#CrowdFunding

I Am What I Pledge – The importance of value alignment and crowdfunder behavior

By Kristian Roed Nielsen

Together with my colleague Julia Binder we recently published a paper on the role of values in driving crowdfunding backer behavior. The study found that altruistically framed campaigns have a higher chance for funding as compared to campaigns that emphasize egoistic or environmental motives, but even more importantly, that message framing needs to be aligned with the personal values of the backers. As such, our study highlights important similarities between resource mobilization in social movements and in crowdfunding.

The growth of reward-based crowdfunding as an alternative source of innovative financing has recently triggered great enthusiasm for its potential to enable a greater diversity of entrepreneurs to access to important seed funds (Gerber and Hui, 2013; Sorenson et al., 2016). This enthusiasm is in part related to the fact that – as compared to other forms of innovation capital and indeed other models of crowdfunding, such as lending or equity-based – the consumer plays a central role as a financier of the reward-based innovation. Considering that consumers represent a different kind of investor (Assenova et al., 2016), they are also driven by a wider and distinct range of motivations as compared to traditional investors (Lehner, 2013).

Understanding this new kind of investor has thus been subject to increasing academic debates, especially regarding the success criteria of reward-based campaigns (Mollick, 2014).

However, empirical evidence to date has produced mixed results – while some studies suggest a social- or environmental value orientation of a given reward-based campaign to significantly increase its odds of receiving funding (Calic and Mosakowski, 2016; Lehner and Nicholls, 2014), other studies have found no such effect (Cholakova and Clarysse, 2015; Hörisch, 2015).

Thus, despite enthusiasm from a range of actors, it is unclear under which conditions reward-based crowdfunding campaigns are successful in receiving funding. In this respect, the role of message framing has received little interest, despite its potential for shedding light on the criteria for crowdfunding campaign success. Against this background, we sought to examine how founders’ framing of a reward-based crowdfunding message affect the mobilization of backers and what values are conveyed in successful crowdfunding efforts.

The study in a nutshell

The study draws on framing theory as utilized in the literature of social movement mobilization, which focuses on how messages attract audience attention and in turn plays a pivotal role in securing movement participation (Benford & Snow 2000). Considering that in reward-based crowdfunding entrepreneurs are equally concerned about mobilizing backers for their campaign, we investigate whether entrepreneurs’ framing affects backer’s attention and influences their interpretation and action towards the crowdfunding campaign.

Based on the theoretical literature on human values (Schwartz 1994), we operationalize these linguistic frames as egoistic, altruistic, and biospheric (Axelrod, 1994; Groot & Steg, 2008; Stern, 2000). These three values respectively reflect considerations on “what is in it for me”, “what is in it for others”, and “what is in it for the environment” when purchasing a given product (de Groot and Steg, 2008). In order to observe causality between these three linguistic value frames and individual pledging behaviour the study employed an experiment which replicated an online crowdfunding platform to better resemble what individuals would see in the real world and thus providing us with what we hope are more external valid observations (Grégoire et al., 2019).

More specifically, we investigated how the framing of reward-based crowdfunding messages as either egoistic, altruistic, or biospheric affected the success of eight hypothetical projects seeking financing in return for the respective product. Especially this designing of a realistic experimental setting represented a huge hurdle, but also a necessary one.

We find that too often experiments lack the realism of what they are seeking to study which we believe is a real detriment to results they yield. We thus wanted to move outside not only the lab but also create a user experience that best captured what an actually crowdfunding platform looks like.

For researchers entering with minimal programming experience it was a steep, but really rewarding learning curve. If a professional programmer saw our work, they would likely have a meltdown over the messy coding, but it worked and inspired many new ideas.

Fresh insights

The results provide fresh insights into an emerging debate relating to the potential of crowdfunding to support entrepreneurship.

Firstly, our findings show that while some consumers respond positively to campaigns emphasizing intrinsic benefits, an emphasis on such collective benefits cannot be seen as a silver bullet for crowdfunding success. Indeed, while we find that an emphasis on altruistic benefits leads to an overall higher willingness to support the campaign, we find no such effect in the case of products emphasizing the benefits for the environment, but rather that the attractiveness of a crowdfunding campaign is dependent on the alignment with the values of the respective target audience.

