PURSUING LEGITIMACY AND PROJECT SUCCESS:
AN EXPLORING RESEARCH IN DUTCH
REWARD-BASED CROWDFUNDING
Tsung Han Yu
10841415
23
thof September 2015
MSc. in Business Administration
Entrepreneurship and Management in the Creative Industries
University of Amsterdam
Faculty of Economics and Business
Statement of originality
This document is written by Tsung Han Yu who declares full
responsibility for the contents of this document.
I declare that the text and the work presented in this document is original
and that no sources other than those mentioned in the text and its
references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the
supervision of completion of the work, not for the contents.
Table of Contents
Abstract ... 4!
1. Introduction ... 5!
2. Theoretical Background ... 11!
2.1 Crowdfunding ... 11!
2.1.1 Crowdfunding and its Origin ... 11!
2.1.2 Crowdfunding trend and models ... 14!
2.1.3 Factors to Crowdfunding success ... 15!
2.1.4 Research on project legitimacy ... 16!
2.2. Legitimacy and crowdfunding ... 17!
2.2.1 The importance of legitimacy ... 18!
2.2.2 The concept of legitimacy ... 20!
2.3 Research question and legitimacy-building activities ... 21!
2.3.1 Institutional perspective ... 21!
2.3.2 Cultural entrepreneurship perspective ... 25!
3. Research design and data collection ... 27!
3.1 Research setting ... 27!
3.2 Research design and data collection ... 29!
3.3 Variables ... 31!
3.3.1 Dependent Variables ... 31!
3.3.2 Independent variables ... 31!
3.3.3 Control Variables ... 32!
4. Analysis and results ... 35!
4.1 Descriptive statistics ... 35!
4.2 Correlation table ... 37!
4.3 Regression analysis ... 39!
4.4 Robustness tests ... 41!
5. Discussion and conclusion ... 42!
5.1 Findings and discussion ... 42!
Abstract
The purpose of this study is to examine whether pursuing legitimacy of a project leads to crowdfunding project success. Crowdfunding is a novel way to finance initial capital especially for cultural ventures because it possesses the trait of open call, and thereby enabling entrepreneurs to draw valuable resources from the crowd. The factors of successful funding have been widely discussed in the literature; however, few studies have focused on the role of legitimacy of a crowdfunding project from institutional and cultural entrepreneurship perspectives. From an institutional perspective, entrepreneurs are relatively passive in the legitimation process by receiving third-party endorsements; on the other hand, entrepreneurs act more actively in constructing legitimacy from the view of cultural entrepreneurship. Both perspectives refer to legitimacy as a critical factor for new venture survival. Following this logic, we propose that pursuing crowdfunding project legitimacy would facilitate the crowdfunding project resource gathering process, which, in turn, leads to project success. To be specific, we examine a sample of 514 Dutch reward-based crowdfunding projects and propose four legitimacy-building activities, three of them are from institutional perspective and one is from cultural entrepreneurship perspective, to observe whether these actions are associated with project success. By conducting a binary regression, the results show that only by acting actively (frequent project updates) do the project founders facilitate project success. This finding is inline with the cultural entrepreneurship perspective, which implies that entrepreneurs can take control of legitimation process by adapting cultural tools for strategic purposes.
1. Introduction
Crowdfunding, to some extent, is an age-old concept. It originated from charitable fund raising, micro-finance, and crowdsourcing; however, it represents itself as a new fundraising mechanism in the online environment (Mollick, 2014; Agrawal et al., 2011; Belleflamme et al., 2014). With the development of crowdfunding, resource-insufficient individuals such as artists and cultural entrepreneurs have one more alternative to fund their ventures without traditional financial intermediaries (e.g. banks and venture capitalists) (Mollick, 2014). This major advantage elicits a trend of crowdfunding and facilitates a broader resource exchange between crowdfunding participants and society (Lambert & Schwienbacher, 2010). In 2014, the global crowdfunding market has experienced a huge growth, from $6.1 billion in 2013 to $16.2 billion; where as, the industry is set to more than double once again, on its way to raising $34.4 billion in 2015 (Massolution, 2015). The expanding market size of crowdfunding clearly shows that crowdfunding is an unstoppable fund-raising phenomenon worldwide.
The rising trend of crowdfunding can also be seen in the blossoming of crowdfunding platforms, particularly for arts and cultural industries (Bannerman, 2013). A series of crowdfunding platforms have devoted themselves for creative and cultural production. For example, Swarm of Angels was developed with a mission to help independent filmmaking1. Kickstarter2 and Indiegogo3 focus on funding for creative projects. For the music industry, SellaBand4, MyMajorCompany5, Artist-share6, Slicethepie7, and Bandstocks8 appeared, allowing fans to invest in or fund artists and bands to produce songs and albums (Bannerman, 2013). For the fashion industry, Cameesa9 and 99designs10 enables the crowd to join on-progress design 1 www.aswarmofangels.com 2 www.kickstarter.com 3 www.indiegogo.com 4 www.sellaband.com 5 www.mymajorcompany.com 6 www.artistshare.com 7 www.slicethepie.com 8 www.bandstocks.dloadshop.com 9 www.cameesa.com
projects and build up communities to discuss and share ideas. In France, The New Patrons11 aim to collect support for artists especially in the field of fine art, visual art, and performing art. In Sweden, Crowdculture12 is characterized as a platform combined with public (government) co-funding, funding for all kinds of cultural projects. In Asia, JD Finance13 and FlyingV14 are also targeting creative projects as well as projects related to social welfare. The developing of these platforms worldwide, again, appears to be a rapid growing trend of crowdfunding phenomenon. In general, there are four types of crowdfunding models. Lending-based and equity-based crowdfunding models reward their backers by financial returns such as interests and equity; whereas, patronage-based and reward-based models are characterized as non-financial returns for the supporter’s contribution. In this study, we are particularly interested in the reward-based model because it is the most popular model in crowdfunding (Massolution, 2015). Two of the world s largest platforms are both in this model, Kickstarter and Indiegogo. This model helps project founders (e.g. entrepreneurs or artists) to harness the resources from the backers and function as a market-driven fundraising mechanism (further explanations of four models and a crowdfunding definition are addressed in the next chapter). The rewards provided by the project enable the project founder to observe market acceptance and desirability. As a consequence, one of the main reasons for an entrepreneur to use reward-based crowdfunding is to examine a product/market fit (Gerber et al., 2012; Belleflamme et al., 2014). If a project can successfully raise massive monetary support from the crowd, it signals that there is a potential market for this product or service.
