REPORT TO RESEARCH PARTICIPANTS: Crowdfunding Innovation: It s Not about the Money Michael A. Stanko Poole College of Management North Carolina State University Raleigh, NC 27695-7229 mike_stanko@ncsu.edu David H. Henard Poole College of Management North Carolina State University Raleigh, NC 27695-7229 dhhenard@ncsu.edu March 2016 PLEASE DO NOT DISTRIBUTE THIS DOCUMENT WITHOUT PERMISSION FROM THE AUTHORS About this Research Project As part of a research initiative examining innovation outside traditional firm boundaries, we set out to better understand how crowdfunding impacts innovation efforts. To do this, we follow up with organizations launching products through funded Kickstarter campaigns at least one year after crowdfunding. Being primarily interested in product innovations, we focus here on four categories: technology, product design, hardware and video games. The 200+ Kickstarter alumni providing data for our study collectively raised over $17M from 239,000 backers during their Kickstarter campaigns. By combining data from Kickstarter campaigns with survey data from the respective crowdfunding entrepreneurs (concerning their product s market performance and their organization s innovation tendencies), we are able to gain insight into how the crowd helps and hinders innovation efforts. Interviews with several Kickstarter alumni provide additional insights.
The crowdfunding phenomenon, in its ability to support startups ambitious product development efforts with the help of large numbers of individual backers, is clearly a catalyst in the product innovation space. Backers value the experience of being part of the development and launch of these products, and often offer critiques and new ideas as product development progresses. As we ll discuss, these backers voices play a critical role in shaping innovation efforts and in determining the market success of the products ultimately developed through crowdfunding. From our interactions with innovating entrepreneurs who completed successful (i.e., funded) Kickstarter campaigns, it is clear that there are both supporters and detractors with regard to the merits of crowdfunding. Even the mention of the topic elicited an emotional response from several Kickstarter alumni who participated in our study. Sentiment ranged from very positive ( Reward-based crowd funding tools have changed the landscape for entrepreneurs. They allow [us] to quickly engage with a large customer audience to improve and accelerate the product development process ) to very negative ( We did a lot of research, but we were still clueless about how little Kickstarter would do for us in terms of the marketing and how poor of a method this is for funding ). To quantify these perceptions, we calculated a Net Promoter Score (a measure of customer loyalty) of 22.7% for our Kickstarter alumni, which is below benchmark industry scores for both financial services (34.8%) and B2B service providers (67.2%), the closest comparable categories. 1 While the nature of Kickstarter as an intermediary (backer behavior is inherently uncontrollable, but backer behavior greatly impacts the crowdfunding entrepreneur s experience), may contribute to Kickstarter showing poorly by this measure, it is clear that there is some discrepancy as to the perceived value of the crowdfunding experience to entrepreneurs. Often, entrepreneurs find that crowdfunding is much more effortful than they had initially planned on. For many, administering a crowdfunding campaign becomes a full time job. During campaigns, publicity and backer relations require significant time and effort which, for some entrepreneurs, are new skill sets. After the campaign concludes, completing manufacturing and shipping to a large number of individual customers can create logistical headaches as well. 2 Some critics of the process pointed out that most of the money raised through crowdfunding campaigns came from a very 1
small set of donors. In one case, a study participant told us that friends and family were the central backers. Several entrepreneurs mentioned that you cannot expect Kickstarter to deliver backers to you. As one study participant told us, You need to bring your own traffic to Kickstarter. Generally, our research suggests that non-financial benefits of crowdfunding are very important to entrepreneurs (see chart). Particularly valued are: building awareness with potential customers, customer feedback regarding the product, and developing credibility with potential investors (i.e., equity investors). Noted one study participant, We would have really struggled to advance our product without the feedback and engagement we received through our campaigns. Not to mention that the Kickstarter campaigns created a great deal of market awareness for our company. Kickstarter backers are a group of engaged, early adopters. Gaining awareness with this group is especially valuable to crowdfunding entrepreneurs; these early adopters tend to influence substantial numbers of subsequent consumers. Beyond financial backing, which of these potential benefits from Kickstarter was valuable to your organization? Clearly, backers value the crowdfunding experience of being along for the ride of product development of observing and even providing input into the development and commercialization of a product. Of the product innovations in our study, an average of 62% of product development efforts 2
