online Pro- Social Lending, SSRN Working Paper Crowdfunding Industry Report (2012, 2013). Annual reports by Massolution, Retrieved June 26, 2014 from & De Buysere, K.; Gajda, O.; Kleverlaan, R. & Marom, D. (2012). A Framework for European Crowdfunding, European Crowdfunding Network. Dolata, U. & Schrape, J.-F. (2013). Zwischen Individuum und Organisation. SOI Discussion Paper Gerber, E. M.; Hui, J. S. & Kuo, P. (2012). Crowdfunding: Why people are motivated to post and fund projects on crowdfunding platforms, Northwestern University, Creative Action Lab. Hagedorn, A. (2012). Crowdinvestment als Finanzierungsform für Unternehmensgründungen in Deutschland. Eine kritische Analyse. Paper G-Forum 2012, Potsdam. Hagedorn, A. & Kortleben, H. (2013). Eine Analyse des Investitionsverhaltens beim Crowdinvesting. Die Rolle der Motivation und asymmetrisch verteilter Information. Paper G-Forum 2013, Koblenz. Harzer, A. (2013). Erfolgsfaktoren im Crowdfunding. In: Will, A. & Brüntje, D. (Eds.): Menschen Märkte Medien Management: Schriftenreihe; 7. Ilmenau: ilmedia. Also available from DocumentServlet?id=20873 Hemer, J. (2011). A Snapshot on Crowdfunding. Working Papers Firms and Region No. R2/2011, Fraunhofer ISI. 4

5 Klöhn, L. & Hornuf, L. (2012). Crowdinvesting in Deutschland Markt, Rechtslage und Regelungsperspektive, in: Zeitschrift für Bankrecht und Bankwirtschaft ZBB, 24(4), Kickstarter (2014). Kickstarter Stats. Retrieved June 27, 2014 from Kuppuswamy, V. & Bayus, B. L. (2013). Crowdfunding Creative Ideas: The Dynamics of Project Backers in Kickstarter. SSRN Working Paper Leimeister, J. M. (2012). Crowdsourcing: Crowdfunding, Crowdvoting, Crowdcreation. Zeitschrift für Controlling und Management (ZFCM), 56, Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of Business Venturing, 29, Moritz, A. & Block, J. (2014). Crowdfunding und Crowdinvesting: State-of-the-Art der wissenschaftlichen Literatur. Zeitschrift für KMU und Entrepreneurship, 62(1), Müller, C. & Walther, T. (2011). Kritischer Vergleich von Crowd-Funding Angeboten. Paper G-Forum 2011, Zürich. Müllerleile, T. & Joenssen, D.W. (2014). Key Success-Determinants of Crowdfunded Projects: An Exploratory Analysis. In: Lausen, B.; Krolak-Schwerdt, S. & Böhmer, M. (Eds.). (in press). Data science, learning by latent structures, and knowledge discovery. Springer: Heidelberg. Müllerleile, T.; Joenssen D.W. & Müllerleile, A. (2014). Crisis, Co-Financing, and Crowdfunding: Igniting Regional Development. In: Papadopoulos, G.; Ketikidis, P. & Kofteros, S. (Eds.), Proceedings of the 7th international conference for entrepreneurship innovation and regional development, SEERC, Nicosia. Schwienbacher, A. & Larralde, B. (2012). Crowdfunding of Small Entrepreneurial Ventures, in: Cumming, D. (Eds.): The Oxford Handbook of Entrepreneurial Finance, New York: Oxford University Press, Steward, J. & Ramos, J. (2014). Crowdfunding and the Role of Managers in Ensuring the Sustainability of Crowdfunding Platforms. JRC Scientific and Policy reports. European Commission. EUR EN. 5