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Fighting for Funds: An Exploratory Study into the Field of Crowdfunding

document Crowdfunding

Degree Project in International Marketing and Brand Management

FIGHTING FOR FUNDS: AN EXPLORATORY STUDY INTO THE FIELD OF CROWDFUNDING

Authors: Ralph Van Wingerden and Jessica Ryan

Supervisor Jon Bertilsson

BUSM08 Spring 2011

ABSTRACT Title: Fighting for Funds: An Exploratory Study into the Field of Crowdfunding Seminar Date: Tuesday, May 31, 2011 Course: BUSM08: Degree Project in International Marketing and Brand Management Authors: Ralph Van Wingerden and Jessica Ryan Advisor: Jon Bertilsson Keywords: Crowdfunding, crowdsourcing, funding, fundraising, investing, and motivation

Thesis Purpose:

This thesis investigates users of crowdfunding platforms in order to further the insight into understanding what affects their motives and behaviour. The relationship between intrinsic and extrinsic motivation as well as peer influence is investigated.

Theoretical Perspective:

This study is grounded on the limited theories surrounding crowdfunding and crowdsourcing, as well as relevant theories in the neighbouring fields of intrinsic and extrinsic motivation, investment decision-making, early stageinvestment, informal investing, informal venture capitalists, online

collaboration, and business angels.

Methodology:

Exploration of the predicted relationships was tested in a quantitative crosssectional design. Data was gathered by means of a web-based Likert scale questionnaire, which was distributed to crowdfunders primarily by crowdfunding platform administrators, and through the use of Facebook, Linkedin, and Twitter.

Analysis:

This study relies on quantitative data analysis. As part of this analysis, the authors made use of correlation, regression and factor analyses in order to find patterns in the data that resemble and contradict findings in the theoretical framework.

Conclusions:

The findings confirm that: there are two major groups of individuals that crowdfund; more people engage for intrinsic reasons than might be expected; frequency and amount are reflected in motivational reasons for engagement; age does influence funding behaviours; and crowdfunders share similarities and differences with individuals in related fields.

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TABLE OF CONTENTS
Abstract......................................................................................................................... I Chapter 1 ...................................................................................................................... 1 Introduction .................................................................................................................. 1
1.1 Background: Crowdsourcing ....................................................................................... 1 1.1.1 The Origins of Crowdsourcing ................................................................................. 1 1.1.2 The Principles Underlying Crowdsourcing .............................................................. 2 1.1.3 Examples of On-line Crowdsourcing Platforms ....................................................... 3 1.1.4 What Crowdsourcing is Not ..................................................................................... 3
Mass Customization .................................................................................................................... 3 Creation of Limited Access Markets ........................................................................................... 3 Creation of Free Access Markets ................................................................................................ 4 Open Source and Open Content Projects .................................................................................... 4

1.2 Background: Crowdfunding......................................................................................... 5 1.2.1 The Launch of Crowdfunding .................................................................................. 5 1.2.2 Crowdfunding Projects ............................................................................................. 6 1.2.3 Types of Crowdfunding ............................................................................................ 7 1.3 Benefits for Emerging Innovators ................................................................................ 7 1.3.1 Effective Reach ........................................................................................................ 8 1.3.2 Market Exploration ................................................................................................... 8 1.3.3 Predictive Power ....................................................................................................... 8 1.4 Crowdfunding in Relation to Early-Stage Investment, Informal Venture Capitalists and Business Angels ......................................................................................... 9 1.5 Legal Limitations to Crowdfunding .......................................................................... 10 1.6 Problem Statement ...................................................................................................... 11 1.6.1 Current Research Gaps ........................................................................................... 11 1.6.2 Fundamental Question ............................................................................................ 12 1.7 Research Questions ..................................................................................................... 12 1.8 The Purpose of Theoretical and Practical Relevance ............................................... 13 1.8.1 Theoretical Relevance ............................................................................................ 13 1.8.2 Practical Relevance ................................................................................................ 13 1.9 Thesis Structure ........................................................................................................... 14

Chapter 2 .................................................................................................................... 15 Theoretical Framework ............................................................................................. 15
2.1 Motivation: Background ............................................................................................. 15 2.2 Intrinsic Motivation and Collaborative Work .......................................................... 16 2.3 Extrinsic Motivation in Crowdsourcing .................................................................... 18 2.4 Informational Cascades, Momentum and Investment Context .............................. 19 2.5 Summary ...................................................................................................................... 21

Chapter 3 .................................................................................................................... 22 Methodology and Method ......................................................................................... 22
3.1 Methodology................................................................................................................. 22 3.1.1 Ontological and Epistemological View .................................................................. 22 3.1.2 Exploratory Approach to Research......................................................................... 23 3.2 Method .......................................................................................................................... 24 3.2.1 General Research Design and Data Collection Method ......................................... 24 3.2.2 Research Sample .................................................................................................... 25 3.2.3 Questionnaire Design ............................................................................................. 26

Objectives in Writing the Questionnaire ................................................................................... 26 Creating the Questionnaire Questions ....................................................................................... 27 Likert Scale ............................................................................................................................... 29 Language ................................................................................................................................... 30 Small Pilot Study ....................................................................................................................... 31

3.3 Methods of Analysis .................................................................................................... 31 3.4 Quality of Research Design......................................................................................... 32 3.4.1 Reliability ............................................................................................................... 32 3.4.2 Validity ................................................................................................................... 33 3.4.3 Generalizability ...................................................................................................... 33 3.5 Summary ...................................................................................................................... 33

Chapter 4 .................................................................................................................... 34 Results and Discussion............................................................................................... 34
4.1 Response Rate Analysis ............................................................................................... 34 4.2 Descriptive Statistics ................................................................................................... 34 4.2.1 Participant Information Questions. ......................................................................... 35 4.2.2 Motivation Related Questions ................................................................................ 35 4.2.3 Peer Influence Related Questions ........................................................................... 35 4.3 Scale Reliability ........................................................................................................... 36 4.4 Bivariate Analysis ........................................................................................................ 37 4.4.1 Correlation Analysis: Motivation ........................................................................... 38 4.4.2 Correlation Analysis: Peer Influence ...................................................................... 41 4.5 Factor & Regression Analyses .................................................................................... 43 4.5.1 Initial Factor Analysis Results................................................................................ 43 4.5.2 Initial Regression Analysis Results ........................................................................ 45 4.5.3 Re-examination of Factor Analysis ........................................................................ 46 4.5.4 Regression Analyses of Individual Items ............................................................... 47 4.5 Summary ...................................................................................................................... 50