Secondly, when seeking to garner funding via a crowd, the importance of customer segmentation and a thorough understanding of these customers’ values and expectations remains the most relevant task before designing and launching the crowdfunding campaign.

Our results clearly show that the willingness to invest in a campaign largely depends on the alignment between backers’ values with the values transmitted in the campaign.

Finally, the findings provide implications for sustainable entrepreneurs, for whom crowdfunding has been emphasized to provide a relevant fundraising opportunity (Testa, Nielsen, et al. 2019).

On the one hand, the fact that crowdfunding is driven largely by consumers rather than professional investors does not in itself change consumer demands; demands which more often than not fail to correlate with sustainable behavior (Sheeran 2002; Webb & Sheeran 2006). While one may argue that the motivations of funders for pledging towards a campaign may be different from those of a professional investor, our results seem to confirm that consumers seek to satisfy their own values when deciding to invest in a crowdfunding campaign. On the other hand, this does not imply a lack of significant potential for sustainable entrepreneurs’ success in reward-based crowdfunding.

Considering the increasing concern for sustainability and because of our finding that value alignment has a particularly high potential in a crowdfunding context, sustainable campaigns focusing on a clearly delineated target group have a high likelihood to reach their aspired funding goal.

About the author

Kristian Roed Nielsen is Assistant Professor at the Department of Management, Society and Communication at Copenhagen Business School. His research strives to examine what, if any, potential role the “crowd” could have in driving, financing and enabling sustainable entrepreneurship and innovation. Kristian’s Twitter: @RoedNielsen

References

Assenova, V., Best, J., Cagney, M., Ellenoff, D., Karas, K., Moon, J., Neiss, S., Suber, R., Sorenson, O., 2016. The Present and Future of Crowdfunding. Calif. Manage. Rev. 58, 125–135.

Axelrod, L., 1994. Balancing Personal Needs with Environmental Preservation: Identifying the Values that Guide Decisions in Ecological Dilemmas. J. Soc. Issues 50, 85–104. https://doi.org/10.1111/j.1540-4560.1994.tb02421.x

Benford, R.D. & Snow, D.A., 2000. Framing Processes and Social Movements: An Overview and Assessment. Annual Review of Sociology, 26, pp.611–639. Available at: http://www.jstor.org/stable/223459.

Calic, G., Mosakowski, E., 2016. Kicking Off Social Entrepreneurship: How A Sustainability Orientation Influences Crowdfunding Success. J. Manag. Stud. 53, 738–767. https://doi.org/10.1111/joms.12201

Cholakova, M., Clarysse, B., 2015. Does the Possibility to Make Equity Investments in Crowdfunding Projects Crowd Out Reward-based Investments? Entrep. Theory Pract. 39, 145–172.

de Groot, J.I.M., Steg, L., 2008. Value Orientations to Explain Beliefs Related to Environmental Significant Behavior: How to Measure Egoistic, Altruistic, and Biospheric Value Orientations. Environ. Behav. 40, 330–354. https://doi.org/10.1177/0013916506297831

Gerber, E.M., Hui, J., 2013. Crowdfunding : Motivations and Deterrents for Participation. ACM Trans. Comput. Interact. 20, 34–32. https://doi.org/http://dx.doi.org/10.1145/2530540

Grégoire, D.A., Binder, J.K., Rauch, A., 2019. Navigating the validity tradeoffs of entrepreneurship research experiments: A systematic review and best-practice suggestions. J. Bus. Ventur. 34, 284–310. https://doi.org/https://doi.org/10.1016/j.jbusvent.2018.10.002

Hörisch, J., 2015. Crowdfunding for environmental ventures: an empirical analysis of the influence of environmental orientation on the success of crowdfunding initiatives. J. Clean. Prod. 107, 636 – 645. https://doi.org/http://dx.doi.org/10.1016/j.jclepro.2015.05.046

Lehner, O.M., 2013. Crowdfunding social ventures: a model and research agenda. Ventur. Cap. 15, 289–311. https://doi.org/10.1080/13691066.2013.782624

Lehner, O.M., Nicholls, A., 2014. Social finance and crowdfunding for social enterprises: A public-private case study providing legitimacy and leverage. Ventur. Cap. 16, 271–286.

