ERC Understanding Small Business Growth - Massimo Colombo.

1. Making a successful crowd-funding campaign:
The role of social capital
Massimo G. Colombo, Politecnico di Milano School of
Management
massimo.colombo@polimi.it
ERC Understanding Small Business Growth
Conference Birmingham,
February 11th, 2015

2. Outline of the talk
•WHAT WE KNOW ABOUT CROWDFUNDING
Definition of crowdfunding
Neighbouring phenomena
Crowdfunding @ Politecnico di Milano School of Management
•FACTORS THAT DETERMINE THE SUCCESS OF A
CROWDFUNDING CAMPAIGN: THE ROLE OF SOCIAL CAPITAL
Colombo M.G., Franzoni F., Rossi-Lamastra C. (2015) Internal
social capital and the attraction of early contributions in
crowdfunding projects. Entrepreneurship Theory and Practice, 39
(1), pp. 75-100
2

3. INTRODUCTION TO
CROWDFUNDING
3

4. Definition of crowdfunding
Crowdfunding involves an open call, mostly through dedicated
platforms on the Internet, for the provision of financial resources, either
in form of donation or in exchange for the future product or some form
of reward (Belleflamme, Lambert, & Schwienbacher, 2014, JBV)
•Open call: I wish to develop an entrepreneurial project/idea and I ask
for money on the Internet
•The evolution of an ancient practice, made possible by Web 2.0
•Often projects have a philanthropic content …
•… But crowdfunding is increasingly used to finance entrepreneurial
ventures and start-ups
Use of a dedicated platform: specific benefit from network effects and
dedicated services offered by the platform
•Financial resources: proponents receive more than money
Comments and suggestions to fine-tune their projects
4

5. What crowdfunding is not:
Neighbouring phenomena
Crowdfunding is part of a larger trend: involvement of users in innovation
processes (von Hippel, 2005)
Neighbouring phenomena:
•Crowdsourcing: firms asking Internet users for ideas and solutions to be
used in their innovation processes (Afuah and Tucci, 2012)
Crowd-science: scientists asking Internet users to contribute to scientific
projects in a decentralized way (Franzoni and Sauermann, 2014)
Open Source production: decentralized production of intangible and
tangible goods by developers who coordinate through the Internet
•Main phenomenon: Open Source Software (e.g., Linux, Apache)
•But also: Wikipedia, Local Motors (https://localmotors.com/) , …
5

6. Crowdfunding models
Types of crowdfunding platforms:
•Equity-based platforms: underwriting by the crowd of the risk
capital issued by a company
•Donation-based platforms: project funding motivated by
philanthropy or sponsorship, without any other remuneration for
crowdfunders
•Lending-based platforms: underwriting of debt contracts between
two parties (i.e., the lender and the borrower)
•Reward-based platforms: financing is provided in the expectation
of a rewards or a prize (material or not).
6

7. … And crowdfunding in Italy
7
8

8. Follow as on Facebook:
Entrepreneurship, Finance & Innovation at SoM POLIMI:
https://www.facebook.com/EntInno.PoliMI
•The Crowdfunding Observatory @ Politecnico di Milano School
of Management monitors the evolution of the crowdfunding industry
in Europe. It collects data on
Platforms and firms running these platforms
Projects and proponents
Crowdfunding @ Politecnico di Milano School
of Management
9

9. Researching crowdfunding @ Politecnico di
Milano School of Management
• What determines the success of a (reward) crowdfunding
campaign?
• Proponents’ reputation and human capital
• Use of content analysis to check the role of proponents’ optimism and
charisma
• The role of proponents’ social capital
• The geography of crowdfunding
• Why in some geographic areas there are many crowdfunding projects while
in other areas just a few projects are launched?
• Does the localisation of the proponent influences success?
• Mapping the crowdfunding industry in Europe
 Role of newly created and incumbent firms (i.e., crowdfunding players) that
created and run crowdfunding platforms
9

10. • Dushnitsky, G., Guerini, M., Piva, E., Rossi-Lamastra, C.,
The entry of crowdfunding players in the financial service
industry: the European case, Politecnico di Milano School of
Management Working Paper
Main results
• As of 2013, in the EU-15 countries there were 414 active
crowdfunding players
 330 are de novo entrants, 84 are de alio entrants
 40 players exited the market
The Crowdfunding Observatory:
Crowdfunding in Europe
7

