Success Factors for UK-Based Crowdfunding Projects. Should the Founders’ Demographic Profile Match That of the Target Audience?

Chapter 1: Introduction

1.1. Problem Definition and Rationale

Crowdfunding is the process of raising money through specialised online portals (i.e. crowdfunding platforms) by individuals, businesses, and organisations to fund their activities and achieve personal, social, or business goals (FCA, 2014, s. 1.4). Since the early 2010s, crowdfunding has become a viable alternative to traditional modes of financing, such as bank loans, for small and medium-sized enterprises (SMEs) worldwide (Hervé & Schwienbacher, 2018, 1514). The advantages of this funding method include simplified access to capital (Grüner & Siemroth, 2018, 2), overcoming geographic constraints (Miglo & Miglo, 2018, 2), and collecting feedback from a large audience of potential customers (Bade, 2018, 166). The potential risks include the dilution of ownership structure in equity-based crowdfunding (Cumming, Johan & Zhang, 2018, 654). Nonetheless, crowdfunding has gained popularity rapidly because of constrained liquidity in financial institutions. In the UK, the amount of funds raised through crowdfunding platforms exceeded £1 billion in 2014 (Ridley, 2016, 58). However, over 60% of crowdfunding campaigns fall short of their targets (Statista, 2018, 1). Thus, it is important for project creators to understand which factors can increase or diminish the probability of crowdfunding success.

The existing research on success factors in crowdfunding projects has largely been undertaken in other contexts than the UK. The funding goal size has been consistently found to reduce the likelihood of success (Lagazio & Querci, 2018, 318; Por, Yang & Kim, 2016, 1). A range of studies examined the contribution of project description and communication channels to attracting investments (Lukkarinen, Teich, Wallenius & Wallenius, 2016, 26; Yuan, Lau, & Xu, 2016, 67; Zhu & Li, 2018, 587). Meanwhile, the founder-related factors received surprisingly little attention, despite the central role of founders in project communication and delivery (Costa e Silva, S., & Vieira, 2017, 83). In one study, the founders’ experience in the industry increased the probability of project success (Por et al., 2016, 1). In another, the adoption of group identity by the project founder encouraged investments from inexperienced backers (Allison, Davis, Webb, & Short, 2017, 707). Similarly, the influence of the target audience’s traits has been seldom examined, although some evidence suggested their potentially powerful impact (Xie et al., 2018, 12). This research project is intended to bridge this research gap by examining the effect of congruence between founder and backer traits on crowdfunding campaign success.

1.2. Thesis Background

The size of the British crowdfunding market increased by 12 times – from £267 million to £3.2 billion – between 2012 and 2015 (Baeck, 2017, 7). The most common types of campaigns launched by businesses are peer-to-peer landing, invoice trading, and equity-based crowdfunding, with reward-based crowdfunding being significantly less popular (Baeck, 2017, 8). This statistic does not include British projects launched on foreign platforms, such as Kickstarter or Indiegogo, but includes foreign projects launched on British platforms. Currently, the UK has 65 active platforms for crowdfunding, which is a slight decline from 78 platforms in 2014 (Bone & Baeck, 2017, 1). Meanwhile, the amount of raised funds continues to increase (Bone & Baeck, 2017, 1), indicating that the demand for crowdfunding services is not yet saturated. Larger platforms are better positioned to benefit from the ongoing growth, attracting steady flows of creators and backers. In particular, Crowdcube, one of the largest UK-based crowdfunding platforms, hosted by 23% more projects in 2017 and raised a total of £130 million (Watts, 2018, 1).

The research specifically looking into the demographic composition of project creators and backers in the UK context is extremely scarce. In the US, it has been estimated that about 22% of adult population have contributed to a crowdfunding project at least once and 3% have created their own projects (Smith, 2016, 1). 62% of backers contributed under $50, and only 3% invested over $500 (Smith, 2016, 1). The average backer on Kickstarter and Indiegogo was male, aged 25-34, with below-average income (AOTK, 2014, 1). The need to obtain similar data for the UK market is addressed in the course of this investigation.

1.3. Aim and Objectives of the Project

The aim of this doctoral project is to evaluate the impact of a distance between project creators’ and backers’ demographic traits on crowdfunding project success.

To examine the role of demographic congruence between project creators and target audience from the perspective of the theory of fit.
To construct the demographic profiles of UK-based crowdfunding project creators and backers.
To establish the impact of founder-backer congruence on project success on a representative UK sample.
To provide recommendations on how organisations using crowdfunding should select the ‘face’ of the project to maximise the probability of success.

1.4. Intended Contribution and Significance

This thesis can contribute to a better understanding of consumer motives driving contribution to crowdfunding projects. The results of this project can be used by organisations raising funds through crowdfunding to select the appropriate project ‘face’ to attract backers.

1.5. Research Method

A two-stage research design is adopted for this project. At the first stage, secondary data including project success/failure, founder demographics, and backer demographics is collected from major UK-based crowdfunding platforms and associated social media pages of creators and backers. The data is processed using regression analysis to identify patterns. At the second stage, an experiment is conducted involving 15 actual backers and 15 potential backers. The convenience sampling frame is used to select and approach the participants in the researcher’s personal network. The participants are presented with crowdfunding scenarios featuring project creators with varying degrees of similarity to themselves. The experiment data is processed using regression analysis.