Chapter 5 .................................................................................................................... 51 Conclusions ................................................................................................................. 51
5.1 Conclusions: Motivational factors ............................................................................. 51 5.2 Conclusions: Peer Influence Factors ......................................................................... 53 5.3 Theoretical Implications ............................................................................................. 54 5.4 Managerial Contributions .......................................................................................... 55 5.5 Limitations ................................................................................................................... 56 5.6 Suggestions for Future Research ............................................................................... 57

References ................................................................................................................... 58 Appendix A: Different Types of Crowdsourcing ....................................................... i Appendix B: Distribution Methods ............................................................................ii Appendix C: Questionnaire ....................................................................................... vi Appendix D: Labelling ............................................................................................... ix Appendix E: Descriptives ............................................................................................ x
Age, frequency, average amount and platform descriptives ........................................... x Motivation Related Descriptives ....................................................................................... xi Peer Influence Descriptives ............................................................................................. xiv

Appendix F: Point-Biserial Corrolation ................................................................xvii

CHAPTER 1 INTRODUCTION What does a hip hop band from Italy, titanium bike locks, a football team in the UK, an urban wallmounted garden, and farmer‟s market mustard have in common?

They are all projects pitched on crowdfunding websites in hopes of being funded by individuals from around the world, so that they may one day become a reality. Crowdfunding is a novel concept both in the „real‟ and academic world. It presents consumers with the opportunity to fund creative arts, existing businesses, start-ups and charities with amounts as low as $1, consequently making it possible for anyone with internet access to participate. These consumers, or more accurately consumer-investors going forward, will be referred to as „crowdfunders‟. This thesis investigates users of crowdfunding platforms in order to further the insight into understanding what affects their motives and behaviours. Using a quantitative approach, the relationship between intrinsic and extrinsic motivation, as well as peer influence will be explored.

However, before crowdfunding can be discussed, it is important to first understand it in the broader setting of crowdsourcing, a more established concept that forms the basis of crowdfunding. This will enable an insight into the dynamics and context of crowdfunding to be reached. The current chapter will therefore elaborate on previous research on both crowdsourcing and crowdfunding. Based on the literature review the problem statement including the research aim will be presented, followed by the theoretical and practical relevance of the research.

1.1 Background: Crowdsourcing
This subsection will elaborate on the origins of crowdsourcing followed by the principles underlying the concept. As crowdsourcing is easily confused with other similar concepts a section explaining what crowdfunding is and is not will then draw this subsection to a close.

1.1.1 The Origins of Crowdsourcing Although the term is relatively new, the concept underlying crowdsourcing has been around for centuries. As Howe (2006b) suggests, the Longitude Act can be considered as the first crowdsourced project. Travel and transport across the Atlantic and Indian Oceans grew rapidly during the 16th and 17th centuries, causing the persisting navigation errors to become a very costly problem for the governments and merchants involved. In an attempt to solve this problem the British government

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Van Wingerden & Ryan initiated the Longitude Act, which offered cash prizes to those who were able to develop a method to more accurately determine longitude while at sea (Sobel 1995, as cited in Masters, 2004). Crowdsourcing is the use of labour distributed or outsourced to a „crowd‟ of what traditionally are referred to as „consumers‟. These consumers, similar to those in open innovation, open source and user generated content actively add value to a product, project or service, thus becoming part of the production process. In essence, what started out as outsourcing has developed into „crowdsourcing‟. As time passed, the concept evolved and in 2006, the term „crowdsourcing‟ was born as Jeff Howe and Mark Robinson coined the word in the June issue of „Wired Magazine‟, defining it as: “[C]rowdsourcing represents the act of a company or institution taking a function once performed by employees and outsourcing it to an undefined (and generally large) network of people in the form of an open call. This can take the form of peer-production (when the job is performed collaboratively), but is also often undertaken by sole individuals. The crucial prerequisite is the use of the open call format and the large network of potential labourers” (Howe, 2006b).

Within two years of first being defined a few gaps within the definition were identified and Martin, Lessmann and Voß (2008, as cited in Welbers, 2010) redefined crowdsourcing as: “[A]n interactive form of service provision, which is collaborative or competitiveorientated organized and involves a large group of extrinsic or intrinsic motivated actors with different knowledge levels under application of modern information and communication system on the basis of web 2.0. Objects are products and services of different innovation level, which are developed due reactive or proactive behavior of the participants” (p. 8).

1.1.2 The Principles Underlying Crowdsourcing It is key to note that crowdsourcing is applied by organisations within both the commercial and nonprofit domain. Moreover, whilst some crowdsourcing initiatives can include monetary remunerations, others solely provide intangible rewards, which leads to the range of motives for both crowdsourcer and company participation to be rather vast. It should also be noted that one of the main problems surrounding the concept of crowdsourcing, and for that matter crowdfunding, is that of legalities and intellectual property rights, (Whitla, 2009) as work is usually the result of collaboration between multiple individuals. Due to „Web 2.0‟, collaboration is common amongst individuals situated around the world with different laws. Similarly, for crowdfunding pertinent legal and policy issues concern investor protector and ownership (also see 1.5 Legal Limitations to Crowdfunding). 2

1.1.3 Examples of On-line Crowdsourcing Platforms Although the concept at first glance may seem complex and the term crowdsourcing may still be new to the majority of the population, there exists examples of crowdsourcing all around us, many of which we interact with on a near-daily basis. Commonly used examples of crowdsourcing include, but are not limited to the following: 1) Google Maps1: traffic layer application which allows your phone to send information regarding the speed at which your car is moving back to Google who then compares it to other cars‟ movement in the area and provides real time road congestion reports (Barth, 2009). 2) Google Earth2: users are able to view detailed satellite images of most places on Earth (Google, 2011). Content is built up in the database by both Google and on-line users to create maps and complimentary information (Taylor, 2008). 3) Amazon Mechanical Turk3: a systems which allows users to perform (small) tasks that “are frequently those that are difficult for computers and yet simple for humans” (Ross, Zaldivar, Irani and Tomlison, 2010, p.1) such as „image labelling‟ or the „processing of natural language‟. In return, users get paid per completed task. There are numerous applications of crowdsourcing in use today. Appendix A is taken from research by Kleeman et al. (2008), which is organized typologically to illustrate the different types of crowdsourcing.