With the fast growing trend of crowdfunding; however, the research in this field is still in exploratory stage (Lambert & Schwienbacher, 2010; Agrawal et al., 2010; Belleflamme et al., 2014; Mollick, 2014; Etter et al., 2013). The dynamic of project success is to most of the researcher’s interests. Some research focused on the quality signals of crowdfunding projects 10 www.99designs.com 11 www.newpatrons.eu 12 www.crowdculture.se 13 www.z.jd.com 14 www.flyingv.cc
(Burtch et al., 2013; Mollick, 2014), some discuss the impact of social networks and social media (Mollick & Kuppuswamy, 2014; Agrawal et al., 2011). In addition, Etter et al. (2013), Greenberg et al. (2013), and Mitra (2014) examine predictors of project success in the early stage of a campaign. After reviewing those aforementioned studies, it is surprising that few of them mentioned project legitimacy in this entrepreneurial context. This leads to the notion that the legitimacy of a project has been to some extent under-explored.
We have noticed that research on crowdfunding legitimacy can be done merely by observing initial settings at the beginning of the campaign, such as project funding target, funding duration, visual pitch, and team composition (Frydrych et al., 2014). However, a crowdfunding campaign is a resource-assembling process, just like launching a new venture, asking resource for survival (Harrison, 2013; Marom & Sade, 2013; Mollick, 2014). Project founders actually can take some strategic moves to enhance their project legitimacy during the campaign (Suchman, 1995), such as providing frequent updates. In addition, gaining media coverage and endorsement by industrial experts would also enhance the perceived legitimacy. It is clear that the topic of legitimacy of a new venture is widely discussed in the field of entrepreneurship (Cohen & Dean, 2005; Zimmerman & Zeitz, 2002; Aldrich & Fiol, 1994); however, this topic remains undiscussed in the crowdfunding context.
“Legitimacy is a generalised perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs and definitions (Suchman, 1995, p. 574)”. It has been proven to be of crucial for new ventures seeking to collect initial capital (Aldrich & Fiol, 1994; Zimmerman & Zeitz, 2002). It is also important for artists and cultural entrepreneurs to demonstrate the value of their ideas (Lounsbury & Glynn, 2001). In other words, legitimacy could help news ventures to overcome their “liability of newness” and to increase their otherwise limited chances of survival (Singh et al., 1986). As a result, the absence of legitimacy in crowdfunding research brings it to our interest. In order to close this gap, we examine legitimacy of crowdfunding project from two perspectives; institutional perspective and cultural entrepreneurship perspective. These two perspectives share similar assumption that the consequences of legitimation are beneficial for new ventures (Überbacher, 2014). This is because both perspectives have been heavily influenced by Stinchcombe’s (1965) early argument that legitimacy mitigates the “liability of
newness” and facilitates the survival of new ventures. They both argue that judgments of a new venture’s legitimacy increase audiences’ willingness to trust and support the venture, thus enabling it to acquire necessary resources for survival.
Although institutional perspectives and cultural entrepreneurship perspectives have similarities with regard to the importance of legitimacy, a significant difference exists between them. The institutional perspective emphasizes how institutions influence audiences’ legitimacy judgments. It highlights the attributes of new ventures and their environments as a legitimation mechanism. This implies that audiences play a controlling role in the new venture legitimacy process (Überbacher, 2014). For example, Rindova and Pollock (2003) indicate that media coverage of a new firm facilitates its performance of initial public offerings (IPO). However, even though new firms try to pursue media endorsement by providing information to the press, the company-provided information appears to have less credibility to influence the audiences’ behaviors (Pollock & Rindova, 2003). It is clear that the new ventures are relatively passive in the legitimation process comparing to the audiences’ active selecting. New ventures have to be reviewed and scrutinized for certain attributes conforming to the audiences’ legitimacy criteria. If new venture attributes fit certain criteria of institutions on which audiences rely in their social judgment and resource allocation process, they are regarded as legitimate and “selected-in”, otherwise, they are lack of legitimacy, fail to acquire resources, and sooner-or-later perished. In other words, entrepreneurs are passively waiting to be accepted by the institutions and audiences. This shows the fact that institutional perspective is an audience-centered view, which entrepreneurs can hardly take actions to construct legitimacy, but only receiving legitimacy by conforming to legitimacy criteria.
In contrast, the cultural entrepreneurship perspective emphasizes the entrepreneurs’ ability to actively create, build up, and further legitimize new ventures. This view regards entrepreneurs as skillful cultural operators, adept at mobilizing “cultural tools” for strategic purposes (Weber & Dacin, 2011; Lounsbury & Glynn, 2001). Take entrepreneurial storytelling for example, it is a critical cultural tool for entrepreneurs in pursuit of legitimacy because it strives to make the unfamiliar familiar by framing the new venture in terms that are understandable (Lounsbury & Glynn, 2001). This is in line with Aldrich and Fiol (1994) who have stated that narratives make ventures are more compatible with widely established sets of activities. From this perspective,
the audiences - resource holders - are relatively passive in the legitimation process than the audiences from institutional view because they are passively response to entrepreneurial actions. Owing to this, the new venture could actually take control of the legitimation process. By implementing a series of legitimacy-building actions, new ventures could actively enhance their legitimacy. As a result, Überbacher (2014) referred to this perspective as actor-centered because new ventures could mobilize to shape the judgment of audiences as mechanisms of legitimation. In addition, compare to the audiences-centered perspective, the audiences of actor-centered perspective possess more fluid and broad legitimacy criteria (Überbacher, 2014). This fluidity and breath, in turn, enable entrepreneurs adjust legitimacy in their favor and “construct” their new ventures as legitimate for their audiences. For instance, Santos (2009) showed how entrepreneurs skillfully mobilized discursive analogies between the not-yet-legitimate online shopping domain and the more conventional and legitimate offline-shopping domain- for example, by evoking a clear image of “check out” & “shopping carts- in order to shape audiences’ understanding of the new domain and to enhance influence in the legitimation process. This shows that entrepreneurs could actively influence the legitimacy judgment by conducting strategic moves.
Although the audience-centered (institutional perspective) and actor-centered views (cultural entrepreneurship perspective) seem to be contradictory, they do not appear overly realistic in the light of anecdotal evidence about the new ventures’ strategic actions and audiences’ legitimacy judgment in the legitimation process. Instead, such evidence reveals “mutual influence” (Washburn & Bromiley, 2013) of audiences and actors, who are both relatively “active”; Audiences attempt to assess the (inherent) attributes of new ventures and entrepreneurs engage in a variety of actions to shape these assessments in their favor (Überbacher, 2014). In essence, the legitimacy of a new venture could be influenced from both dimensions. Following this logic, we propose 3 audience-centered hypotheses from the institutional perspective: expert endorsement, media endorsement, and the trait of company-founded projects, which could facilitate a crowdfunding projects resource gathering process. In addition, we propose the fourth hypothesis from an actor-centered view, stating that project updates act as entrepreneurial storytelling mechanisms in the crowdfunding context. This storytelling mechanism would have positive associations with constructing legitimacy, which in turn, can lead to project success.
