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Does Online Crowdfunding Reward Actual Innovation?

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

 

Bottom Line: Although crowdfunding has been hailed as a brilliant new tool for edgy entrepreneurs, Internet investors tend to back safer, less groundbreaking products.

In recent years, crowdfunding has taken the world by storm. A World Bank study projected that the crowdfunding market will blossom into a US$96 billion business by 2038, almost 1.8 times as large as the current venture capital industry. Many have predicted that online crowdfunding will democratize product development, allowing small entrepreneurs who lack the contacts, resources, and experience of larger companies to overcome economic, geographic, and social barriers on their way to market.

For all the hype swirling around crowdfunding platforms such as Kickstarter, GoFundMe, and IndieGoGo, a question lingers: Do Internet investors back projects that are truly innovative? To be innovative, a product can’t simply be novel, it must also be useful — improving on previous attempts at accomplishing some task or service.

Traditionally, researchers have found that consumers in shopping contexts prefer genuinely innovative products — those that are both original and useful — and will talk up products that meet those criteria.

The same might not be true of crowdfunding, however, according to a new study of Kickstarter projects, their product descriptions, and the level of investment they attract.

The study’s authors found that the amount of money pledged increased when the product description emphasized either originality or utility — but dropped when both attributes were mentioned. The findings suggest that the crowd does not yet prize true innovation.

On a crowdfunding platform, investors back projects by pledging money (and get some kind of reward from the creator in turn — usually the product when it launches). On many platforms, if the total amount pledged surpasses the creator’s goal, the project gets funded by the crowdfunding platform; if not, the pledged funds are returned to the would-be investors. Product descriptions, therefore, are vital to the crowdfunding process: Potential backers base much of their decision on the claims made, through either text or video, on the project’s webpage.

The authors examined a data set of all projects on Kickstarter from its inception in April 2009 to February 2017, focusing on projects in the U.S., where the platform is based. The authors limited their analysis to products related to innovation in nine categories: apparel, apps, fashion, food, hardware, product design, tabletop games, technology, and video games.

For each product, the authors tabulated the number of times the words novel or useful and their synonyms were used in text descriptions and the audio of the project video.

A claim of novelty increased funding, on average, by about 200 percent, the authors found, compared with products that didn’t mention novelty. A claim of usefulness boosted funding by about 1,200 percent. The large difference between these two effects implies that people value the utility and function of a potential innovation more than they do its originality of uniqueness, which jibes with previous research.

But when creators promised both novelty and usefulness, funding for their projects decreased by 26 percent, on average, suggesting that the “crowd” does not view originality and utility as synergistic or worthy of financial backing.

The authors note that their findings held regardless of the choice of synonyms and the length of the product descriptions, as well as for both small and large projects. Similarly, it didn’t matter whether the projects were ultimately funded or not.

Why would consumers prefer innovative items in a purchasing context, but not in a crowdfunding setting? After all, just as with shopping, individuals on a crowdfunding platform are free to choose the product they want. And since Kickstarter is aimed at facilitating innovation, shouldn’t the platform attract even more backers who are actively seeking out truly innovative projects?

Why would consumers prefer innovative items in a purchasing context, but not in a crowdfunding setting?

The authors posit that the high degree of ambiguity surrounding crowdfunding might scare consumers away from supporting groundbreaking projects. In the typical shopping context, they point out, consumer regulations protect the buyer. But in crowdfunding, consumers may never receive the product. Even those products that reach fruition often fall behind schedule. Another study found that more than 75 percent of successfully funded Kickstarter projects are significantly delayed. While they wait, backers get neither refunds nor a product. And as a funded project evolves, its features may change without the consent of its backers.

When faced with uncertainty or risks about a product, consumers usually opt for more traditional items, research has shown. “We speculate that the higher level of uncertainty in the crowdfunding context drives backers to choose modest innovations and shy away from more extreme innovations, i.e., innovations that are high on both novelty and usefulness,” the authors write.

Source: “Does the Crowd Support Innovation? Innovation Claims and Success on Kickstarter,” by Anirban Mukherjee (Singapore Management University), Cathy L. Yang (HEC Paris), Ping Xiao (University of Technology Sydney), and Amitava Chattopadhyay (INSEAD), HEC Paris Research Paper No. MKG-2017-1220, Sept. 2017

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Does Online Crowdfunding Reward Actual Innovation?