1.1.4 What Crowdsourcing is Not As explained in the previous subsection there are various phenomena that may be easily confused as being forms of crowdsourcing, but in reality are only related. Kleemann et al. (2008) classified and explained the following as being phenomena similar yet only relating to crowdsourcing: Mass Customization The product is intended to be sold to the mass market to reap the benefit of economies of scale, yet is „personalized‟ by an individual to meet their unique needs and desires. Mass customization differs from crowdsourcing in that the product becomes the property of the designer where the ownership rights do not pass onto the individual in crowdsourcing. Examples include Dell Computers4. Creation of Limited Access Markets A platform offered by a third party company intended for users to connect and engage in some form of exchange while the company running the platform acts as a mediator and is financially rewarded
1 2

“Google Maps”, http://maps.google.com/, retrieved on 22/03/2011 “Google Earth”, http://www.google.com/earth/index.html, retrieved on 22/03/2011 3 “Amazon Mechanical Turk”, https://www.mturk.com/mturk/welcome, retrieved on 22/03/2011 4 “Dell Computers”, http://www.dell.com/us/p/, retrieved on 07/03/2011.

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Van Wingerden & Ryan for this activity alone. This phenomenon differs from crowdsourcing in that there is no co-production occurring between the platform provider and users. Examples include eBay.com5, Amazon‟s Marketplace6, and PayPal.com7. Creation of Free Access Markets Differs from „creation of limited access markets‟ in that the platform provider is not financially compensated, the platform is free to use. The creation of free access markets is not considered crowdsourcing, as there generally is no co-production occurring between the platform provider and users. Examples include Flickr.com8 and YouTube.com9. Open Source and Open Content Projects Peer production and collaboration lie at the heart of open source and open content projects as volunteers come together to work to reach a common goal. The main difference between this form of collaboration and crowdsourcing is that open source generally does not involve monetary compensation. Moreover, whilst crowdsourcing tends to be initiated by a third party who has legal ownership of the intellectual property created by contributors, open source is characterised by intellectual property that is part of either the public domain or under an open source license10. As Brabham (2008a) describes it, crowdsourcing is: “[A] hybrid model that blends the transparent and democratizing elements of open source into a feasible model for doing profitable business, all facilitated through the web” (p. 82). Furthermore, Brabham (2009) argues that while open source “emphasize[s] the common good” (p. 9), crowdsourcing differs because of the use of a „bounty‟ on problems that are presented by commercial third parties. Examples of open content and open source include Wikipedia.com11 and the Linux Operating System. Martin et al. (2008) acknowledge that although there are similarities between on the one hand open source and open innovation and on the other hand crowdsourcing, there is a significant difference between these concepts in terms of scope and the individuals involved. The author argue, as displayed in Figure 1 below, that open source is the domain of specialists and can be both innovative and non-innovative, whilst open innovation is the innovative result of efforts by both amateurs and specialists. Martin et al. (2008) continue by arguing that crowdsourcing encompasses both specialist and amateur participation as well as innovative and non-innovative results.

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“eBay.com About”, http://ebay.about.com/, retrieved on 07/03/2011. “Amazon Marketplace”, http://www.amazon.com/gp/help/customer/display.html?nodeId=537796, retrieved on 07/03/2011. 7 “PayPal.com”, https://www.paypal.com/, retrieved on 07/03/2011. 8 “Flickr.com”, http://www.flickr.com/, retrieved on 07/03/2011. 9 “Youtube.com About”, http://www.youtube.com/t/about_youtube, retrieved on 07/03/2011. 10 “Open Source Initiative”, http://www.opensource.org/, retrieved on 12/04/2011. 11 “Wikipedia.com About”, http://en.wikipedia.org/wiki/Wikipedia:About, retrieved on 07/03/2011.

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Crowdsourcing
Knowledge Level Specialist

Open Source

Amateur

Open Innovation Non-innovative Innovative Degree of Innovativeness

Figure 1 - Crowdsourcing classification scheme (adopted from Martin et al., 2008, p.1259)

1.2 Background: Crowdfunding
In its simplest form, crowdsourcing can be considered as the online outsourcing of tasks to a group or „crowd‟ of virtual individuals. As a sub-set of crowdsourcing, crowdfunding has only recently started to gain attention in both the academic and professional world. Whereas crowdsourcing revolves around the division of labour and the contribution of efforts, input or work, contributions within crowdfunding are monetary in nature, be it as a donation, investment or pledge. This subsection presents an overview of the (limited) body of work on crowdfunding, including descriptions of the launch of crowdfunding, crowdfunding projects and types of crowdfunding.

1.2.1 The Launch of Crowdfunding Belleflamme et al. (2011) identify crowdfunding as a subset of crowdsourcing, defining it as: “Involv[ing] an open call, mostly through the Internet, for the provision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights” (p.7). Or put more simply, it is a fundraising mechanism that taps into the market or „crowd‟ of „consumerinvestors‟ who by means of a donation, investment or pledge can support the development of a vast array of projects, including creative arts, charities, and entrepreneurial ventures. In return for a financial contribution consumer-investors may receive a variety of rewards such as music albums, artwork or „meet-and-greets‟ with the artist whereas other platforms offer the possibility to earn a monetary return on the investment made, depending on the platform on which a project is hosted and the nature of said project. In the crowdfunding model, consumers actively invest or donate money in order for projects to be realized, which approaches fundraising from a novel angle.

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Van Wingerden & Ryan

A Little Money

A Lot of People

The Power of Crowdfunding

By pooling small contributions of money....

...from groups of people who share common interests....

....everyone has the power to achieve financial goals!

Figure 2 - Crowdfunding: How it Works (from Singapore Entrepreneur, 2008)

On the opposing side, individuals and companies are able to receive funding for their ventures and creative projects that may not otherwise be possible by pooling these donations. According to Kappel (2009), crowdfunding is especially useful for companies without an “established track record” (p.385), which suggests a certain similarity to e.g. the informal investor, as will be further discussed in the following sections.