The empirical setting of this study is the Dutch arts and cultural industry. We draw data from one of the most prominent crowdfunding platforms in the Netherland, Voordekunst. This platform enables artists and cultural entrepreneurs to raise initial capital from the crowd for their new ventures. The database from the Voordekunst provides a large number of samples (we examined 514 projects in our study) from which to draw conclusions in our study. In addition, Voordekunst employs several interacting features (such as revealing expert endorsement and instant updates of a project on its project profile page) to facilitate legitimacy- building and resource exchange. This allows us to further examine the interaction between legitimacy-building activities and project outcomes.
This study makes several contributions to the field of crowdfunding (venture finance) and organizational legitimacy. Firstly, we discuss the importance of legitimacy from institutional perspective as well as cultural entrepreneurship perspective. Both perspectives share a similar viewpoint that legitimacy is of crucial importance for the survival of new ventures because it fundamentally increases audiences’ willingness to trust and support the venture, enabling the venture to acquire valuable resources for its operation (Überbacher, 2014). Secondly, we further advance the discussion of the dynamics of project success in terms of legitimacy. Little research has been conducted in this field up to the date of this study. Thirdly, we focus on four particular sources of legitimacy and examine their effects on the project performance. Our findings show that conducting project updates are strongly associated with project legitimacy and project success. These results are in line with a cultural entrepreneurship perspective by arguing that the entrepreneur is able to mobilize legitimacy formation by conducting strategic moves. In practice, we reveal a more nuanced picture of legitimacy formation during rewards-based crowdfunding, shedding light for project founders to be more efficient in allocating valuable resources to assemble financial support.
This thesis is structured as follows: first, the research on the origins of crowdfunding and its traits is reviewed (Chapter 2.1). Second, the importance of legitimacy and our hypotheses are proposed (Chapter 2.2). Third, the research design and the methodology are described (Chapter 3). Fourth, the results are presented and discussed (Chapter 4) and finally the conclusion (Chapter 5).
2. Theoretical Background
In chapter 2, we will first review empirical literature on crowdfunding and develop our definition of crowdfunding for this research (Chapter 2.1). Secondly, we examine the concept of legitimacy interacting with new ventures and how it may work within crowdfunding (Chapter 2.2). Further, we propose our main research question and hypotheses for this study (Chapter 2.3).
2.1 Crowdfunding
In section 2.1.1 we introduce the concept of crowdfunding and its inherent characteristics from crowdsourcing. In addition, the trends of crowdfunding and its four major models are presented. Finally, the factors of crowdfunding project success followed by an existing research gap are revealed.
2.1.1 Crowdfunding and its origin
Since crowdfunding is a recent phenomenon, the literature of crowdfunding is still in the infant stage (Belleflamme et al., 2014). Recently, several exploratory studies have revealed a more comprehensive background for crowdfunding, particularly in regards to the field of venture finance (Rossi 2014; Pazowski & Czudec 2014; Lambert & Schwienbacher 2010). In order to parallel previous research on crowdfunding, we review the crowdfunding articles using the lens of venture capital and provide our point of view afterwards.
The term crowdfunding itself first appeared in 2006 and was discussed as a mechanism to raise venture capital from social networking (Lawton & Marom, 2010). Social networking is understood as the use of a digital platform (like Facebook) for the purposes of communicating between friends and family (Hampton & Wellman, 2003), which functions as important source of early-stage venture capital. However, the notion of raising support from social networks is not new. It is noted that the charitable fund-raising (Bremner, 1996) and micro-finance (Morduch, 1999) could be the origins of crowdfunding (Mollick, 2014; Frydrych et al., 2014). Charitable fund raising is collecting funding through voluntary donation; where as, micro-finance is the collection of investments for small business or individual entrepreneur who lacks access to traditional financial institutions. With the combination of characteristics of these two financial services, crowdfunding represents a new mechanism for entrepreneur to collect initial capital
through voluntary participation from the society.
Another similar mechanism- crowdsourcing - is also related to the birth of crowdfunding. “Crowdsourcing represents the act of a company or institution taking a function once performed by employees and outsourcing it to an undefined (and generally large) network of people in the form of an open call (Howe, 2006, p. 5).“ As Howe (2006) proposed, the essence of crowdsourcing is the use of an open call in order to collect support from a large group of people. The open call format can be understood as a public request asking for voluntary assistance. One of the benefits of the open call is the reduction of the production costs (Howe, 2006). For example, television shows15 may apply crowdsourcing to downsize their production fee. Another important benefit of the open call format is that it is a market-driven mechanism meaning that people are free to choose what project to support and because the crowdfunding supporters are autonomous. In addition, supporters could become prospective customers, so that potential customers’ needs and want could be developed into the project through their participation. It is clear that crowdfunding inherits the traits of crowdsourcing, drawing the financial support from the crowd either in form of donation or in exchange for some form of reward (Lambert and Schwienbacher, 2010). Crowdfunding helps resource-deficient entrepreneurs utilise the wisdom of crowds16 (Surowiecki, 2004) instead of professional investors or other traditional financial intermediaries to overcome capital gaps in the early stage of ventures (Belleflamme et al., 2014; Mollick, 2014; Pazowski & Czudec, 2014). Particularly after the economic recessions in 2008, because of a sharp fall in the availability of early stage financing from formal financial institutions, crowdfunding become a fast growing trend to raise initial capital (Harrison, 2013). It is important to note that the trait of the open call differentiates crowdfunding from traditional financial mechanisms. With the developments in information and communication technology
15 Television shows like America’s Funniest Home Videos crowdsource their material in order to reap huge financial
savings; An half-hour comedy show can cost close to $1 million, a cheap crowdsourced television production only costs a fraction of that (Howe, 2006b).
16 The wisdom of crowds refers to the aggregate intelligence, which means that it is a process of taking into account,
the collective opinion of a group of individuals rather than a single expert to answer a question (Surowiecki, 2005). As a result, the crowd can serve the same function as board of directors or external company consultants (Pazowski, 2014).