11. • Number of active crowdfunding players active at the end of 2013 and
number of players per million of residents
• Players entering and exiting the crowdfunding segment per year
Crowdfunding in Europe:
Active players in EU-15 countries
7
•There are differences
across countries which are
not entirely explained by
population size
•Most players entered after
2010
•Exit is still a marginal,
though growing
phenomenon

12. • De novo entrants:
• are more numerous than de alio entrants: low entry costs and novelty
• are negatively associated with the strength of the financial service
industry
• De alio entrants:
• are positively associated with the number of crowdfunding platforms:
wait and see approach
Crowdfunding in Europe:
De novo and de alio entrants at the end of 2013
7

13. Internal social capital and the attraction of early
contributions in crowdfunding (CF)
Massimo G. Colombo, Chiara Franzoni, Cristina Rossi-Lamastra

14. The paper in a nutshell
• Aim: determinants of the early success of CF projects
 Early contributions known to be crucial to lead to final success
• Empirical setting: crowdfunding projects on Kickstarter.com
 4 classes: design, technology, film & video, videogames
• Theoretical lens/ Focus: Social Capital
 Prior work documented the role of external social capital, i.e.
personal relationships (F&F, Facebook contacts) that
individuals have or not have independently of the
crowdfunding initiative
 Focus on the social capital that the proponent establish within
the crowdfunding platform (internal social capital)
14

15. CONCEPUTAL BACKGROUND
15

16. Dynamics of CF: Role of early contributions
Regularity in the dynamics of CF projects
Contributions received at the outset of a crowdfunding project largely
anticipate success (Agrawal et al., 2014)
•Why are early contributions (both headcounts of backers and capital
pledged early in project life) so important?
•At the outset of a crowdfunding project there is high uncertainty
about the
quality of the project
ability of proponent
Moreover, the project still is in a fluid state
16

17. Early contributions
Early contributions enable
1. Observational learning: when quality of projects is uncertain,
evidence of support from others functions as a signal of quality and
triggers imitation and herding behavior (Bikhchandani et al., 1998)
2. Word of mouth: early backers function as a marketing channel,
because they talk (or tweet) to other ‘potential’ backers
3. Feedback: CF platforms are a powerful development tool. A project
gets developed during the lifetime of the campaign and eventually
consolidate to meet needs of a broader customer base. More feedback in
early days means faster consolidation
Remains to be explained what triggers early contributions.
Social capital?
17

18. Social capital and early contributions
Social capital has been documented to be associated to project
contributions and success
The relevance of social capital that proponents have outside the
crowdfunding platform is documented in prior studies
 Family & friends (Agrawal et al., 2011)
 Facebook contacts (although not having Facebook is better than
having few Facebook contacts) (Mollick, 2013)
We call this EXTERNAL SOCIAL CAPITAL
This evidence is consistent with that of the entrepreneurial finance
literature (friend-funding phase)
•Social ties help overcome information asymmetries in the funding
phase (e.g. not having social ties makes it less likely to receive seed-
capital, Shane & Cable, 2002; Shane, 2009)
18

19. Internal social capital (1/2)
Proponents of can also rely on a second source of social capital,
which is created internally within the CF community
•Proponents develop social ties inside the CF platform by interacting
with other proponents
E.g. giving attention, money, feedback and visibility to the projects
of others
We call this INTERNAL SOCIAL CAPITAL
•Internal social capital attracts early contributions because it triggers
pro-social behavior in the form of obligation of reciprocity (Coleman,
1990)
19

20. Internal social capital (2/2)
In the realm of CF, reciprocity can happen in two ways
1. Specific reciprocity
“I help you because I want to show my gratitude for helping me in the
past” (Putnam, 1995)
2. Generalized reciprocity
“Regardless of whether or not you helped me, I help you because I
want to be a helping person/a good member of this community”
(Portes, 1998)
 It is a social norm in the CF community: Members of the
community are prone to help because:
• They were helped in the past;
• They expect to be helped in the future.
20