1.2.2 Crowdfunding Projects Crowdfunding can be applied to fund a vast range of projects, including but not limited to business ventures, creative arts, NGO funding, and charities. Currently, a substantial portion of crowdfunding platforms revolve around creative projects with music (Agrawal, Catalini and Goldfarb, 2011) and movie (Braet and Spek, 2010) projects taking centre stage. However, it is important to acknowledge that crowdfunding is being adapted by other industries as well, including most recently those of journalism (spot.us12), software (Blender Foundation13) (Lambert and Schwienbacher, 2010) and sporting clubs (MyFootballClub14).

The range of successful projects within the crowdfunding domain is vast and by no means limited to only one category of project type. One of the most successful crowdfunding stories is that of the „TikTok‟15 watches project, which transforms an iPod Nano into a watch. Although the goal was set at only $15,000USD this project managed to raise over $940,000USD through 13,512 crowdfunding backers. Director Franny Armstrong raised more than £450,000 for the production, £180,000 for the

12 13

“Spot.us About”, http://spot.us/pages/about. Retrieved on 16/03/2011 “Blender Foundation”, http://www.blender.org/blenderorg/blender-foundation/. Retrieved on 16/03/2011 14 “MyFootballClub About”, http://www.myfootballclub.co.uk/about-myfootballclub. Retrieved on 16/03/2011 15 “TikTok and Luna-Tik MultiTouch Watch Kits” http://www.kickstarter.com/projects/1104350651/tiktok-lunatik- multitouch-watch-kits, Retrieved on 29/03/2011

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UK release and £220,000 for the international release of the film “The Age of Stupid” 16. The film, concerning climate change, has since been aired on the BBC in the UK, Finland, Norway, Netherlands, and Belgium in December 2009 and on the American Discovery Channel on April 16th, 2010, winning many awards along the way (Spanner Films, 2011). And the winner of the most profiled crowdfunding project to date, with rumours of an investment by FaceBook founder Mark Zuckerberg, is that of Diaspora17. This Kickstarter project is an open sourced social network rival to the very popular FaceBook and through their crowdfunding efforts the four programmers from NYU‟s Courant Institute managed to raise over $200,000USD from 6,479 crowdfunders by their deadline.

1.2.3 Types of Crowdfunding Similar to crowdsourcing, crowdfunding is aimed at getting input from the public or „crowd‟, more specifically the desired input for crowdfunding is in the form of a monetary contribution. Belleflamme et al. (2011) identify „direct‟ and „indirect‟ fundraising. Whereas the first is aimed directly at the crowd, the second is characterized by the use of platforms such as Kickstarter 18, Sellaband19 and Fundable20. These platforms offer individuals and companies the opportunity to encourage (creative) projects or businesses (start-ups) by means of monetary contributions. Users can at any time decide to (not) invest in a project, with most platforms offering reimbursement to funders whose projects fail to meet their funding target, which is set at the beginning of the project.

The focal point of this thesis lays on indirect crowdfunding platforms and, more specifically, the users or „crowdfunders‟ that participate in the funding of projects through platforms. These platforms offer their users the possibility of ex ante funding of projects, businesses or creative arts. As Kappel (2009) argues this type of crowdfunding, where crowdfunders contribute funds in order to achieve a certain goal, is especially useful for individuals or companies who do not yet have an “established track record” (p.385).

1.3 Benefits for Emerging Innovators
Crowdfunding has a number of benefits for individuals, NGOs and companies that aspire to receive funding for their projects. Going forward these fund seekers will be referred to as „emerging innovators‟. These emerging innovators can consist of anyone from a company to a creative artist or

16

“Top 5 Crowdfunding Success Stories”, http://www.crowdcube.com/blog/2010/11/08/top-5-crowdfunding-success-stories/ retrieved on 29/04/2011. 17 “Decentralize the Web with Diaspora” http://www.kickstarter.com/projects/196017994/diaspora-the-personallycontrolled-do-it-all-distr, retrieved 29/04/2011 18 “Kickstarter.com FAQ” http://www.kickstarter.com/help/faq?ref=footer , retrieved on 06/03/2011. 19 “Sellaband.com About Us” https://www.sellaband.com/en/pages/about_us, retrieved on 06/03/2011 20 “Fundable.org” http://www.fundable.org/, retrieved on 06/03/2011.

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Van Wingerden & Ryan from a NGO to an individual. This subsection focuses of the three primary benefits for emerging innovators.

1.3.1 Effective Reach First and foremost, crowdfunding is a relatively effective way of reaching a wide audience. Whilst an „analogue‟ funding pitch generally can only address (very small) groups of individuals, the reach of an online crowdfunding pitch is virtually limitless. Not only does a pitch generally only need to be compiled once, the marginal costs of sharing an idea or proposal to n+1 prospective investors can be neglected. Once a pitch is hosted on a website, the marginal cost of physical storage and cost-perdisplay are oftentimes close to 0. However, these platforms often do charge a certain percentage of raised funds.

1.3.2 Market Exploration Secondly, commercial parties can utilize crowdfunding as a tool to explore a market (Belleflamme et al., 2010) whilst reducing the risk that comes with launching a new product to a minimum due to the funding structure. Belleflamme et al. (2011) propose that crowdfunding concerns more than „just‟ raising funds, in that “it is a way to develop corporate activities through the process of fundraising” (p.28). Moreover, both commercial and non-commercial parties alike can use crowdfunding as a way to generate awareness for their product (Belleflamme et al., 2010) or create a “hype around a new product” (Schwienbacher and Larralde, 2010, p.7), making use of consumer-investors‟ word-ofmouth. Due to the relatively high long-term value of a customer acquired through (e)WOM (Villanueva, Yoo and Hanssens, 2008) this can be considered as a significant benefit to the emergent innovators. Thus, besides being a way of raising funds, it can act as a marketing tool in itself (Belleflamme et al., 2010; Schwienbacher and Larralde, 2010).

