Financing Nascent Entrepreneurs by Reward-Based Crowdfunding: Lessons From Indiegogo Campaigns

Introduction

Crowdfunding (CF) has experienced an impressive growth in recent years (Di Pietro & Butticé, 2020; Yu, Johnson, Lai, Cricelli, & Fleming, 2017). The development of internet and information technologies apparently increased the awareness and the participation of the “crowd” to fund entrepreneurial projects (Agrawal, Catalini & Goldfarb, 2010; Baumgardner, Neufeld, Huang, Sondhi, Mursalin, & Talha, 2017; Gajda & Mason, 2013).

CF online platforms may be clustered in four main models, depending on the reward scheme design of the call (André, Bureau, Gautier, & Rubel, 2017; Cho & Kim, 2017; Mollick, 2014). The donation or patronage CF is more common in philanthropy, where a donation occurs without any expected direct reward. The lending CF involves the concession of small loans that were made available by the “crowd”, expecting to be repaid plus an interest rate. The reward-based CF is a model where crowdfunders are seen as early customers that buy products previously to entering the market (André et al., 2017). In the equity CF model the crowdfunders acquire equity stakes if they support a crowdfunding call and are treated as an (equity) investor. These different models of CF are suitable for the project's promoters according to their needs and the different characteristics of the entrepreneurial projects (Paschen, 2017).

Compared with other funding options, CF offers some advantages either for entrepreneurs' calling for funds (crowdfundees) and investors searching for new business opportunities (crowdfunders). However, CF also involves some risks, especially for crowdfunders, as the default risk will not be borne by any intermediary (Moritz & Block, 2016).

Despite all the potential that CF is able to offer as a fundraising tool, not all campaigns are really successful in attract potential investors and fail to collect the expected funds. Other projects, in turn, have been able to exceed far the financial objective they have initially proposed. As an example, existing statistics indicate that in 2019 the success rate of the Kickstarter CF platform is just about 37.4% (Statista, 2020).

Therefore, it is important to understand how the funders make decisions for a project as unlike business angels or venture capital funds, crowdfunders might not have any specialised knowledge about the industry nor the project to be funded (Belleflamme, Lambert, & Schwienbacher, 2014). Further, in CF the relationships established between founders and funders are mainly based on the interaction facilitated by the online environment of the platforms or other social media.

The objective of this chapter is to understand why some CF campaigns are more successful than others in attracting funds. By analyzing the strategies used by different CF campaigns in Indiegogo, the second international leading reward-based CF platform, we aim to get new insights about the most relevant factors that contribute to the success of a fundraising campaign. The drivers of success will be grouped into project-related and entrepreneur-related factors.

The identification of the critical success factors of a CF campaign will provide practical recommendations for crowdfundees and platform operators, helping them raise the attention of the investors for support a project.

The paper is organized as follows. The next section presents the concept and models of CF, explaining in more detail the reward-based CF model. After that, we analyze the main drivers of the success of a CF campaign. Then, we present the methodology used in the investigation. In the following section, the results attained are presented and discussed. The paper ends with the main conclusions, limitations and future research directions.