Mollick, E., 2014. The dynamics of crowdfunding: An exploratory study. J. Bus. Ventur. 29, 1–16. https://doi.org/http://dx.doi.org/10.1016/j.jbusvent.2013.06.005

Schwartz, S.H., 1994. Are There Universal Aspects in the Structure and Contents of Human Values? J. Soc. Issues 50, 19–45. https://doi.org/10.1111/j.1540-4560.1994.tb01196.x

Sheeran, P., 2002. Intention—Behavior Relations: A Conceptual and Empirical Review. European Review of Social Psychology, 12(1), pp.1–36. Available at: http://dx.doi.org/10.1080/14792772143000003.

Sorenson, O., Assenova, V., Li, G.-C., Boada, J., Fleming, L., 2016. Expand innovation finance via crowdfunding. Science (80-. ). 354, 1526 LP – 1528.

Stern, P.C., 2000. New Environmental Theories: Toward a Coherent Theory of Environmentally Significant Behavior. J. Soc. Issues 56, 407–424. https://doi.org/10.1111/0022-4537.00175

Testa, S. et al., 2019. The role of crowdfunding in moving towards a sustainable society. Technological Forecasting and Social Change, 141, pp.66–73. Available at: http://www.sciencedirect.com/science/article/pii/S004016251831953X.

Webb, T.L. & Sheeran, P., 2006. Does changing behavioral intentions engender behavior change? A meta-analysis of the experimental evidence. Psychological bulletin, 132(2), pp.249–268

Photo by Ian Schneider on Unsplash

Female entrepreneurs & reward-based crowdfunding: Offline inequality and online equality?

By Kristian Roed Nielsen

Traditional sources of entrepreneurial finance tend to favor men, while female entrepreneurs are often bypassed. Thielst, G.H. (2019), for example, found that Danish investors tend to be more skeptical towards female entrepreneurs and place higher demands on them for details, numbers, and forecasts. However, with the emergence of reward-based crowdfunding we are witnessing an outcome contrary to this offline gender inequality, that women are systematically more successful than men (Gorbatai & Nelson 2015, p.1). Let us explore why.

Reward-based crowdfunding – how does it work?

Reward-based crowdfunding is an increasingly common source of finance for a diversity of entrepreneurs and creative projects, where individuals invest a pre-defined amount of money with the expectation that if successfully funded, they will receive a tangible (but non-financial) reward often in the form of a product or service.

In reward-based crowdfunding hitting ones funding target is thus of critical importance as the campaign, as otherwise the pre-invested (or pledged) money would be returned to the backers.

Reward-based crowdfunding, like other forms of crowdfunding, is thus dependent on the successful interaction between a number of actors including the central organizing platform, a number of content providing campaigns, and a large diverse group of funders/backers.
(Nielsen 2018)

The growth of reward-based crowdfunding has moved it beyond a niche phenomenon exemplified by the fact that in the past decade it has resulted in more than $10 billion in pledges from over 75 million backers (Blaseg et al. 2020) and has thus rightly captured researcher attention.

Female founders and reward-based crowdfunding

A diversity of studies into the antecedents of success in a reward-based crowdfunding context have all observed similar results – that women are significantly more likely to achieve their funding goals as compared to men (see Gorbatai & Nelson 2015; Marom et al. 2016; Greenberg & Mollick 2016; Nielsen 2019). Some of the reasons we have uncovered thus fare include differences in funding goals, communication styles, and activist female backers.

Both my recent research into crowdfunding in Denmark (Nielsen 2019) and the work by Marom et al. (2016) find that women tend to ask for less and thus also subsequently raise less through successful campaigns as compared to men.

For example, in a Danish context women had an average funding goal of 23.746,00 DKK as compared to men who set it at 27.960,00 DKK. Men therefore also experienced, when successful, more financial support earning on average 6.000,00 DKK more than women.

However, these differences in funding goals also mean the women are significantly more likely to actually hitting their funding goal and thus actually being financed. Women’s financial expectations of what they can raise through crowdfunding thus seem better aligned with reality. However, these differences in funding goals only account for parts of the overall picture.