1.3.3 Predictive Power Having established the fundraising capabilities of crowdfunding and the potential to be used as a marketing tool, it is interesting to consider findings on the workings of crowdfunding platforms in light of e.g. Caves‟ (2000) „nobody knows principle‟. According to Caves (2000), this principle argues that in the „creative sector‟ it is incredibly difficult, both ex-ante and ex-post, to determine why a project will and/or has been a success. Perhaps the structure of ex-ante investing by consumers and the inherent marketing capabilities (Belleflamme et al., 2010; Schwienbacher and Larralde, 2010) can moderate the implications of the seemingly random nature of success as stipulated by this principle, limiting the investment risk for companies whilst assessing the market at the same time. Taking this into consideration crowdfunding can be viewed as an efficient „litmus test‟ in high-risk high8

investment industries such as the music industry (Agrawal et al., 2011) where ex ante success chances of a product are very difficult to assess, especially for record labels who traditionally invest in new artists (Caves, 2000).

1.4 Crowdfunding in Relation to Early-Stage Investment, Informal Venture Capitalists and Business Angels
Agrawal et al. (2011) find evidence that crowdfunding can “reduce the economic frictions associated with investing in early-stage projects over long distance” (p.17). Entrepreneurial projects in the early-stage often only have access to regional or local sources of funding, with Sorenson and Stuart (2005, as cited in Agrawal et al. 2011) even reporting that “the average distance between lead VC and target firm is approximately 70 miles” (p.2). Similar findings on venture capital investors were presented by Zook (2004) and Harrison and Mason (1992). Moreover, Mason and Harrison (1995, p. 168) report that: “There is widespread agreement that an equity gap exists for companies seeking small amounts of risk capital which constrains the development of the SME sector […] it is particularly acute in peripheral regions which lack an indigenous venture capital industry” (p. 168).

Perhaps crowdfunding can overcome these limitations by making use of the extensive reach and scope of the Internet and „Web 2.0‟ (Agrawal et al., 2011). More specifically when the crowdfunded project revolves around an entrepreneurial venture, start-up or existing business, one can reason that there is a certain similarity between business angels and informal venture capitalists on the one hand and crowdfunders on the other. Landström (2007) specifies that informal venture capital projects revolve around investments made by private individuals in companies to which they do not have family ties.

Moreover, unlike institutional venture capitalists, the money invested comes from their private personal capital. Informal venture capitalists also tend to have “small investment experience and limited investment capacity”21. Sørheim and Landström (2001) distinguish between four categories of informal investors, as displayed in figure 3. Avdeitchikova (2008) presents a categorisation of investment roles, similar to that of Sørheim and Landström (2001), by offsetting financial to nonfinancial contribution, as displayed in figure 4 below. The following chapter, in which several hypotheses are presented, will draw on Sørheim and Landström‟s (2001) and others‟ informal venture

21

Hans

Landström,

“A

market

perspective

On

Venture

Capital”

Retrieved

from

www.cru.aau.dk/fileadmin/dokumenter/Seminar/Seminar_190407_mat.pdf, Aalborg, April 2007.

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Van Wingerden & Ryan capitalist theories and more specifically on the „business angel‟ group, who show a high level of both financial and non-financial resources (Avdeitchikova, 2008).

Competence
Low Group 2
Investment Activity

High Group 4 Business angels (25% of the investors) Group 3 Analytical investors (21% of the investors)

High

Traders (24% of the investors) Group 1

Low

Lotto investors (30% of the investors)
Landström, 2001, p.358)

Figure 3 - Categorisation of Informal Investors using four initial clusters (as found in Sørheim and

Contribution of Non-financial resources Low financial resources Contribution of High Group 2 Capital-oriented role Group 1 Micro investor role High Group 4 Classical business angel role Group 3 Knowledge-oriented role

Figure 4 - Investment roles (as adopted from Avdeitchikova, 2008, p.62)

Low

1.5 Legal Limitations to Crowdfunding
Although there are several benefits for both emerging innovators and crowdfunders to engage in crowdfunding, payment of monetary rewards or profits shares are often limited due to legal restrictions (Belleflamme et al., 2011; Schwienbacher and Laralde, 2010). Kappel (2009), in a research on the potential use of crowdfunding in the US recording industry, distinguishes between a „betting model‟ and an „investment model‟ of crowdfunding, which falls under betting and securities law respectively. Moreover, Bonabeu (2009) identifies issues concerning the ownership of intellectual property in crowdsourcing, which given its multi-investor nature, are likely to be valid concerns for crowdfunding as well. This translates into the treatment of financial rewards being rather complex, hence why certain platforms may offer a financial return or not largely depending on their country of origin. 10

1.6 Problem Statement
Crowdsourcing and crowdfunding have presented the consumer with a new way of „consuming‟ products and experiences. Although one can argue that the idea underlying crowdfunding is not new, the concept of raising funds through the internet on the scale on which it currently occurs certainly is. The term „crowdfunding‟ has been coined recently, but has gained online attention very rapidly during the last 18 months22. As Appendix B shows, most crowdfunding platforms have set the minimum investment amount as low as $1 or $5, making it accessible to the majority of common consumers in developed countries.

With an increasing number of crowdfunding platforms and substantial amounts invested (e.g. $15 million through Kickstarter.com during its first 18 months (The Economist, 2010)); crowdfunding is becoming an interesting opportunity to raise funds and promote products, projects and services (Belleflamme, 2011; Schwienbacher and Larralde, 2010). Moreover, crowdfunding can become a viable funding method for individual artists, SMEs and entrepreneurs, since it presents the possibility to broaden the geographical horizon of traditional investment-seeking (Agrawal et al., 2011; Kappel, 2009), which is a valuable characteristic given venture capitalists‟ tendency to invest in geographically nearby companies (Zook, 2004). Perhaps crowdfunding can aid in closing the „equity gap‟ often encountered by capital-seeking SMEs, as displayed by Mason and Harrison (1995).

1.6.1 Current Research Gaps Given the novelty of the concept and its recent step into the limelight, the body of literature on crowdfunding is rather small. Nonetheless, a number of gaps have been identified in the handful of (working) papers on crowdfunding. Belleflamme et al. (2011), Schwienbacher and Larralde (2010), and Ward and Ramachandran (2010) suggest that research ought to be performed on the nature of the ownership structure in crowdfunding and its subsequent implications on e.g. corporate governance and investor protection. Moreover, the latter authors identify the need to further research on why so many crowdfunding projects seem to lose „momentum‟, causing their target funding to remain unobtained. Statistics provided by the popular crowdfunding platform Kickstarter23 also support this gap as only 43% of pitched projects meet their goal.

