UNC Kenan-Flagler Business School

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UNC Kenan-Flagler Business School

ROI: RESEARCH INSIGHTS FROM KENAN-FLAGLER


Follow the Crowd (To See if They’re Following You)

5/22/2013

They’ll tell you if you’re onto the Next Big Thing. 

Crowdfunding platforms – raising funds through online crowdsourcing – holds promise for entrepreneurs, artists, game developers and nonprofits alike.

“If the crowd believes you have a worthwhile idea, it will support you,” said Venkat Kuppuswamy, a strategy and entrepreneurship professor. “If it doesn’t, maybe you have an answer that has saved you a lot of trouble.”

Crowdfunding sites, such as Kickstarter, provide platforms for entrepreneurs to post information about their projects, fundraising goals and deadlines. Small investors pledge an amount, and if the goal is met by the deadline, investors’ credit cards are charged. If pledges fall short of the goal, investors aren’t charged, and the entrepreneur receives no funding.

Kuppuswamy’s earlier research delved into how firm strategy adapts to financial constraints and the benefits of diversification for firms operating in poorly functioning capital markets. In his crowdfunding research, he examines how investor behavior changes over the funding cycle of a project.

Kuppuswamy scraped data from Kickstarter for all projects that had even one backer, dating from Kickstarter’s inception in 2009 until the data were no longer publicly available in early 2012. He assembled a panel data set for each project and conducted an analysis of contribution behavior over time.

He found that several things can influence the success of a crowdfunding capital raise. The size of the crowd affects investment behavior through the bystander effect. The larger the crowd, the less pressure any individual feels to commit to funding. In a smaller crowd, individuals feel more onus to contribute. While a large crowd indicates past support, raising too much too soon will reduce motivation, over time, to invest.

“Ideally, you want a steady increase in the size of your crowd,” Kuppuswamy said.

The urgency that builds as the deadline approaches can help reduce the negative influence of the bystander effect. After all, the project disappears if it fails to meet its goal, and investors not only want the reward they will receive if the project goes forward, but they also derive satisfaction from being the savior. Moreover, updates and engagement with the crowd through social media become particularly critical to drumming up support when the entrepreneur is battling the bystander effect.

“In the last election, we heard how small businesses were the engine of the economy,” Kuppuswamy said. “One of the biggest challenges facing new businesses is raising funds. Crowdfunding, done right, is one solution.”

Venkat Kuppuswamy is assistant professor of strategy and entrepreneurship at UNC Kenan-Flagler.