1.6. Expected Outcomes

Dwelling on the theory of fit (Misra & Beatty, 1990, 161), the researcher expected backers to be attracted to those project creators who resembled themselves in terms of race, age, and gender. The congruence between project creators’ and backers’ demographic traits was anticipated to produce a positive and significant impact on project success. These patterns were expected to hold across the two stages described in Section 1.5.

References

Allison, T. H., Davis, B. C., Webb, J. W., & Short, J. C. (2017). “Persuasion in crowdfunding: An elaboration likelihood model of crowdfunding performance”. Journal of Business Venturing, 32(6), 707-725.

AOTK. (2014). Crowdfunding Demographics: Understand Kickstarter and Indiegogo Backers. Retrieved from http://artofthekickstart.com/crowdfunding-demographics-understand-kickstarter-and-indiegogo-backers/.

Bade, M. (2018). “Bargaining over crowdfunding benefits”. Journal of Enterpreneurship and Public Policy, 7(2), 166-177.

Baeck, P. (2017). Crowdfunding and alternative finance in the UK. Retrieved from https://www.gov.scot/binaries/content/documents/govscot/publications/minutes/2017/10/expert-advisory-panel-on-the-collaborative-economy-august-2017/documents/f9424fc5-ae97-4454-87b6-669e36602f13/f9424fc5-ae97-4454-87b6-669e36602f13/govscot%3Adocument?inline=true.

Bone, J., & Baeck, P. (2017). UK crowdfunding platform trends. Retrieved from https://www.nesta.org.uk/blog/uk-crowdfunding-platform-trends/.

Costa e Silva, S., & Vieira, A. (2017). “Understanding Success according to Crowdfunding Project’s Initiators”. Studia Universitatis Babe-Bolyai Oeconomica, 62(3), 83-100.

Cumming, D., Johan, S., & Zhang, Y. (2018). “Public policy towards entrepreneurial finance: Spillovers and the scale-up gap”. Oxford Review of Economic Policy, 34(4), 652-675.

FCA. (2014). The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other media. Retrieved from https://www.fca.org.uk/publication/policy/ps14-04.pdf.

Grüner, H., & Siemroth, C. (2018). “Crowdfunding, Efficiency, and Inequality”. Journal of the European Economic Association, 1-35. DOI: 10.1093/jeea/jvy023.

Hervé, F., & Schwienbacher, A. (2018). “Crowdfunding and innovation”. Journal of Economic Surveys, 32(5), 1514-1530.

Lagazio, C., & Querci, F. (2018). “Exploring the multi-sided nature of crowdfunding campaign success”. Journal of Business Research, 90(1), 318-324.

Lukkarinen, A., Teich, J., Wallenius, H., & Wallenius, J. (2016). “Success drivers of online equity crowdfunding campaigns”. Decision Support Systems, 87(1), 26-38.

Miglo, A., & Miglo, V. (2018). “Market imperfections and crowdfunding”. Small Business Economics, 1-29. DOI: 10.1007/s11187-018-0037-1.

Misra, S., & Beatty, S. E. (1990). “Celebrity spokesperson and brand congruence, an assessment of recall and affect”. Journal of Business Research, 21(1), 159-173.

Por, M. H., Yang, S.-B., & Kim, T. (2016). “Successful crowdfunding: The effects of founder and project factors”. Proceedings of the 18^th Annual International Conference on Electronic Commerce e-Commerce in Smart Connected World (ICEC), 1-7.

Ridley, D. (2016). “Will New Regulation on Crowdfunding in the United Kingdom and United States Have a Positive Impact and Lead to Crowdfunding Becoming an Established Financing Technique?” Statute Law Review, 37(1), 57-76.

Smith, A. (2016). Collaborative: Crowdfunding platforms. Retrieved from http://www.pewinternet.org/2016/05/19/collaborative-crowdfunding-platforms/.

Statista. (2018). Percentage of successfully funded Kickstarter projects as of October 2018. Retrieved from https://www.statista.com/statistics/235405/kickstarter-project-funding-success-rate/.

Watts, J. (2018). Crowdcube’s record-breaking 2017 saw 32 businesses raise more than £1m. Retrieved from https://startups.co.uk/crowdcube-2017-raised-1-million/.

Xie, K., Liu, Z., Chen, L., Zhang, W., Liu, S., & Chaudhry, S. (2018). “Success factors and complex dynamics of crowdfunding: An empirical research on Taobao platform in China”. Electronic Markets, 1-13. DOI: 10.1007/s12525-018-0305-6.

Yuan, H., Lau, R., & Xu, W. (2016). “The determinants of crowdfunding success: A semantic text analytics approach”. Decision Support Systems, 91(1), 67-76.

Zhu, C., & Li, X. (2018). “The influence of design factors on the financing results of crowdfunding projects”. Journal of Modelling in Management, 13(3), 587-604.