Braet and Spek (2010), argue that the benefits for emerging innovators, other than financing, which potentially include gaining (viral) publicity could be a topic of future research. Schwienbacher and Larralde (2010) underline the need to understand the “optimal remuneration and participation
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Google Search Trends : „Crowdfunding‟ and „Crowd funding‟, Nov. 2007 until Feb. 2011 http://goo.gl/IRc0N Note: results are normalized. Retrieved on 28/03/2011. 23 Strickler, Y. (n.d.). Happy Birthday Kickstarter!. The Kickstarter Blog. from http://blog.kickstarter.com/post/5014573685/happy-birthday-kickstarter retrieved on 05/04/2011

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Van Wingerden & Ryan scheme” (p.20) in order to optimize the funding process. Furthermore, several authors suggest that the financial return is not the primary motivator or concern for crowdfunders (Lambert and Schwienbacher, 2010; Ward and Ramachandran, 2010) but do not offer up any definite conclusions on what it may be. What that primary motivator indeed is, thus remains unclear.

1.6.2 Fundamental Question Before researchers can focus on issues such as the ownership of intellectual property, investor protection or the viral marketing capabilities of crowdfunding, which arguably are important matters or in the latter case a valuable characteristic, it is important to first ask a more fundamental question. In essence, that question is „why?‟ This question needs to be answered in order to better understand the workings and characteristics of the crowdfunding phenomenon. Therefore, the research problem this thesis revolves around is the motivation of individual users to crowdfund. Although it seems likely that consumers who engage in crowdsourcing or crowdfunding are different from „traditional‟ consumers, little to nothing is known concerning the motivations and behaviour of these so-called crowdfunders. Given recent developments and the potential that lies in crowdfunding, it seems important that these motivations and behaviours be researched in order to gain a better understanding of what drives crowdfunders. This knowledge can subsequently be used to aid platforms and emergent innovators in „pitching‟ their project, product or service.

1.7 Research Questions
Given the lack of knowledge on crowdfunders and the motivational forces affecting engagement in this activity, the aim of this research is to discover what could drive these consumers to participate. Thus, the research is exploratory in nature. The goal in exploratory research usually is “to develop hypotheses or questions for further research” (Cooper and Schindler, 2006, p.140).

More specifically, the goal is to identify whether there are any intrinsic or extrinsic motivational factors and if so what sort of relationships exist between the nature of incentives, profit sharing, and peer influence on crowdfunders‟ behaviour. Research in related fields such as crowdsourcing, online collaboration, investment decision-making and informal investing will be used as a starting point in order to investigate the relationships which will be tested through a quantitative analysis. Based on the research purpose, the research question can be formulated as follows: What causes consumers/individuals to engage in crowdfunding? Specific issues can then be addressed through subresearch questions. These include, but are not limited to, the following: 1) What role does intrinsic motivation play in the crowdfunder‟s decision to invest?

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2) What role does extrinsic motivators in the form of monetary rewards play in the crowdfunder‟s decision to invest? 3) How do actions by other crowdfunders influence the behaviour or preferences of a crowdfunder?

1.8 The Purpose of Theoretical and Practical Relevance
The purpose of the proposed research is to gain a deeper understanding into what drives the behaviours and motivations of crowdfunders (believers) who use on-line crowdfunding platforms, in order to determine what the success factors for crowdfunding projects are. Gaining a better understanding is imperative given the recent surge in crowdfunding projects and its potential implications for investors, consumers, companies as well as policy makers.

1.8.1 Theoretical Relevance There are a number of fields to which crowdfunding can add new insights through this exploration of the field. Firstly, there has been very little research focussed specifically on the area of crowdfunding. This research can help define the outlines of the „typical‟ crowdfunder, as well as the characteristics of the markets in which crowdfunders simultaneously consume and invest. Doing so can have a number of interesting theoretical implications. The similarities and differences between crowdfunders and „regular‟ consumers and the marketing capabilities inherent in crowdfunding can shed new light on for example early adaptor or electronic word-of-mouth theories. Secondly, crowdfunding can add to the debate of value creation in and through online collaboration. Other potentially relevant implications can be found in areas such as the predictive or trendsetting powers of crowdfunding projects in complex sectors, such as creative arts and perhaps in terms of informal investing and venture capital.

1.8.2 Practical Relevance Although the term crowdfunding has only recently been coined, it is an area of consuming (or investing) that has rapidly grown over the course of the last few years. For example, one of the major crowdfunding platforms, Kickstarter.com, has launched over 20,000 projects with 43% meeting their target goal whilst helping to raise over $53 million between its launch in April 2009 to April 201024. Similarly, Sellaband.com, who focussed on providing music artists with funding for album creation, raised $3 million between their start in 2006 and July 2010.

24

Strickler, Y. (n.d.). Happy Birthday Kickstarter!. The Kickstarter http://blog.kickstarter.com/post/5014573685/happy-birthday-kickstarter retrieved on 05/04/2011

Blog.

from

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Van Wingerden & Ryan Given the relatively low cost of attracting capital through crowdfunding platforms, in combination with the increasing amount of capital raised through these platforms, it is evident that practitioners will benefit from insights into the motivation of crowdfunders and subsequently the factors that can „make or break‟ a crowdfunding project. Furthermore, as mentioned above, crowdfunding can play an important role for creative artists in light of Caves‟ (2000) nobody knows principle. Moreover, it shows promise of being able to close the equity gap (Mason and Harrison, 1995) encountered by SMEs around the world. Finally, it is important to understand the working of and motivators behind crowdfunders from a government perspective, in order to be able to develop policy to deal with crowdfunding (Kappel, 2009; Whitla, 2009).

1.9 Thesis Structure
This first chapter has set out the context within which this thesis is placed. Crowdsourcing and crowdfunding were defined and a general lack of literature on the latter concept has been established. Furthermore, the research aim, purpose and relevance were introduced. The next chapter will present the theoretical framework, followed by the third chapter which gives an insight into the methodological reasoning and decisions made concerning methods. Subsequently, the analysis of data and discussion of results will be discussed. Finally, the last chapter will present the research conclusions, as well as the implications and limitations of the study.

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CHAPTER 2

THEORETICAL FRAMEWORK
This chapter sets forth to create a theoretical framework in which crowdfunding and related fields are further presented. Although there is little literature on crowdsourcing and even less on crowdfunding there is quite an extensive body of published literature on related concepts and fields such as online collaborative work and open innovation. Moreover, when the concept of crowdfunding is first presented, many similarities between venture capitalists and angel investors come to mind.