(such as developing the product s feature set, conducting business analysis, prototyping, engineering, design, coding) had been completed at the time of the Kickstarter campaign. Our research shows that when a higher percentage of product development activities is completed before crowdfunding, campaigns attract fewer backers. Many potential backers value the perception that they are part of the development effort as the final product takes shape. This backer desire for inclusion regardless of how large or small is a powerful sociological effect that innovating entrepreneurs should be aware of because its power can be harnessed to attract backers. Interestingly, this is contrary to the mindset of many equitybased investors, who would view a product that is further along in the product development process as a sign of less financial risk and quicker return on investment. Crowdfunding and the Product s Market Performance What determines how well a crowdfunded product will do in terms of its future market performance? Two elements of the crowdfunding experience are consistently noteworthy as drivers of the market performance of the product: an openness to external ideas and the number of backers attracted through the crowdfunding campaign. Openness. Innovative organizations of any size can find ideas from both internal and external sources. Open search tactics involve looking to external sources like customers, suppliers, distributors, and universities to augment internal new product development ideas. For the entrepreneurs in our study, the greater the openness to external new product development ideas, the greater the market performance of their product. This outside-in approach is not unique to crowdfunded innovations, but the association we observe between crowdfunding entrepreneurs openness to outside ideas and the ultimate market success of their products is noteworthy. While openness to external ideas is generally a good thing, interestingly, the data from our study indicates that drawing new product development ideas from one particular source consultants has a negative impact on market performance. In follow-up interviews, several study participants noted that a cottage industry of crowdfunding consultants has sprung up to help entrepreneurs with their campaigns, promotions, and logistics. While these consultants may be valuable in other areas, 3
our analysis suggests that crowdfunding entrepreneurs would do well not to engage with them regarding product development efforts. Backers. The number of backers attracted is a very important predictor of a crowdfunded product s future market performance. Interestingly, the number of backers trumps the amount of money raised as a driver of market performance. The amount of money raised by the crowdfunding entrepreneurs in our study is statistically inconsequential to the future market performance of their products. This begs the question: why is the number of backers important for future market performance but the amount of money raised is not? Before we discuss the value of backers further, consider that money raised through preorders is likely later accompanied by cost overruns due to some of the same factors that cause delays, meaning that the margins on pre-orders may be smaller than planned. Our results emphasize the importance of individual backers beyond their wallets. As noted previously, backers are often interested, early adopters who offer ideas and feedback on the crowdfunded product. Importantly, backers can also spread worth of mouth awareness to subsequent customers, enhancing overall market performance. One study participant echoed this sentiment, declaring that backers tend to be good evangelists and many like to show off their latest finds to others. This evangelism has led to unexpected publicity and channel opportunities for some of the crowdfunding entrepreneurs in our study. While money raised from crowdfunding is obviously necessary for early stage product development, its effects don t directly impact the later market performance of the product. When setting up a reward-based crowdfunding campaign, entrepreneurs should focus on both recruiting and engaging as many backers as possible. Focusing only on the dollars at this point appears to be myopic. Crowdfunding and Big Ideas In addition to studying the impact of a crowdfunding experience on the market outcomes of crowdfunded products, our research also focuses on the question of how crowdfunding impacts entrepreneurs ability to focus on big ideas in subsequent innovation efforts. Once crowdfunding is complete, will these organizations continuing innovation efforts have a radical focus (i.e., substantial 4