(ICT)17, crowdfunding facilitates broader resource exchange between crowdfunding participants and society (Lambert & Schwienbacher, 2010). For instance, the project founder could reach more invetors without geographical limitations by using the Internet. This lowers the dependency on traditional investment forms that act locally. In addition, the broader resource exchange is not limited to financial resources (although it may be the main purpose), while non-financial resources such as information, legitimacy, market visibility and knowledge can be facilitated through mutual interaction between participants. For example, the trait of open call helps crowdfunding participants to collect general perceptions (feedback) on a project, and thus, the desirability and appropriateness of the project would be revealed during the crowdfunding campaign. Owing to this, several researchers also regard crowdfunding as a marketing tool, enabling pre-sales and price discrimination18 for new products (Belleflamme et al., 2014).
Because of the newness of crowdfunding, there is no universal accepted definition of it. One frequent cited definition proposed by Mollick (2014, pp. 2), “crowdfunding refers to the efforts by entrepreneurial individuals and groups – cultural, social, and for-profit – to fund their ventures by drawing on relatively small contributions from a relatively large number of individuals using the internet, without standard financial intermediaries.” This definition focuses more on the purpose of crowdfunding (e.g. cultural, social, and for-profit) as well as the absence of traditional financial institutions; however, it is insufficient in a sense of the open call-exchanging valuable resources via ICT. Another definition proposed by Lambert and Schwienbacher (2010) better fits the current research. They regard crowdfunding as an open call, “essentially through the internet, for the provision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights (Lambert and Schwienbacher 2010, pp. 6)”. This definition reveals the inherit trait of open call from crowdsourcing, yet partially ignore the tendency of marketing tool and the exchange of non-financial resources from crowdfunding. As a result, we propose crowdfunding represents an open call, offering entrepreneurs a market-driven fundraising mechanism to assemble valuable
17 The development of information and communication technology (ICT) provides an interactive online environment
between crowdfunding participants. This technology includes Web 2.0, which is argued to be of crucial for crowdfunding (Belleflamme, 2014). Roughly speaking, Web 2.0 is a Web-as-participation-platform that facilitates interaction between users. It enables entrepreneur to easily reach networks of investors or consumers.
18 Price discrimination is an economic term referring to a firm tries to set two (or more) different prices in different
resources (both financial and non-financial) in the online environment.
2.1.2 Crowdfunding trend and models
This section identifies four basic crowdfunding models. As Mollick (2014) noted, four crowdfunding models are mainly different from the motivations of the crowdfunding participants. First of all, the patronage model, also called the donation-based model, regards funders as philanthropists, who expect no direct return for their donations. As a result, this model is relatively well-aligned with models of social entrepreneurship (Lehner, 2013). An example of this model is platform - Fundly19, which allows individuals and organizations to create an online fundraiser solely for the purpose of collecting donations.
Secondly, a lending-based model links founders and backers in a debtor and lender relationship. In this model, project backers (investors) prefer monetary rewards where they can receive fixed periodic income and expect repayment of principal (Mollick, 2014). It is a model more like peer-to-peer loans because individuals receive financial support directly from other individuals. Example of lending crowdfunding platforms are Prosper20 and Lend a Hand21.
Thirdly, an equity-based model creates an entrepreneur–investor (or stakeholder) relationship where project backers act as stakeholders participating the nascent venture and co-share the risk as well as profit of the project results (Mollick, 2014). This model makes crowdfunding more similar to traditional funding raising mechanism such as initial public offering (IPO). Owning to this, equity-based crowdfunding are often involved in complicated government regulations and limitations in the practice (Heminway & Hoffman, 2011). An example of this type is Australian Small Scale Offerings Board (ASSOB). This platform enables investors to browse small equity offerings of start-ups and to buy shares in these ventures.
The last model is reward-based crowdfunding. Project founders are characterised as creators, designers, or artists whereas project backers represent early customers or co-creators rather than
19 www.fundly.com 20 www.prosper.com 21 www.lendahand.net
stakeholders. Unlike lending or equity model, reward-based crowdfunding offers non-financial rewards in exchange for backers contribution (Mollick, 2014). These rewards are usually in a form of a product or service that would be produced/performed after the project is complete. A significant example of this type of platform is Kickstarter and Indiagogo. These platforms allow project founders to raise money by offering tangible and intangible rewards in return for financial support. Tangible rewards could be a T-shirt, CD, or postcard, while intangible rewards could be an experience or a service.
It should be noted that the four types of models are not mutually exclusive. More than not, these models overlap as projects may allow backers to achieve several different goals simultaneously. One crowdfunding project could have more than one type of rewards depending on the level of backer contributions. For example, reward-based model are often mixed with patronage one. The backers contribute within a minimum level receive no tangible rewards (e.g. a public Thank you ); however, rewards such as a product or service would be received if backers contribute to a certain level.
2.1.3 Factors to crowdfunding success
The last section for successful fundraising is represented by a product/service that's has reached a potential market; however, the factors that indicate whether the campaign is successful is still a question. Several studies related to factors of project success are presented. First, Mollick (2014) investigates the underlying dynamics of crowdfunding success by analysing 48,526 projects on Kickstarter and points out the quality signals could be important factors. In addition, he also observes that the potential of crowdfunding to overcome long-distance investment barriers is limited (Mollick, 2014). These results are in line with Agrawal et al. (2011), who examined the relationships between geographical limitation, social network and project success. They find that space (geographic distance) continues to matter and offline social networking impacts the shape patterns of crowdfunding interactivity (Agrawal et al., 2011).
Second, research by Etter et al. (2013) on Kickstarter proposes a model22 could predict project success with a relatively high accuracy in the early stage of a campaign. Third, Kuppuswamy and Bayus (2013) and Colombo et al. (2014) also examined funded projects listed on Kickstarter and showed that the effect of customers’ social media participation plays a key role in the success of a project. Fourth, the development of social interactions surrounding a given crowdfunding project, and the nature of the development process itself, may also be critical to the outcome of the crowdfunding effort (Burtch et al., 2013).
2.1.4 Research on project legitimacy
The previous section discussed the dynamics of crowdfunding success. Several factors are suggested to have positive association with better project performance. Some research focused on the quality signals of crowdfunding projects (Burtch et al., 2013; Mollick, 2014), some discuss the impact of social networks and social media (Agrawal et al., 2011). However, few of the research mentioned legitimacy as it relates to project success.
