Entrepreneurs interested in raising funding through crowdfunding as it becomes more widely across the U.S. and North Carolina should check out new research from NCSU about the impact of a campaign, from size to dollars, can have.

When it comes to crowdfunding for startups, turns out the size of the “crowd” – i.e. number of investors – is more important to financial success than the amount of money raised. So says a paper from N.C. State’s Poole College of Management.

“A lot of people initially see crowdfunding solely as a way to raise money – but, to me, it seemed like a way to learn and create a community that raises awareness of a product,” said Michael Stanko, an associate professor of marketing in NC State’s Poole College of Management who is the lead author of a paper on the work.

“So, I wanted to know whether my perception was accurate. How important is the dialogue with crowdfunding backers? What aspects of a crowdfunding campaign contribute to a product’s later success in the market?”

Based on a study of more than 1,000 kickstarter campaigns deemed successful in terms of hitting financial targets, the NCSU researchers drew two “key” findings:

  • The amount of money a crowdfunding entrepreneur raised was inconsequential to their product’s ultimate success in the market
  • The number of people who contribute to a crowdfunding campaignwas an important contributor to the later market success of a product. In other words, the more backers a campaign attracted, the more likely the product was to exceed financial goals when it launched to the mainstream market.

The findings are based on complete survey results of 173 crowdfunding entrepreneurs and partial responses from 51 more. Campaigns raised at least $10,000, and there was an average of 1,078 backers.

Respondents had all run successful campaigns raising at least $10,000. The mean funding raised was $78,726, from an average of 1,078 backers.

“We found that crowdfunders who raised a lot of money were no more likely than those who raised smaller amounts to meet their sales, profit or other financial goals when their products later hit the marketplace,” Stanko explained.

“Margins on pre-orders tend to be much smaller than crowdfunding entrepreneurs expect and delays are common. Pre-order revenue doesn’t generally translate into sizable enough margins for entrepreneurs to effectively leverage the proceeds of crowdfunding to the benefit of the product’s mainstream market launch – for instance, by increasing advertising spending.”

Stank also said that the more money a fundraiser generated, the less focus on future “radical” innovation.

“Why does this lack of focus on radical innovation happen? Exceeding funding goals often leaves crowdfunding entrepreneurs scrambling to meet pre-order demand – with typical manufacturing and quality-control challenges exacerbated by inexperience and the lack of resources within many of these small startups,” Stanko says. “Some of these companies get so buried by pre-order fulfillment that it leaves them unable to even think about their next big idea.”

Crowd impact

So why is crowd size important?

“There are two main sources of value that crowdfunding backers bring to tech entrepreneurs,” Stanko says. “Respondents told us that the most valuable thing backers did was serve as evangelists, raising awareness of forthcoming products through social media and traditional word of mouth.

“Secondly, entrepreneurs told us that they also benefited from crowdfunding backers not being shy with their opinions,” Stanko says. Candid, constructive feedback serves as useful advice for entrepreneurs – often providing insights into ways to improve a product.

The paper, “Toward a Better Understanding of Crowdfunding, Openness and the Consequences for Innovation,” was published in the journal Research Policy. David Henard, Board of Advisors Professor of Business Management and professor of marketing in NC State’s Poole College of Management, co-authored the report.

Read the full abstract below:

Abstract: Toward a better understanding of crowdfunding, openness and the consequences for innovation

Crowdfunding is now a commonly used tool for innovating entrepreneurs, yet many unresolved questions surrounding crowdfunding’s effect on innovation remain. Often, crowdfunding backers play an active role in the innovation conversation. Thus, crowdfunding can be viewed as one form of open search (actively seeking out ideas from outsiders). Beyond open search, backers also generate word of mouth awareness for the crowdfunded product. Crowdfunding backers can be thought of as the earliest possible adopters, who may be even more valuable than traditional early adopting consumers. In this study, data pertaining to crowdfunded products from the Kickstarter platform is coupled with survey data from the respective innovating entrepreneurs to better understand the effects of elements of crowdfunding on the subsequent market success of the crowdfunded product as well as the innovation focus of the crowdfunding organization. Results indicate that the amount of funding raised during a crowdfunding campaign does not significantly impact the later market performance of the crowdfunded product, while the number of backers attracted to the campaign does. Open search depth (drawing intensely from external sources) enhances product market performance, while open search breadth (drawing from many external sources) induces a radical innovation focus. Interestingly, adverse effects from over-relying on external knowledge sources are not observed. The small size of the crowdfunding organizations in this study is seen as a boundary condition to previous findings of inverse U-shaped performance effects. Finally, the portion of product development complete when crowdfunding impacts the entrepreneurs’ subsequent focus on radical innovation.

Read more at: http://www.sciencedirect.com/science/article/pii/S0048733317300379