changes in technology, efforts to greatly improve product effectiveness) and importantly, which elements of the crowdfunding experience impact this focus? Notably, we don t see that injecting customer voices into an early stage company hampers the companies ability to focus on substantial innovation. We are cognizant that not all crowdfunding entrepreneurs desire to develop radical innovations, but for those who do, three key factors contribute to a focus on radical innovation in subsequent product development initiatives. The number of updates from the crowdfunding organization to its backers is an important predictor of a focus on radical innovation in the future. Crowdfunding innovators who consistently update backers are taking an active role in the innovation conversation (as opposed to passively monitoring it). They often circulate ideas to backers seeking feedback. According to one Kickstarter alumni, updates provide an easy outlet to show off accomplishments and that can be quite addictive when you keep getting positive customer feedback. There is more motivation to innovate, but most importantly it is easier to innovate as you can bounce ideas off potential customers. More updates lead to greater feedback and interactions with backers, which ultimately leads to more radical product development in future initiatives. Crowdfund early in the product development process. Those innovating entrepreneurs who are further along in the product development process when they crowdfund (recall that study participants report having completed 62% of product development activities at the time of crowdfunding, on average) tend to have a less radical focus in their future innovation efforts. Those pursuing crowdfunding when product development is nearly complete are likely less interested in learning from backers (similar to Serial Kickstarters discussed below) and might be strictly concerned with the financial outcomes of crowdfunding. This disinterest in learning from backers has lingering innovation effects, leading the organization to have a less radical focus in its future projects. Innovating entrepreneurs who initiate crowdfunding campaigns relatively early in the product development process tend to focus on more radical innovations in subsequent ventures. 5
Openness also leads to a greater focus on radical innovation in subsequent efforts. Being open to outside ideas can foster a climate of constant ideation and a general willingness to investigate potentially worthwhile ideas, regardless of where they originate. Given that our research also shows that openness helps a product s ultimate market performance, crowdfunding entrepreneurs would do well to embrace the open innovation concept. Serial Kickstarters While most entrepreneurs use crowdfunding sites to fund development and launch of their first product, Serial Kickstarters use crowdfunding to launch successive products. Of the product innovations in our study, 15% were created by individuals or organizations that are crowdfunding their third (or subsequent) campaign. Serial Kickstarters see crowdfunding as a way to reduce risk in new product development and manufacturing. By setting a funding goal at a level that assures adequate volume for a profitable launch, new product launch risk is reduced. Interestingly, Serial Kickstarters tend to be less open to new product development ideas drawn from backers when compared to first time crowdfunders. Apparently, Serial Kickstarters see crowdfunding as a means to a purely financial end as opposed to a source of constructive external ideas. Describing their approach to serial Kickstarting, one participant in our study said, We use Kickstarter to connect to another base of enthusiastic customers, and we typically fulfill within a month or two of the end of the campaign. The purpose is to help us target production runs so as to keep unit costs as low as possible. But it does not really fuel innovation... we would continue doing it with or without the Kickstarter. This contrasts starkly with what we heard from first time crowdfunders, who acknowledged their businesses may have never gotten off the ground without Kickstarter. One first time crowdfunder put it bluntly, "We did not have a company before Kickstarter". 6
Simple Crowdfunding Prescriptions While crowdfunding a product development venture is an effortful task that is not without drawbacks, such initiatives are enormously popular and have proven to be a successful vehicle for many innovating entrepreneurs. Importantly, the most important benefits of crowdfunding are not financial. Due to their ability to spread word of mouth, as well as for their feedback and ideas, a large base of backers is an important asset for crowdfunding entrepreneurs. In essence, our prescriptions for crowdfunding entrepreneurs are fairly simple: Promote openness. Actively seek out ideas from customers, suppliers, universities and professional organizations. Be open to insights from backers without this openness, entrepreneurs are forsaking much of the value of the crowd. Crowdfund early in the product development process. Backers want to participate in the process, so don t shortcut the experience by waiting until the product is fully developed to crowdfund. Structure your campaign to attract as many backers as possible, even those backers who will not be financially lucrative. Be sure to update these backers often regarding the development process and expect delays in development and production as well as the accompanying cost overruns. Don t ask backers to simply show me the money, ask them to share their thoughts as well. 1 Scores from March 4, 2016. www.npsbenchmarks.com 2 J. Hui, E. Gerber and M. Greenberg. "Easy money? The demands of crowdfunding work." Northwestern University Segal Institute Report (2012). 7