21. Research hypotheses
H1: Internal social capital is positively associated with the amount of
early capital raised by CF projects
H2: Internal social capital is positively associated with the number
of early backers of CF projects
The association of internal social capital and early contributions may
be non-linear or even become negative after a threshold (reversed-U
shaped)
Too much internal social capital is less beneficial or may even be harmful
due to excess cohesion or homologation
H3: Internal social capital is positively associated with the success of
CF projects, but the association is mediated by the number of
early backers and the amount of early capital. Its impact fades
when the amplifying mechanisms are set in place
21

22. The model
early
backers
early
capital
success/
failure
22
INTERNAL
SOCIAL
CAPITAL
H1
H2
H3
success/
failure

23. EMPIRICAL ANALYSIS
23

24. The sample and the variables (1/2)
Empirical analysis based on 669 crowdfunding projects on Kickstarter
• In design, technology, film & video, and videogames
• Posted since October 20, 2012 and closed by January 10, 2013
• Early contributions: conventionally observed at 1/6 of total campaign
duration.
 Most projects span 30 days: this definition considers early the
capital and the backers coming in the first 5 days after the start
24

25. The sample and the variables (2/2)
Rate of success: 37.4%
About 11% of project quit before reaching the deadline
25

26. Empirical strategy
- Show the amplifying mechanisms
- Model impact of internal social capital on early capital (H1)
- Model impact of internal social capital on early backers (H2)
- Model impact of internal social capital on success with or without
early capital and early backers (H3)
Pi =fAi + dBi+ gISCi+ gECi + ei
Pi success (1;0)
Ai vector of project characteristics (pj class, US/non-US, duration of campaign, target
capital, minimum pledge, number of visuals (video & images), number of links to external
websites, reward types (ego-boosting, community-belonging, customized rewards)
Bi vector of individual proponent characteristics (company/individual; individualXgender;
individualXnumber of linkedin connections);
ISCi = number of projects backed by the proponent at the time of launching the
project
ECi Early Capital = % of total capital collected at 1/6 of pj campaign
EBi Early Backers = log(number of backers at 1/6 of pj campaign)
26

27. Models: Amplifying mechanism 27
Robust probit
• Both early backers and
early capital have
positive impact on
success
• Impact of early capital
is stronger
• 1s EB = +83%
likelihood of success
• 1s EC = +133%
likelihood of success

28. H1-H2: Internal social capital as a determinant of
early contributions
28
Tobit models
Internal social
capital is
positively
associated with
early
contributions
• ISC more
closely related
to early
backers than to
early capital
• +1s ISC =
+37% increase
in EB
• +1s ISC =
+9.8%
increase in EC

29. H3 Determinants of early contributions 29
Homologation/
less divergent
thinking?
ISC^2 exhibits a
negative
coefficient
However,
inflection point
is at a level of
ISC links which
corresponds to
more than 99%
of the sample

30. H3 Early contributions are a mediator of
internal social capital
30
Rob. Probit
Dep Var:
1=success;
0=failure
ISC is a predictor
of project success,
but the number of
early backers and
the percentage of
target capital
raised early fully
mediate this
relationship (they
capture 65% of
total effect)

31. Assess magnitude/ statistical significance
of the mediation effect
Product of coefficient approach (Sobel, 1982; MacKinnon & Dwyer,
1993).
•Because final dependent variable is dichotomous, we used the Stata
command binary_mediation (Ender, 2006), which allows for
dichotomous dependent variables and multiple mediators
Confidence level are computed through Bootstrapping
Total effect of Internal_Social_Capital on the likelihood of
success=0.189**
Total indirect effect =0.123**
Direct effect=0.067 not significant (half than total)
31

32. Conclusions
What determines the success of a newly-launched CF project?
•Internal social capital triggers social behavior because of specific and
generalized reciprocity
•This attracts early contributions in the form of capital pledged and
headcounts of backers, despite high uncertainty
Observational learning, word of mouth, and feedback from early
contributions do the rest
•Once these mechanisms are in place, the impact of internal social
capital vanishes
Implications for investigating CF
•CF platforms are a collective where social capital formation takes place
•Because of the amplifying mechanism/success-breeds-success
mechanism, the determinants of success of CF are best visible/should be
investigated in the early days of a campaign
32

33. Crowdfunding @POLIMI
THANK YOU!
33

34. ADDITIONAL SLIDES

35. PAPER
APPENDIX
35

36. 36Distribution of total capital pledged at
closure
Truncated at 500000$

37. 37Variables

38. 38VIF
Truncated at 90^th centile