In addition, Gorbatai & Nelson (2015) found that the communication style of women on crowdfunding platforms trended towards more inclusive and emotional language which in turn is positively associated with funding success. They thus propose that “the institution of crowdfunding may reduce gender inequalities in the fundraising arena by benefitting the communication style of women.” (Ibid, p.1).

Finally, both Marom et al. (2016) and Greenberg & Mollick (2016) found that female backers showed a significant preference for supporting women-led projects. Moreover, Greenberg & Mollick (2016) suggest results from “activist choice homophily” where “women are more inclined to fund women entrepreneurs because of perceived shared structural barriers that come from a mutual social identity.” (Leitch et al. 2018, p.110). They find this trend especially strong in industries in which they are least represented (e.g. technology industry).

Reward-based crowdfunding favors female founders

Thus, unlike many other forms of financing (Sorenson et al. 2016), women appear to benefit from reward-based crowdfunding for the noted reasons: communication style, activist female backers and not least financial expectations that are better aligned with crowdfunding as a financing tool.

However, as with all other research, these initial findings are not universal nor have many of them been validated by follow-up studies and the results are therefore far from conclusive. Nonetheless, we can with a certain degree say that reward-based crowdfunding contrary offline source of innovation finance systematically favors female founders.

About the author

Kristian Roed Nielsen is Assistant Professor at Copenhagen Business School and visiting researcher at Mistra Center for Sustainable Markets at Stockholm School of Economics. His research focuses on consumer behaviour, crowdfunding, sustainable consumption & innovation and user innovation. He strives to examine what, if any, potential role the “crowd” could have in driving, financing and enabling sustainable entrepreneurship and innovation. Seeking to uncover what role the consumer could have in enabling and financing sustainable innovation.

More about crowdfunding

Reward-based Crowdfunding for Sustainable Entrepreneurs: A Practitioner’s Guide

Crowdfunding for Sustainability: Creating a platform for sustainable ideas

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Photo by Authority Dental

Crowdfunding as a cooperative movement – The present and future of crowdfunding in Denmark

By Kristian Roed Nielsen.

How does crowdfunding look like in Denmark and where is it heading? Drawing on empirical data from two well-known reward-based crowdfunding platforms (Kickstarter and IndieGoGo), I try to give a quick overview of the two most famous examples of crowdfunding in Denmark. After which I will give my predictions for where the Danish crowdfunding sector will head and how the emergence of lending-based platforms like Coop Crowdfunding could help take crowdfunding into mainstream in Denmark. Doing so by tapping into our cooperative movement roots by allowing customers to decide, through their loans, what we will eat in the future.

The bank, they don’t understand shit now, especially not in my business.
An entrepreneur’s view on banks (Junge & Bech, 2019)

Trust in banks is for many good reasons at an all-time low as consequence of a series of damning money-laundering scandals, the facilitations of offshore tax havens for the super-rich (i.e. Panama Papers), and not least the lingering resentments from the 2007 financial crisis. Despite these and other indictments, the sector as whole has seemed remarkably unaffected, perhaps because despite our moral reservations they hold a near monopoly on the purse strings not least when seeking a loan for an entrepreneurial endeavor. Or at least they used to.

The emergence of crowdfunding as an alternative source of finance for entrepreneurs is increasingly challenging the banks near monopoly as entrepreneurs now are increasingly engaging consumers and citizens directly for financial support. Citizens have thus become increasingly common enablers of product and service innovation in their own right (Belleflamme et al. 2014) and the global value of funds raised through crowdfunding have already hit US$ 32 billion in 2017 with continued strong growth expected (Statista 2018).

In Danish context, where loans for SMEs remains restrictive (Nielsen 2019), crowdfunding nonetheless remains a uncommon practice and is generally outside the awareness of many entrepreneurs and consumers (Junge & Bech 2019). This is arguably somewhat surprising given the historic strength of cooperatives in Denmark that were driven forth in part due to strong consumer engagement in businesses. The question then is what is the current state of crowdfunding in Denmark? Drawing on empirical data from respectively Kickstarter and IndieGoGo – the two arguably best known examples of crowdfunding – I have sought to provide you with a quick overview of reward-based crowdfunding in Denmark. After which I will give my predictions for where the Danish crowdfunding sector will head.