In one of the very few legitimacy-related crowdfunding works, Frydrych et al. (2014) examined how particular features of crowdfunding process influence organizational legitimacy and success in reward-based crowdfunding. From organizational perspective, they suggest that setting a modest and achievable (lower) funding target and (shorter) duration increases support for the project. This is because a high funding target would decrease project legitimacy without a convincing justification of the amount and use of funds; where as, a long funding period also decreases support for the project because it exposes an uncertain narrative about the project s future (Frydrych et al., 2014). This is supported by research illustrating that entrepreneurs having increased difficulties to effectively maintain and gather momentum for their projects the longer the fundraising period is (Ward & Ramachandran, 2010). For example, people probably need a sense of urgency to commit contribution to a project. Longer durations indicate less urgency, and encourage procrastination of contribution. Another explanation could be that long funding durations are a sign of lack of confidence (Mollick, 2014).
22
The model achieved by combining the time series of money pledged with related tweets. This research claims that the model can predict project success with 89% accuracy in the first 15% of the campaign run time.
In addition, Frydrych et al. (2014) illustrated an important element - visual pitch with a respect to project legitimacy and success. A visual pitch is a short video (in general, around 3 minutes) made by a project founder to introduce their new venture. From cultural entrepreneurial perspective, visual pitch functions as entrepreneurial storytelling (Lounsbury & Glynn, 2001), which enables the project founder to convince resource holders to commit a financial support. Thus, several previous studies regard visual pitches as quality signals because they demonstrate the commitment of project founders. As a result, research in crowdfunding often applies visual pitch as a controlling factor to predict project success (Mollick, 2014). However, as visual pitch appeared to develop into a crowdfunding standard, it becomes weakened in its controlling character to predict success in reward-based crowdfunding (Frydrych et al., 2014). But still, visual pitches can be seen as a powerful entrepreneurial narrative instrument to build up initial legitimacy in the crowdfunding context.
On the other hand, Frydrych et al. (2014) also noted that projects with pairs and teams or organizations demonstrate much higher success rates than projects with individuals. They apply the concept that the composition and characteristics of the founding team in entrepreneurial ventures play an important role for organizational legitimacy and resource assembly processes (Kotha & George, 2012; Zhao, Song, & Storm, 2013). The findings show that projects founded by pairs and teams demonstrate much higher success rates than projects with individuals. However, their data are too small to draw a conclusion in this part.
It is clear that research on project legitimacy is barely based on initial settings of the project, such as project funding target, funding duration, and visual pitch. However, crowdfunding campaign is similar to a new venture, dealing with liability of newness and suffering from resource insufficiency (Harrison, 2013; Marom & Sade, 2013; Mollick, 2014).
From this point of view, legitimacy is an essential factor to ease the problem (Suchman, 1995; Zimmerman & Zeitz, 2002) so that the legitimacy of a project needs further research.
2.2 Legitimacy and crowdfunding
In this section, we follow the research of Mollick (2014) in applying entrepreneurial literature into crowdfunding context in order to explain the importance of legitimacy (Chapter 2.2.1). Then
the concept of project legitimacy is defined (Chapter 2.2.2).
2.2.1 The importance of legitimacy
Legitimacy is a critical factor for organizational survival particularly for new ventures (Aldrich & Fiol, 1994; Lounsbury & Glynn, 2001; Zimmerman & Zeitz, 2002). Legitimacy is the general perception that the actions of an entity are desirable, proper or appropriate within our society (Suchman, 1995) (a detailed explanation is presented in the next section). It is of crucial for two reasons proposed below: demonstrating the value of entrepreneurial ideas and facilitating the resource assembly process.
Firstly, legitimacy helps entrepreneurs to demonstrate the value of their ideas (Lounsbury & Glynn, 2001; Delmar & Shane, 2004). The need to demonstrate the value of entrepreneurial ideas is because those ideas, more than often, are regarded as innovative and challenging the status quo (Aldrich & Fiol, 1994). Status quo can be understood as existing social values currently possessed by the public. As a result, people do not generally accept and take an entrepreneurial idea for granted once they encountered one. For example, when the gasoline-powered automobile was first proposed in the late 19th century, many people believed that this product would never replace the horse and buggy; If anything would replace that mode of transportation, it would be the electric or steam powered automobile (Kirsch, 2000; Rao, 1994). However, the fact is that gasoline-powered automobile became the mainstream and dominated the market in the late 20th century. This example shows people initially suspect innovative ideas so that they are less likely to invest in a new venture. However, legitimacy could overcome potential investors’ resistance as guardians of the status quo. By convincing potential investors that the venture (or the idea) is legitimate - that is, desirable, proper or appropriate within our society - the entrepreneur provides explanations for a new venture and makes their ideas more understandable and valuable (Lounsbury & Glynn, 2001).
Secondly, legitimacy is described as an antidote for the liability of newness (Stinchcombe, 1965). Liability of newness is a problem that most new ventures encounter. It refers to a phenomenon in which newly founded organizations have a higher propensity to fail than mature organizations (Stinchcombe, 1965). Mature organizations need not cope with liability of newness because they are characterised by standard operation routines as well as established internal/external
networking, and therefore, are considered to be more stable than immature organizations (Hannan & Freeman, 1984). The liability of newness could be explained mainly from two aspects: external and internal (Singh et al., 1986; Falke & Sch ne, 2014). Internal liability of newness could be the absence of formal organizational routines, lack of knowledge, high cost of training new employees, undeveloped trust between organization members (Falke & Sch ne, 2014); where as, external liability of newness could be understood as unstable relationships to suppliers, customers, distributors and investors, barriers to entry in terms of brand recognition and market acceptance, and challenges to obtain capital from potential investors (Falke & Sch ne, 2014). Because of internal and external liability of newness, new ventures have a relatively high mortality rate than established organizations.
However, legitimacy would help a new venture to mitigate the liability of newness by facilitating resource acquisition (Zimmerman & Zeitz, 2002). Legitimacy could facilitate resource such as capital, knowledge (technology), human resource (managers and competent employees), market (customer) and networks (supplier, distributors, and other strategic alliance) for a new venture because it increases audiences willingness to trust and support the venture, thus enabling a new venture to acquire the scarce resources needed for its operation (Aldrich & Fiol, 1994; Harman & Freeman, 1989; berbacher, 2014). For instance, Ruef and Scott (1998) examined the survival of 143 hospitals and proved that legitimacy provides notable improvements in organizational survival chances. This could be explained by noting that a hospital enhances its legitimacy by conforming to regulations and various environments (e.g. changing in prescriptions and technology), which leads to a higher chance to be funded when the state funding became highly centralized. For another example, Karlsson and Honig (2009) research on the importance of business plan. Business plans are often taken for granted for investors to examine the preparedness and quality of new ventures (Delmar & Shane, 2003). And Karlsson and Honig (2009) found that writing a business plan provides new ventures with an umbrella of legitimacy, leading to increased trust and willingness to invest of investors. Although research on the relationship between business plans and performance is open to doubt (Ford et al. 2003; Delmar & Shane 2004), it is clear that legitimacy help a new venture by facilitating resource acquisition and survival.