Given that this thesis aims at exploring the motivational and behavioural drivers of crowdfunders this chapter will first begin by defining both intrinsic and extrinsic motivation. Motivational theory from related fields and past research is then presented which leads to initial suggestions of relationships that might exists between these constructs and the propensity to crowdfund. Next, a discussion on the contextual factors of crowdfunding will be set out based on theories in related field including investment decision making and herd behaviour therein. This leads to further suggestions as to where relationships between the context of a project and the individual users‟ likeliness to engage in the funding of a project might exist. These discussions and subsequent suggestions that arise from these discussions will form the theoretical foundation of the survey questions.

2.1 Motivation: Background
Long ago, Charles MacKay‟s book entitled „Extraordinary Popular Delusions and the Madness of Crowds‟ (1841) was used as a framework for collective work. “According to it, the most likely outcome of collective human dynamics is market bubbles, instability and chaos” (MacKay, 1841 as cited in Bonabeau, 2009, p.51). Since that time the outlook on collective work has shifted, becoming more favourable as the „wisdom of the crowds‟ concept emerged: “[A] growing number of applications have shown that a group of diverse, independent and reasonably informed people might outperform even the best individual estimate or decision” (Bonabeau, 2009, p. 51-52).

With the growing acceptance of collaborative work, an increasing number of studies on motivational factors explaining why individuals participate in collective work, for example crowdsourcing, have emerged. During the last decades authors have made use of the intrinsic-extrinsic dichotomy when discussing the concept of motivation (Deci and Ryan, 1985; Ryan and Deci, 2000). Although Kleeman, Voss and Rieder (2008) have applied this dichotomy on user engagement in crowdsourcing, theories regarding the motivation for crowdsourcing and crowdfunding nonetheless remains in a very

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Van Wingerden & Ryan early stage. Before discussing motivations for collaborative work any further, intrinsic and extrinsic motivations will first be defined. Intrinsic motivation is the “inherent tendency to seek out novelty and challenges, to extend and exercise one's capacities, to explore, and to learn […] in the absence of specific rewards” (Harter, 1978, as cited in Ryan and Deci, 2000, p.70). Lepper, Sethi, Dialdin and Drake define it as “com[ing] from the organism itself, arising and persisting in the absence of external events [..]” (p. 24). Contrary to intrinsic motivation where performance is motivated by an inherent satisfaction through performing the task itself, extrinsic motivation concerns motivation through the use of an external factor such as a “promised reward, praise, critical feedback, deadlines, surveillance, or specifications on how the work is to be done” (Amabile, 1993, p.189). Although the factor or reward may be based on the work itself, these motivators are external both to the task or job, as well as the individual performing it.

Generally theorists argue that for task performance, once extrinsic motivators have been placed on a task, intrinsic motivation will decline (Amabile, 1993). Deci, Koestner, and Ryan support these findings by stating that “all expected tangible rewards made contingent on task performance do reliably undermine intrinsic motivation” (1999, as cited in Ryan and Deci, 2000, p.70). Similarly, Amabile, Conti, Coon, Lazenby and Herron (1996) in research into the work environment‟s affect on creativity, find that extrinsic motivators can „undermine‟ intrinsic motivation. Threats, deadlines, pressured evaluations, directives, and imposed goals were also proven to diminish intrinsic motives; however, opportunities for self direction, choice, and acknowledgement of feelings lead to increased intrinsic motivation as they allow the individual an increased feeling of autonomy (Deci and Ryan, 1985).

2.2 Intrinsic Motivation and Collaborative Work
Since theory on crowdfunding is in an infant stage, this discussion draws upon studies on the motivations that drive users in crowdsourcing and open source. This approach is similar to that of Lambert and Schwienbacher (2010) as well as Belleflamme et al. (2011), who identify crowdfunding to be a subset of crowdsourcing. In turn, crowdsourcing research often draws on research from open content and open source creation when establishing its theoretical foundation (e.g. Brabham, 2008a; Kleeman, 2008). Although the context of these studies does not show a perfect fit with the task at hand, it is reasonable to argue that they are similar, especially in the case of crowdsourcing. However, as Brabham (2008a) notes, “[o]pen source motivators are helpful but are not precisely translatable to crowdsourcing cases” (p.87). This is attributed to the absence of monetary rewards (i.e. extrinsic motivator) in open source development. 16

Initial research indicates that intrinsic motivation plays the most important role in explaining why people get involved in crowdsourcing (Luthiger Stoll, 2006, as cited in Kleeman, 2008). By working on the problem people feel more in control of the product or service they will use in the future and in the end save money (cf. Michel, 1997, 2000; Voswinkel, 2000, as cited in Kleeman, 2008). Consumers are also more likely to participate if they are dissatisfied with the current product and feel they can make improvements (Reichwald and Piller, 2006, as cited in Kleeman, 2008): “In sum, the primary motivations of working consumers are intrinsic ("for the fun of it"), but also of central importance are characteristics that make tasks fun (autonomy, creativity, importance of the task)” (p.22). Furthermore, there are several studies that support the notion of „fun‟ as a primary motive for an individual‟s engagement in a task or certain behaviour, which includes but is not limited to the following studies. Using a crowdsourced idea generation competition as the focal point of research, intrinsic motivation to engage in crowdsourcing is found to revolve around involvement, fulfilment and “feelings of competence” (Leimeister, Huber, Bretschneider and Krcmar, 2009, p.203). Lakhani and Wolf (2003) find that intellectual stimulation, which according to the authors is an “enjoymentrelated intrinsic” (p. 12) motivator, is the single most important motivator for users to collaborate on open source software projects. Additionally, in their research on crowdsourcing motivation Lakhani, Jeppesen, Lohse and Panetta (2007), identify „having fun‟ as the single most important motivator for crowdsourcers.

