Successful Crowdfunding: Leveraging Digital Resources on Kickstarter

Entrepreneurs in Canada started using Kickstarter, a crowdfunding website, to finance their creative ideas in 2009. Kickstarter uses an All-or-Nothing (AON) model whereby the fundraiser must meet or exceed the amount they set as their funding goal for the funds to be released to the entrepreneur for their project. As a result, entrepreneurs try to provide the crowd with a sufficient amount of soft information about themselves and the project to reduce the risk of not receiving any pledges. Some examples of soft information include photos, video pitches, a list of relevant projects and/or employers that the entrepreneurs worked with on their profile page (Ahlers, Cumming, Guenther & Schweizer, 2015). Existing studies found that projects that achieve their funding goals also include hyperlinks or quotes from outside organisations, online articles and/or prominent blogs, which made the project seem legitimate (Mollick, 2013). Hence, the larger the goal and/ or the riskier the project, we expect the entrepreneur to provide more soft information to ensure the project is successful and that they can cover their fixed costs. In this paper, we examine how Canadian start-ups use the digital economy to build and promote their business and brand on Kickstarter to obtain funding from the crowd. The paper focuses on three research questions: First, we examine whether the use of social media and portfolio websites increase the probability of completing a successful campaign. We predict that online transparency and presence affect the funding success of projects on Kickstarter. Second, building a portfolio website requires the entrepreneur to have skills and experience using digital media. Hence, we focus on the products offered by each project as an indicator of the founders’ skills. We hypothesise that creators of digital products are more likely to build portfolio websites while entrepreneurs promoting physical products rely on social media. Lastly, considering the importance of creativity to the digital economy, we examine the entrepreneur’s location. We hypothesise that entrepreneurs located closer to the creative clusters in Canada are more likely to create portfolio websites and take advantage of the digital economy. The paper analyzes a sample of 2,177 Canadian Kickstarter projects. We first categorize the projects into digital, physical and a mixture of digital and physical subsets, as well as by location. We determine whether the propensity to use a portfolio website depends on location, and whether such a site’s use increases funding success. SUCCESSFUL CROWDFUNDING: LEVERAGING DIGITAL RESOURCES 3 Kickstarter has become a key source of crowdfunding used by entrepreneurs and business owners to launch their projects and expand their businesses. The platform’s All-or-Nothing (AON) model requires that a particular project meet or exceed a predetermined target funding goal within a predetermined time period or fundraising window. This means that a project listed on Kickstarter is only successful (and that the project creator is only allowed to retain the pledged funds) if (a) the target funding amount is met or exceeded; and if (b) the target amount is met or exceeded by the pre-selected fundraising end date. As the crowdsourcing platform continues to increase in popularity, the factors that impact a project’s credibility and chances of achieving its target amount of funding are becoming increasingly important. Within a project page, Kickstarter allows project creators to include information in the form of text descriptions, photos and videos, as well as links to websites and social media. It is through these links that backers may find out more information about the project looking to be funded or about the individual or team working on the project. Potential backers of projects also have access to the “Author Description” page, where the project creator is able to provide background information about themselves including but not limited to: their location, their education and their previous work experience. This is achieved either through text description and/or the inclusion of links to other websites. There are no required fields when creating either the project or author descriptions other than (a) the project title, (b) the categorization and subcategorization of the project, (c) the location of the project and author, and (d) the funding goal. It is thus at the discretion of the project creator to include whatever information they deem relevant to backers in order to provide themselves with the greatest chance of crowdfunding success. SUCCESSFUL CROWDFUNDING: LEVERAGING DIGITAL RESOURCES 4 This paper will aim to examine and explain which variables affect crowdfunding success on Kickstarter and whether Canadian entrepreneurs and start-ups are using the digital economy and resources to enhance their chances of success on the platform. In this paper, we will study whether the inclusion of social media and portfolio website links within a Kickstarter project’s page increases the probability and level of funding success. We hypothesize that increased online transparency and presence positively influence the backing of a project. We find that whether the number and type of website links included (social media, portfolio website, or a combination of both) has a statistically significant impact on success depends on the “project type”. We have identified project type as either digital projects, physical projects or mixed media projects. Many project creators include links to portfolio website(s) within their project page. Building a portfolio website requires experience using and building digital media content and/or platforms. We hypothesize that the inclusion of portfolio websites within a project description is more significant to the funding success of the “digital project” type (i.e. projects requiring only digital media skills) as compared to other project types. The creators of physical projects are expected to rely on social media platforms as their projects do not require that they possess digital media skills or savvy. We conclude that the use of portfolio websites has a positive and statistically significant impact on these digital projects. The purpose of crowdfunding sites like Kickstarter is to remove geographic barriers, allowing for projects from all locations across Canada to succeed. We, however, hypothesize that proximity to creative clusters within Canada increases a project’s funding success. We believe that the creators of these projects will be more able to take advantage of the digital economy and thus will be more able to create the relevant content needed to help their project succeed. Conversely, SUCCESSFUL CROWDFUNDING: LEVERAGING DIGITAL RESOURCES 5 we will conclude that a project’s location within a digital media or creative cluster does not have a statistically significant impact on funding success. Kickstarter: A Crowdfunding Platform Crowdfunding platforms, such as Kickstarter, act as intermediaries which connect the project initiator with potential backers who provide the necessary funds to help realise a project. Generally, project initiators and backers are private individuals, but in some cases, they are nonprofit organisations or start-ups. Backers choose to financially support the project initiator and make their investment decisions based social networks and free-riding behaviour. This means that the backer is aware of the decisions made by other backers and is therefore influenced to support the project by observing the way other backers behave (Gierczak, Bretschneider, Haas Blohm & Leimeister, 2016). Furthermore, the crowdfunding platform follows a set rules which regulate how and when the website releases the funds which are pooled from investors to the project initiator. These set of rules are known as the payout model (Tomczak & Brem, 2013). Kickstarter uses a payout model known as the All-or-Nothing (AON) model. At the start of the project, the AON model requires the project initiator, also known as the entrepreneur, to meet or exceed the amount they set as their funding goal in order for the funds to be released to the entrepreneur. If the campaign is successful, all the backers’ credit cards are instantly charged and the funds are transferred to the entrepreneur to allow them to start creating their project. However, if the campaign fails then all the pledges are cancelled. From the investor's perspective, this model is associated with low risk as it protects the investor from being overzealous. Essentially, the model protects “optimists and foolhardy investors from their own improvidence” as more rational consumers need to be persuaded to invest for the transfer to take place. This also forces the fundraiser to set a realistic funding goal and to carefully create a budget SUCCESSFUL CROWDFUNDING: LEVERAGING DIGITAL RESOURCES 6 before they request funding. As a result, the model prevents fraudulent campaigns as each project is reviewed and scrutinized by multiple potential investors which increases the chances of a fraudulent campaign being exposed (Tomczak and Brem, 2013). Essentially, the “All-Or-Nothing” model places the risk on the entrepreneur. This is because the structure of the payout model indicates to the crowd that the entrepreneurs using their platform are serious and looking for funding to complete the project. If the entrepreneur fails to raise enough capital, they do not receive the funding and bear the fixed costs associated with the project. The entrepreneur therefore proves that there is minimal risk involved in investing in their project by using an AON platform, such as Kickstarter, to raise capital (Cumming, Leboeuf and Schwienbacher, 2015). In return for their donation, the entrepreneur provides the investor non-monetary incentives. Platforms which allow this type of transaction are called hedonic platforms as they facilitate a hedonistic value propo