In sum, the entrepreneurial ideas are not generally accepted and taken-for-granted in our society; at the same time, the liability of newness would hinder a venture s resource gathering process and lead to a high mortality in ventures. However, legitimacy can demonstrate the value of innovative ideas and mitigate the liability of newness. As a result, legitimacy is a critical factor for organizational survival.
2.2.2 The concept of legitimacy
In the last section, we have discussed the importance of legitimacy. In this section, we further explain the concept of legitimacy and its application on crowdfunding.
The origin of legitimacy was proposed by Weber (1968) as conformity with a set of rules that actors accept either because they feel obliged to do so or because the rules are thought to constitute an appropriate action. Parsons (1960) subsequently suggested that legitimacy exists when there is widespread consensus on the desirability or appropriateness of norms, values, beliefs and meanings. These norms, values, beliefs and meanings prescript and proscribe an entity (a person or an organization) what should and should not be (Homans, 1974).
One of the most frequently cited definitions of legitimacy is Suchman’s (1995) conception: “Legitimacy is a generalised perception or assumption that the actions of an entity are desirable,
proper or appropriate within some socially constructed system of norms, values, beliefs and definitions (Suchman, 1995, p. 574)”. This definition inherits the concepts of Weber (1968) and
Parsons (1960) revealing the core value of legitimacy. That is, meeting and adhering to the expectations of a social system’s norms, values, rules, and meanings (Hirsch and Andrews, 1986; Parsons, 1960). A social system can be understood as an interacting collectivity (e.g. a group of people or organizations) that has ongoing patterns of scripts, rules, norms, values, and models (Zimmerman & Zeitz, 2002). In the crowdfunding context, social system refers to all kinds of crowdfunding participants including supporters, project founders, and platforms. We apply for Suchman’s definition and propose that the legitimacy of a project (project legitimacy) is the extent to which crowdfunding participants perceive a project adhering to their expectations. Therefore, a legitimate project can be understood as a project meeting and adhering to the expectations of the crowdfunding participants’ norms, values, rules, and meanings, so that this project is regarded as desirable, appropriate, and proper and generally accepted by the society
(the crowd).
2.3 Research question and legitimacy-building activities
In the previous section we have introduced project legitimacy in the crowdfunding context and discussed the importance of legitimacy to a new venture. These previous works help us to form our main research question: Does pursuing project legitimacy lead to crowdfunding project success? If so, how can a project efficiently pursue legitimacy and facilitate crowdfunding resource gathering process, leading to project success?
In this section, we adopt the research of berbacher (2014), who stated that legitimacy of a project could be enhanced actively by conducting strategic moves from a cultural entrepreneurship perspective and passively by receiving legitimacy judgment from the audiences via institutional perspective. We propose four legitimacy-building activities, three from an institutional perspective (Chapter 2.3.1) and one from a cultural entrepreneurship perspective (Chapter 2.3.2), to examine how they interact with project success. Further data collection and research design will be presented in the next chapter (chapter 3).
2.3.1 Institutional perspective
The institutional perspective is an audiences-centered perspective, which examines how institutions influence audiences legitimacy judgments ( berbacher, 2014). Institutional studies generally explore the effect of two types of institutions on NV legitimacy; evaluative institutions and cognitive institutions. Evaluative institutions include powerful institutional organizations such as governmental authorities, financial analysts, industry associations, and media organizations, which provide professional information to the audiences; where as, cognitive institutions are widespread and taken-for-granted beliefs among audiences about what constitutes standard or normal organizational behavior within a given field of activity (Meyer & Rowan, 1977). The former influence the legitimacy formation because the audiences regard evaluative institutions as authorities, which can be rely on, when making their legitimacy judgments and resource allocation decisions. On the other hand, the latter have impact on perceived legitimacy because cognitive institutions set standards or expectations about what should and should not be. For example, new ventures should have at least, a business plan (Delmar & Shane, 2004). Both
types of institutions have impacts on audiences legitimacy judgments.
Following this logic, we examine on two types of endorsements from evaluative institutions- expert endorsement and media endorsement. Since an endorsement is a favorable public opinion given by one to another, which serves as a vote of confidence in the endorsed party (Zimmerman & Zeitz, 2002), expert endorsement could be considered as a favorable public opinion given by an expert. An expert could be understood as an entity (e.g. an organization or an individual) with knowledge, skills, or experience in a particular field (Biswas et al., 2006). A venture capital focusing on investing technology firm, or an organization particular for arts and cultural fundraising are examples of expert. In addition, expert presents as a source of valid assertions or one who knows the correct standard on an issue (Biswas et al. 2006). For example, Davila, Foster, and Gupta (2003) state that start-ups could affiliate themselves with venture capitalists in order to signal the unobservable characteristics of their ventures. Unobservable characteristics such as implicit quality and potential value of the venture would be revealed by venture capital, influencing the general perception on the endorsed organization (Davila et al., 2003).
From the institutional perspective, expert endorsements are often viewed as quality assessments, which influence the audiences’ perceptions on things particular when facing uncertainty (Biswas et al., 2006). In crowdfunding context, the potential backers are often facing huge uncertainty because the founders only propose an initial idea of the venture and reveal something as quality signals for future project. In addition, the project rewards are often in a form of cultural good, which quality is hard to be measured (Peltoniemi, 2014). This uncertainty in future project quality and rewards tends to deter supporter from contribution to project (Gerber & Hui, 2013). However, quality assessment conducted by expert helps crowdfunding ventures to reveal its unobservable value and quality for the crowd. People tend to trust the ability of prominent organizations (such as Mondriaan Fonds) to discern quality under conditions of uncertainty (Biswas et al., 2006). For example, Stuart et al. (1999) discussed about that inter-organizational endorsements act as quality assessments because prominent organizations are viewed as experts at the due diligence process (at least in the domain in which they have garnered recognition). So that endorsed new ventures reveal their potential (unobservable) quality and, in turn, lead to better performances in the market of initial public offering (IPO) (Stuart et al., 1999). As a result,
we argue that expert endorsement would increase the perception of project quality and legitimacy, enhancing potential backers’ willingness to contribute, thus leading to a higher chance to project success. This argument leads to our first hypothesis:
H1: For crowdfunding projects, expert endorsement would have a strong association with project success.
