Crowdfunding Innovation: It’s Backers – Not Money Raised – That Predicts Market Success

Research from North Carolina State University finds that the number of backers a new product attracts during crowdfunding predicts the financial success of the product when it reaches the marketplace – but the amount of money raised during crowdfunding does not.

“A lot of people initially see crowdfunding solely as a way to raise money – but, to me, it seemed like a way to learn and create a community that raises awareness of a product,” says Michael Stanko, an associate professor of marketing in NC State’s Poole College of Management and lead author of a paper on the work. “So, I wanted to know whether my perception was accurate. How important is the dialogue with crowdfunding backers? What aspects of a crowdfunding campaign contribute to a product’s later success in the market?”

To address those questions, the researchers started with data on more than 1,000 successful Kickstarter campaigns related to product innovations in four categories: technology, product design, hardware and video games. The researchers contacted the people behind those campaigns with a survey designed to learn more about their experiences and the market success of their products. The entrepreneurs were contacted one to two years after successfully completed crowdfunding campaigns.

The researchers were able to collect complete surveys from 173 crowdfunding entrepreneurs, and got partial responses from 51 more. Respondents had all run successful campaigns raising at least $10,000. The mean funding raised was $78,726, from an average of 1,078 backers.

“The first key finding was that the amount of money a crowdfunding entrepreneur raised was inconsequential to their product’s ultimate success in the market,” Stanko says. “We found that crowdfunders who raised a lot of money were no more likely than those who raised smaller amounts to meet their sales, profit or other financial goals when their products later hit the marketplace. Margins on pre-orders tend to be much smaller than crowdfunding entrepreneurs expect and delays are common. Pre-order revenue doesn’t generally translate into sizable enough margins for entrepreneurs to effectively leverage the proceeds of crowdfunding to the benefit of the product’s mainstream market launch – for instance, by increasing advertising spending.”

In fact, the researchers found that crowdfunding entrepreneurs who exceeded their fundraising goals tended to have a decreased focus on radical innovation in the future. Put simply, the more money raised beyond their goal, the less entrepreneurs focused on big, new ideas.

“Why does this lack of focus on radical innovation happen? Exceeding funding goals often leaves crowdfunding entrepreneurs scrambling to meet pre-order demand – with typical manufacturing and quality-control challenges exacerbated by inexperience and the lack of resources within many of these small startups,” Stanko says. “Some of these companies get so buried by pre-order fulfilment that it leaves them unable to even think about their next big idea.”

The second key finding was that the number of people who contribute to a crowdfunding campaign was an important contributor to the later market success of a product. In other words, the more backers a campaign attracted, the more likely the product was to exceed financial goals when it launched to the mainstream market.

“There are two main sources of value that crowdfunding backers bring to tech entrepreneurs,” Stanko says. “Respondents told us that the most valuable thing backers did was serve as evangelists, raising awareness of forthcoming products through social media and traditional word of mouth.

“Secondly, entrepreneurs told us that they also benefited from crowdfunding backers not being shy with their opinions,” Stanko says. Candid, constructive feedback serves as useful advice for entrepreneurs – often providing insights into ways to improve a product.

“Crowdfunding can be a powerful tool for enabling innovation,” Stanko says. “But entrepreneurs need to better understand that crowdfunding is not merely a financial exercise, and that backers can play a significant role – beyond their wallets – in determining the later market success of their products.”

The paper, “Toward a Better Understanding of Crowdfunding, Openness and the Consequences for Innovation,” is published in the journal Research Policy. The paper was co-authored by David Henard, Board of Advisors Professor of Business Management and professor of marketing in NC State’s Poole College of Management.

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Note to Editors: The study abstract follows.

“Toward a Better Understanding of Crowdfunding, Openness and the Consequences for Innovation”

Authors: Michael A. Stanko and David H. Henard, North Carolina State University

Published: online March 1, Research Policy

DOI: 10.1016/j.respol.2017.02.003

Abstract: Crowdfunding is now a commonly used tool for innovating entrepreneurs, yet many unresolved questions surrounding crowdfunding’s effect on innovation remain. Often, crowdfunding backers play an active role in the innovation conversation. Thus, crowdfunding can be viewed as one form of open search (actively seeking out ideas from outsiders). Beyond open search, backers also generate word of mouth awareness for the crowdfunded product. Crowdfunding backers can be thought of as the earliest possible adopters, who may be even more valuable than traditional early adopting consumers. In this study, data pertaining to crowdfunded products from the Kickstarter platform is coupled with survey data from the respective innovating entrepreneurs to better understand the effects of elements of crowdfunding on the subsequent market success of the crowdfunded product as well as the innovation focus of the crowdfunding organization. Results indicate that the amount of funding raised during a crowdfunding campaign does not significantly impact the later market performance of the crowdfunded product, while the number of backers attracted to the campaign does. Open search depth (drawing intensely from external sources) enhances product market performance, while open search breadth (drawing from many external sources) induces a radical innovation focus. Interestingly, adverse effects from over-relying on external knowledge sources are not observed. The small size of the crowdfunding organizations in this study is seen as a boundary condition to previous findings of inverse U-shaped performance effects. Finally, the portion of product development complete when crowdfunding impacts the entrepreneurs’ subsequent focus on radical innovation.

This post was originally published in NC State News.