Crowdfunding in Denmark: A Quick Overview

Reward-based crowdfunding emerged as means to finance creative endeavors, which is also apparent when we look into which campaign categories that are most popular amongst Danish founders (i.e. Film, Fashion and Music).

Figure 1: Number of Projects by Category (2015-2018).

Among these projects, about 22 pct. succeed in meeting their funding goal, while 78 pct. fail to hit their target[1]. However as is illustrated in the Figure 2 these rates vary significantly depending on for example the project category. For example, the project category ‘Art’ is nearly a 50/50 proposition, but campaign categories like ‘Animals’ have a 100-pct. failure rate.

Figure 2: Average success rates by project category (2015-2018).

Finally, as illustrated in Figure 3 and 4 respectively success rates are strongly affected by geographic location and the regional distribution of crowdfunding resources thus remains strongly tied to the major cities. For example, Copenhagen alone accounts for 50 percent of resources garnered via reward-based crowdfunding. To see why please read my other recent blog post on this topic. So, while certain municipalities outside the major cities have high success rates one should not assume that they have many successful campaigns. In fact, the two municipalities (Vallekilde and Morud) with a 100-pct. success rate have only one campaign per respective municipality.

Figure 3: Success rates by municipality.

Figure 4: Distribution of crowdfunding resources by city.

Future of crowdfunding in Denmark

Crowdfunding in Denmark remains a rare source of income for entrepreneurs and is generally challenged by a lack of awareness from both entrepreneurs and citizens. This lack of awareness furthermore results in a lack of trust in this new form of financing. However, while reward-based crowdfunding remains niche and tailored to specific entrepreneurial endeavors that can offer tangible perks for their supporters, the emergence of other crowdfunding models provides an arguable basis for a strong competitor to the banks. For example, lending-based models, exemplified by Lendino and Coop Crowdfunding, provide entrepreneurs with an access to loans from their customers (and others) that are often cheaper then what banks are willing to offer (Junge & Bech 2019). The lenders on the other hand, who face little incentive to keep their saving in a fixed interest account at a negligible interest level, are increasingly incentivized to look for alternatives like these lending-based models especially as many loans are guaranteed.

I therefore believe that especially Coop Crowdfunding’s focus on driving new and more sustainable business models within the food sector represents, as they say themselves, a return to a type of cooperative movement 2.0 that is well-placed in Danish context. Coop Crowdfunding provides a platform for entrepreneurs to find engaged citizens who want to drive new and more sustainable food practices and are willing to put their money where their mouth is by offering cheaper loans as compared to the banks. In a country with high levels of trust and in context of an engaging story were consumers themselves can decide what we will eat in the future, I believe Coop Crowdfunding model could signal an opportunity for crowdfunding and not least green growth in Denmark.

Footnote

[1] It is important to bear in mind that there are some significant differences between the two platforms analyzed. While Kickstarter is an “all-or-nothing” platform, which means that the creator of the campaign only keeps the money if (s)he hits their funding goal IndieGoGo is primarily a “keep-it-all” platform, where the creator of the campaign can choose to keep the money if (s)he thinks that they can provide the promised service or product for the money raised. This translates into significantly different “success rates” for respectively IndieGoGo and Kickstarter if hitting the creators funding mark is definition of this. Whereas on Kickstarter 46,4 pct. of Danish campaigns hit their funding goals only 5 pct. do so on IndieGoGo.

References

Belleflamme, P., Lambert, T. & Schwienbacher, A., 2014. Crowdfunding: Tapping the right crowd. Journal of Business Venturing, 29(5), pp.585–609. Available at: http://www.sciencedirect.com/science/article/pii/S0883902613000694.

Junge, I.C. & Bech, L.L., 2019. Choosing Crowdfunding: A study of why entrepreneurs choose to engage in crowdfunding and how the choice of crowdfunding model and purpose change throughout the startup life cycle. Copenhagen Business School.

Nielsen, B., 2019. 10 år efter finanskrisen: Mange små virksomheder får stadig et nej i banken. Jyllands-Posten. Available at: https://finans.dk/erhverv/ECE11308747/10-aar-efter-finanskrisen-mange-smaa-virksomheder-faar-stadig-et-nej-i-banken/?ctxref=ext.