In addition to expert endorsement, several researchers have suggested that the media plays an important role in legitimation processes (Baum & Powell, 1995; Elsbach, 1994; Pollock & Rindova, 2003). Some scholars argued that media coverage reflects public evaluation (as generalised perception we previous mentioned in the definition of legitimacy) and therefore provides a measure of organizational legitimacy (Baum and Powell, 1995), while others suggested that the media affects perceptions of legitimacy and thus is an helpful tool that firms need to manage strategically in order to build up legitimacy (Fombrun, 1996). This study applies to the latter notion arguing that media coverage would affects the investors perception of a new venture. For example, Pollock and Rindova (2003) showed that media coverage would influence the investor choice about IPO (initial public offering) firms. Their finding suggests that the media, through its ability to expose investors to companies, can increase both the financial capital a firm captures from its IPO and the demand for its shares. They view the media as a "propagator" of legitimacy, which means that some level of legitimacy may be necessary for a firm to be considered newsworthy, and then media coverage further legitimates the firm. Another example is that something new and emergent in a relatively young industry may take advantage of media coverage in order to gain legitimacy because media plays a role of market sense-maker in defining new markets or categories (Kennedy, 2008).
In the crowdfunding context, we follow a similar rationale, proposing media coverage as a "propagator" of legitimacy; Certain levels of legitimacy may be necessary for a crowdfunding project to be considered newsworthy, and then the media further legitimates projects. The media increase the project legitimacy by directing public attention to those it selects for coverage, therefore increasing the public's exposure to the project and at the same time, influencing the perceptions of it (Pollock & Rindova, 2003). By framing positive descriptions, media coverage influences the ways that people interpret and evaluate information about projects (Fombrun,
1996). Thus, we argue that media coverage would enhance the project legitimacy by influencing potential backers perceptions and increasing the visibility of project, thus leading to a better performance.
H2: For crowdfunding projects, media coverage would have a strong association with project success.
Above are two types of endorsement from evaluation institutions; however, we propose the third factor that would influence legitimacy formation from cognitive institutions. Cognitive institutions are widespread and taken-for-granted beliefs among people about expectations and standards within a given field of activity (Meyer & Rowan, 1977). In the field of institutional theory, one important strategy by which organizations generate legitimacy is through conformity to commonly held rules, norms and beliefs (Suchman, 1995), such as adherence to legal authority (e.g. the government). Delmar and Shane (2004) examine 223 Swedish new ventures for more than 30 months and argue that establishing a legal entity is of crucial for building legitimacy in the early stage. This is because establishing a legal entity demonstrates conformity to the government’s rules and norms. A series of rules must be adhered to for being a legal entity, such as registering with tax authorities, and obtaining any necessary permissions from regulatory agencies and localities when they begin their operations (Delmar & Shane, 2004). As a result, establishing (being) a legal entity represents the conformity to commonly held rules, norms and beliefs, and thus, increases the legitimacy.
Follow the same logic, we argue that project founded by established legal entity (such as registered organization or company; hereafter, company-founded project) would be perceived to be more legitimate than project created by individuals. This is because a project proposed by an established legal entity demonstrates adherence to the norms of legal authority and provides a basis for the crowd to perceive legitimacy of the project. In addition, a company-founded project may possess established external networks, which facilitates project success. For example, a product design company could ask for co-creation of the project with its current distributor and supplier, which would involve more people in the project. Further, a previous product or prototype of the rewards could be demonstrated to the crowd, acting as a proof of project quality, and thus increase the potential backers willingness to contribute, leading to a higher probability
of project success.
H3: For crowdfunding projects, company-founded projects would have a strong association with project success.
2.3.2 Cultural entrepreneurship perspective
A cultural entrepreneurship perspective is an actor-centered perspective, which regards the entrepreneur as a skillful cultural operator, having the ability to utilize cultural tools for actively constructing legitimacy. One of the most frequently discussed cultural tools is entrepreneurial storytelling (Aldrich, 1999; Lounsbury & Glynn, 2001). Entrepreneurial storytelling is a mechanism to shape interpretations of the nature and potential of new ventures to those who may supply needed resources (Lounsbury & Glynn, 2001). Entrepreneurial stories refer to verbal expression or written language in order to communicate with potential resources holders that the new venture has its future (Martin et al., 1983). In Lounsbury and Glynn’s article (2001), they proposed that “entrepreneurial storytelling will have its most significant impact on enabling capital acquisition… of new venture formation, by making the unfamiliar new enterprise more familiar, understandable, acceptable…(pp.550)”. They further explained that such stories help entrepreneurs to make their venture comprehensible and meaningful in an effort to confront part of liability of newness (Lounsbury & Glynn, 2001). As a result, by creating encompassing stories, the initiation, idea, knowledge, and vision of an entrepreneur could be disclosed and explained to the potential resources holders, enhancing the legitimacy of a project.
In the crowdfunding context, we propose that conducting project updates functions as entrepreneurial storytelling increasing the project legitimacy, for two reasons. First of all, project updates make the unfamiliar new project more familiar, understandable, and acceptable to the crowd (Xu et al., 2014). A crowdfunding project update is designed to draw the crowd’s attention and is intended to keep potential backers aware of a campaign’s progress (Xu et al., 2014). The content of a project update often includes project news, a milestone progress, or even a siren for final sprint of the campaign. (Appendix one shows the example of project update.) Project updates are not obligated during the crowdfunding campaign; however, they provide valuable information about project progress. This information about project progress could reveal whether a project is still on the track as previously planned, and whether necessary changes had been
made by the project founder. By reviewing project updates, potential backers could understand more about the project reliability and internal consistency, which makes projects more familiar and acceptable to them.
Secondly, the legitimacy of new venture is increased by the degree to which founders demonstrate their commitment to it (Aldrich, 1999; Delmar & Shane, 2004). Where as, frequent project update could be one of the best ways to demonstrate the founder’s commitment because it takes time and effort to inform potential backers what is the current situation of the project. By devoting scarce time and efforts on project updates, project founder could fill the void of previous experience and track records, increasing the acceptance of the project, and thus leading to project success.
In sum, we argue that project updates act in a way similar to storytelling (Lounsbury & Glynn, 2001), making the unfamiliar new project more familiar, understandable, acceptable to the crowd, facilitating the resource gathering process of a campaign, and demonstrating of internal consistency as well as founder’s commitment of a project, so that project updates would increase the project’s legitimacy, in turn, leading to project success.
H4: For crowdfunding projects, project updates would have a strong association with project success.
3. Research design and data collection
3.1 Research setting
In this section we first introduce the chosen platform, Voordekunst, and then discuss the research design.
