By now, most Nordic entrepreneurs are likely to have had a brush with crowdfunding; whether because they’ve considered it themselves or because they’re one of the “friends, family and fools” who’ve funded another’s dream project.
One of the biggest international crowdfunding sites is, of course, Kickstarter. With rewards as incentives and the draw of international names like Zach Braff and innovative tech like Memoto, it’s no surprise that Kickstarter has moved away from being merely a new way to collect contributions to a viral internet marketing sensation.
However, although blogs abound with advice on “how to succeed at crowdfunding”, the subject has thus far had limited rigorous academic study. Project founders want to know, for example, why some projects fail while others succeed? Project funders, on the other hand, want to know if crowdfunded projects actually deliver results.
A recent work-in-progress paper by Wharton academic Ethan Mollick tries to answer some of these questions with reference to Kickstarter data. He analysed 48 526 projects worth $237million, a subset of all those on Kickstarter, and found that 48.1% (23 718) succeeded in raising the amount of money they sought.
Of course, these numbers are only representative of the Kickstarter market – and thus represent only UK and US-founded projects and only reward- and donation-based crowdfunding. The market is different in the Nordics; not least because equity crowdfunding is an option here, where it isn’t in the US. These numbers nevertheless give us some interesting food for thought around what Kickstarter-style crowdfunding looks like elsewhere in the world.
So what is the likelihood of success, according to this study?
Indicators of Success
1. Projects either fail completely – or, with a few exceptions, just reach their goals.
Mollick found that those that failed did so by large margins, obtaining on average 10.3% of their goal and a mere 3% raising 50% of their goal.
Those that succeeded in raising their full amount, did so by narrow margins – with 50% making around 10% over there goal and only 1 in 9 receiving 200% of their goal. Not surprisingly, the most successful projects – that received over 10 times their goal – were overwhelmingly in hardware, software, games or product design.
2. Quality: crowds screen like any other investor. Moreover, the effects of this screening are magnified by social media.
Mollick observes that, like in other entrepreneurship studies, a project’s preparedness is often a signal of quality. In particular, he points to standards outlined by Kickstarter itself, namely the importance of 1. Having a video and 2. Providing regular updates as indicators of preparedness and professionalism. He suggests that spelling errors in project pitches signal lack of preparedness, and thus indicate lower quality.
Moreover, because of the link between crowdfunding and social media, once a project has been flagged as “prepared”, funders share this information with their network – such that the effects are large and often picked up on by the media.
3. A large network of connections is key.
In traditional entrepreneurship literature, having a large network of people to draw on is recognised as providing access to information and unique opportunities, while also potentially providing credibility through word-of-mouth.
Unsurprisingly, the necessity of a network is clear in crowdfunding too. Although being featured is strongly correlated with success, founders who had lots of Facebook friends would be more likely to succeed than those with fewer. A founder with 10 Facebook friends would have a 9% chance of success, while one with 1000 friends would have a 40% chance of success. However, not linking your Facebook account to the project is better than having too few Facebook friends.
Delivery hurdles
Fraud in crowdfunding is often mentioned as a significant risk. Yet this study suggests that funders have little to worry about. Looking at a sample of design and technology projects, Mollick found that the direct failure rate of projects was a mere 3.6% and that those not responding were worth a mere $21 324 in pledges relative to $4.5m for the rest of the projects.
However, late delivery is a very real possibility, with most projects studied delivering later than expected. Only 24.9% of projects analysed delivered on time, with a mean delay of 2.4 months across all those delayed.
These delays were due to a variety of problems, including unexpected success, manufacturing problems, shipping complexities, changes in scale and scope and unanticipated certification issues, with projects funded at 10 times their goal half as likely to deliver at their promised time relative to those who achieved their exact funding goal.
The original Wharton paper is available here and also looks at whether there is a link between where in the US project founders come from and what kind of projects they produce.
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A PhD student and voracious reader based in Stockholm, Claire Ingram is interested in open innovation, co-creation, start-up funding, public policy and pictures of puppies on Reddit. You can contact her on Twitter @Claire_EBI.
Wheat wrapped in dollars image by Shutterstock.