Statista, 2018. Crowdfunding – Statistics & Facts. Statista. Available at: https://www.statista.com/topics/1283/crowdfunding/ [Accessed April 24, 2018].

About the author

Kristian is Assistant Professor at the Department of Management, Society and Communication and Visiting Researcher at Mistra Center for Sustainable Markets – Stockholm School of Economics. His research explores the potential role that “the crowd” could play in enabling sustainable entrepreneurship and innovation. Follow him on Twitter @RoedNielsen.

By the same author

The Winners and Losers of Reward-based Crowdfunding

Reward-based Crowdfunding for Sustainable Entrepreneurs: A Practitioner’s Guide

Photo

Photo by Rob Curran on Unsplash.

The Winners and Losers of Reward-based Crowdfunding

By Kristian Roed Nielsen.

Proponents of reward-based crowdfunding have touted its emergence as an alternative source of innovation finance as an exciting and democratizing event. This democratization is enabled via the unique blend of crowdsourcing (Poetz and Schreier 2012) and micro-financing (Morduch 1999). Fundraising is enabled by a widely dispersed community of users, whose interactions are facilitated by one or more platforms (e.g., IndieGoGo, Kickstarter, Kiva), trading “a small group of sophisticated investors” for “large audiences (the ‘crowd’)” (Belleflamme, Lambert, and Schwienbacher 2014:2). But how does the change in investors really change who is rewarded – basically who are the winners and losers of reward-based crowdfunding? It was with this question in mind that Caleb Gallemore, Kristjan Jespersen and I set out to follow the money and identify exactly where and who benefits from this new source of finance by analyzing data from the large US-based reward-based platform IndieGoGo.

Where does the (crowd) money go and why?
Firstly, and perhaps not surprisingly, it appears that it is the already affluent regions that benefit the most from crowdfunding activities, while less well-off areas still receive the short end of the stick. Clearly while crowdfunding may offer an extra opportunity for achieving financing, this does not offset other factors that play an important role in entrepreneurial success e.g. background, education and social network that favour areas already affluent.

More surprisingly we also found that increased competition – i.e. more campaigns – actually increase the likelihood of funding success. For each percentage increase in the number of campaigns in the same neighborhood, we estimate a decrease of about 11% in the odds that each of those campaigns will receive no funding pledges. Indicating the increased competition actually results in a net positive outcome where campaigns rather than leeching of one another, generate momentum for further success. This may be because of increased levels of visibility of crowdfunding activities as a whole at the local level. In other words, people living in areas with more crowdfunding activities might be more aware of the practice, increasing the pool of potential investors. Another possibility is that areas with high levels of crowdfunding activities might generate local communities that can share knowledge and advice about the process, improving the quality of local ventures.

Finally, and still undergoing analysis, we increasingly find that certain people are – naturally – more successful then others at achieving crowdfunding success. Witnessing that for each successful campaign launched by an individual or group the likelihood for future success increases dramatically – hence after five successful campaigns launched by a given person or group they have a near 100 pct. chance of future success. We are perhaps witnessing the birth of the professional crowdfunder.

Crowdfunding as the democratizing agent of innovation?
As money seems to coalesce around certain regions and individuals we have to wonder whether this trend will continue. Will we increasingly see certain regions and individuals benefitting while other less well-off or professional lose out? And what does this mean for crowdfunding as the democratizing agent of innovation? It offers opportunity for you and I to drive innovation, but that innovation process itself perhaps unsurprisingly still seems to cluster around certain regions and persons. While this is by no means the final word – this is still early day research of only one sample – these observations nevertheless complicate the idea of relying on crowdfunding as a new mechanism for economic development, poverty reduction, or social action. While crowdfunding certainly provides a new way to access capital, it may not provide such access equitably.

Kristian is Assistant Professor at the Department of Management, Society and Communication and Visiting Researcher at Mistra Center for Sustainable Markets – Stockholm School of Economics. His research explores the potential role that “the crowd” could play in enabling sustainable entrepreneurship and innovation. Follow him on Twitter @RoedNielsen.

Pic by olgavisavi, via Fotolia.