Moreover, Kleeman et al. (2008) find that for crowdsourcing, the involvement in and control over what is created is a strong motivator for crowdsourcers. However, as Lambert and Schwienbacher (2010) point out, the majority of crowdfunding projects do not offer direct involvement in or control over the decision-making process within that project. The authors hypothesise that when investors “cannot be involved in the happening of the initiative” (Lambert and Schwienbacher 2010, p.10), more rewards may be required to satisfy the investor. Belleflamme et al. (2010) came to a similar proposition, stating that: “A negative correlation exists between whether a reward is offered and whether it is a passive investment, which suggests that rewards and control are used as substitutable incentives” (p.7-8). Similarly, studies on investment decision making reveal similar „for the fun of it‟ reasons for involvement. San José, Roure and Aernoudt (2005) found that, although not the primary motivator, „fun‟ plays a significant role in the angel investor‟s decision-making process. Although the authors argue that for informal venture capital investors the „financial reasons‟ are the most important motivator, Harrison and Mason (1992) acknowledge that non-financial motives also play an important 17

Van Wingerden & Ryan role. The authors argue that “the fun of making informal investments” (p. 463) is a significant motivator for informal venture capitalists. Similarly, Baty and Sommer (2002) argue that angel investors are generally motivated by non-financial factor such as “joy in the process” (p. 292). Harrison and Mason (1992) find that besides „having fun‟, the ability to “play an active role in the entrepreneurial process” (p. 463) is an important motivator for informal venture capitalists. In addition, Ibrahim (2008) argues that for business angels, one of the most important motivators apart from financial incentives is the ability to be involved “in a new venture‟s development” (p.1439). In this regard, one could argue that there‟s a similarity between crowdfunding platforms and angel investor groups, although the latter generally invest on a much larger scale. Moreover, Duxbury, Haines and Riding (1996) find that business angels “are intrinsically motivated [and] highly involved with their work and their investments” (p. 44). Similarly, Avdeitchikova (2008) finds that business angels display a relatively high non-financial investment into targeted firms, suggesting a strong involvement that goes beyond financial contributions.

What authors on informal venture capitalists and angel investors as well as crowdsourcers and crowdfunders accordingly seem to argue is that the researched individuals all seek a certain „sense of involvement‟ with the project they fund. This „sense of involvement‟ can manifest itself in various forms such as the form of control over the decision-making process. Moreover, „having fun‟ seems to play a significant role for individuals or individual users partaking in e.g. crowdsourcing, open content creation and angel and informal investing. Given the similarities between the context of these fields and/or activities with what is known to be crowdfunding, it is suggested here that similar motivations might transcend to the activity of crowdfunding. Therefore, as subsequent sections 3.2.3 on the survey creation and chapter 4, which contains the data and results, will show these motivations form one of the spearheads in this thesis research.

2.3 Extrinsic Motivation in Crowdsourcing
There are several researchers who have concluded that it is not intrinsic motives but extrinsic motives that were the underlying reason for individual engagement in certain activities. Brabham (2008b), in his study of the photo crowdsourcing community iStockphoto, finds that “the opportunity to earn money” –an extrinsic motivator- plays the most important role for the active crowdsourcers within the iStockphoto community. In subsequent research on crowdsourcing, Brabham (2009) found further support that „making money‟ plays an important role in crowdsourcing. Although Lakhani, et al. (2007) find that intrinsic motivation such as enjoyment, a factor potentially influencing crowdfunders as discussed in the previous section, plays the most important role in crowdsourcing, they argue that

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the desire to win the award money or „bounty‟ also plays a significant role. Similarly, Peng and Zhang (2008), find a moderate positive effect of „direct compensation‟ on the use of crowdsourcing as well. Although these findings do not perfectly align with Brabham‟s (2008b; 2009) conclusions, which place the ability to earn money as the top motivator, these initial studies do converge in suggesting that the possibility to earn money plays a significant role in crowdsourcing. Furthermore, these findings seem to contrast the aforementioned authors‟ findings on the importance of intrinsic motivation. However, it should be noted that the general context of e.g. open source is one in which the ability to earn money as an individual contributor is generally not present (Brabham, 2008a). These initial findings by Brabham (2008a; 2008b; 2009) on crowdfunding and Lakhani (2007) and Kleeman et al. (2008) on crowdsourcing could indicate that a relationship exists between crowdfunding and extrinsic motivation (i.e. financial return) and therefore deserve further investigation.

Returning to the first chapter on the crowdfunding literature review, it must be noted that because of legal limitations in e.g. the USA, not all crowdfunding platforms offer the possibility of profit sharing, or for that matter, any form of pecuniary reward. A number of platforms located in other countries, such as Sellaband.com which is legally located in Germany, do offer the possibility of profit sharing or monetary rewards. Given the extensive reach of the World Wide Web, these differences in legal circumstances do not necessarily imply that citizens of e.g. the USA do not have access to platforms where monetary rewards or returns make up part of the crowdfunding experience. It is of interest in investigating the importance attributed by individuals to whether or not a platform allows emerging innovators to disburse monetary rewards to their funders.

From a theoretical point of view it is of interest to become more knowledgeable on this issue in order to better understand not only decision making process on a project-to-project basis, but also from a wider platform perspective, whilst from a more practical point of view, it could be valuable to pertain information concerning the crowdfunder‟s choice of platform set off against his preference in order to gain insight into the crowdfunder‟s ability to find a platform that best meets their needs amidst a rapidly increasing number of platforms. Therefore, as is displayed in the following sections, data will be gathered on the characteristics of their primary platform in order to further explore the difference between platforms that do and platforms that do not offer the ability to earn a monetary reward.

2.4 Informational Cascades, Momentum and Investment Context
Since there is virtually no literature on crowdfunding, let alone the investment decision-making aspect of crowdfunding, theory from related fields and similar contexts are utilized in order to examine the 19

Van Wingerden & Ryan crowdfunder‟s behaviour. Specifically, the theories on „informational cascad

Summary
This thesis investigates users of crowdfunding platforms in order to further the insight into understanding what affects their motives and behaviour. The relationship between intrinsic and extrinsic motivation as well as peer influence is investigated.

Description
The findings confirm that: there are two major groups of individuals that crowdfund; more people engage for intrinsic reasons than might be expected; frequency and amount are reflected in motivational reasons for engagement; age does influence funding behaviours; and crowdfunders share similarities and differences with individuals in related fields.

Tags: and motivation, Crowdfunding, Crowdsourcing, Funding, Fundraising, investing

Posted by Adam Frazer

Sep 11, 2011 11:01 pm GMT Viewed 4420 times

Author: Ralph Van Wingerden and Jessica Ryan Source

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