“(Dutch) Doe het voor de kunst” is the mission statement of Voordekunst, which in English is “Do it for the art.” Voordekunst is a prominent crowdfunding platform dedicated to art and the culture industry in the Netherlands. Roy Cremers initiated it in 2009 within the 'Amsterdamse Fonds voor de Kunsten' (AFK). In 2010, Voordekunst first launched its online platform to help artists and cultural entrepreneurs collect financial support from the public. In 2011, with grants from the Ministry of Culture, Voordekunst separated from AFK and became an independent foundation. To date (April of 2015), Voordekunst has successfully helped fund 1,200 projects, with over 6.3 million euro collected and more than 65,000 donors. It is now the largest arts and cultural crowdfunding platform in the Netherlands.
Voordekunst aims to connect the crowd with artists and cultural entrepreneurs (project founders). The slogan “For the art.” encourages people to fund a project, just for the art, without expecting any financial returns. Voordekunst refers to artists who delivery art and cultural goods as project founders; individuals that contribute to a project are donors (as opposed to investors) who contribute without pecuniary motivations because there are no monetary rewards on this platform. In this study, we follow the previous research on Kickstarter (Mollick, 2014) and use the term “backers” to represent donors on the Voordekunst.
At the time of our research, the Voordekunst website worked as follows. Project founders set up a profile page on Voordekunst, where they can include narratives, a film (obligatory), a photo, bio, links, blog postings, stories, or a prototype of their projects. Then the founder set-up the funding target and establish a time period for this crowdfunding campaign. During the campaign, potential backers can contribute to the project, but the contribution (money) cannot be accessed by the founder until the end of the campaign and only if the project was a success.
The title of the project, founder of the project, endorser, current funding percentage, current funding amount, funding target, and remaining time are displayed on the project profile page.
Further details such as the number of updates, the number of current donors, and project feedbacks are also revealed when click on the profile page. Example of how project profile page looks like shows in figure 1. (For a more comprehensible understanding about the project profile page, please refer to Voordekunst website23.)
Figure 1- Example of project profile on Voordekunst
Project founders on the crowdfunding platform are actually facing many of the same financing challenges as first-time entrepreneurs in other settings (Agrawal et al., 2011). In order to facilitate the funding process, the platform of Voordekunst is designed with information and communication technology (ICT) features that enable project founders to conduct a range of activities such as demonstrating third-party endorsement, presenting project updates, revealing the founder profile, and enclosing the links to media coverage. These activities help project founders to market their ventures, build up the legitimacy of a project, and communicate directly with current and potential backers.
On the other hand, potential backers on Voordekunst may search on the website, browse projects profile page, learn about projects that interest them, and decide whether to contribute on a specific project to make it realized. In general, potential backers will evaluate the quality of project or focus on some type of rewards, product, service, or performance (Mollick, 2013). One of the most important things needing to be mentioned is that project founders are actually competing for valuable resources (financing) from those potential backers on the platform. Even philanthropically motivated individuals could allocate scarce resources to the project if it interested them. However, the motivations of Voordekunst backers are various and beyond this research.
As the largest crowdfunding platform for arts and cultural industries, Voordekunst not only provides an online platform for crowdfunding participants, but also plays a role as consultancy, helping artists and cultural entrepreneurs to launch a crowdfunding campaign. Voordekunst provides courses and workshops for individuals who are interesting in being a project founder. In addition, Voordekunst offers lectures to firms and organizations whoever plan to launce a project. Most important of all, Voordekunst has an establish network- a number of strategic alliances. These alliances would facilitate crowdfunding process by providing artistic evaluation, public endorsement, as well as substantial finance support. For example, Amsterdam Fund for the Art would endorse a project as a signal to present that the project has at least certain level of artistic value and an Amsterdam interest.
3.2 Research design and data collection
This study seeks to examine the relationship between legitimacy-building activities with project success in the crowdfunding context. We conduct empirical research (Mollick, 2014) applying an explorative empirical research method. This method is appropriate for an emerging topic in the evolving field of entrepreneurship (Aldrich & Baker, 1997), as this initial data can serve as a helpful base for developing future theory (Eisenhardt, 1989). We analysed four legitimacy-building activities effects on project legitimacy and project success. We present data that have been subject to statistical analysis to validate our hypothesis. Then, we discuss the issues arising out of the results from an organizational legitimacy perspective triangulating with existing theory.
We used a web data extraction method to capture detailed data from the Voordekunst website, similar to other crowdfunding studies (Mollick 2014; Greenberg et al., 2013; Agrawal et al., 2011). Web data extraction facilitates the collection of relatively large data-set with high levels of data validity because the site is in active use and the data is generated specifically for web-based transmission (Kosala & Blockeel, 2000). We were able to capture activities on projects listed on Voordekunst since it was founded. This data-set allows us to explore Voordekunst s diversity and enables us to generalise our findings to the Voordekunst population. By collecting variables such as the project-funding target, number of backers, and other project-related data we are able to provide a first attempt to study entrepreneurial practices in the development of organizational legitimacy and capital assembly in reward-based crowdfunding. In the initial set, 2,999 projects were in the database and we omitted non-approved and non-active projects which were cancelled before starting or only for system testing thus 1,432 successfully-launched projects in our data remains. Then we limited our sample to projects within the period of 2014 for several reasons. First, we eliminate concerns about market perception, visibility and credibility of the Voordekunst between an established crowdfunding platform nowadays and the newly launched platform four years ago. Second, several important strategic partners of the Voordekunst have joined in 2013, limiting samples in 2014 increases the internal consistency. For example, we notice that one of the most prominent visual art and cultural heritage funding institutions in The Netherlands, Mondriaan Fund24, has become a strategic partner of Voordekunst since 2013, and begun to public support artistic projects on the Voordekunst. Other important funding institutions such as VSB Fund25 (Verenigde Spaarbank Fund), Keunstwurk26 Friesland and Gelderland also have become strategic partners of Voordekunst one after another at the end of 2013. These institutions provide endorsements and financial support for specific projects on the Voordekunst. However, before Voordekunst forming strategic partners with these endorsers, projects have no public endorsement by them. Taking a period of 2014 increases the consistency of samples. Third, the crowdfunding market is still in a fast-growing pace27 so that keeping our sample in an
24 www.mondriaanfonds.nl 25 www.vsbfonds.nl 26 www.keunstwurk.nl
academic year ensures projects were launched in a similar market condition. As a result, we limited of sample during 2014, and a final sample of 514 observations remained in our study.
3.3 Variables
Our study analyzes the effect of legitimacy-building activities on the reward-based crowdfunding project success. All the variables used in the analysis are defined in this section. Our criteria to include variables in our specifications are based on empirical research (Frydrych et al., 2014) and our hypotheses —namely the four legitimacy-building activities in crowdfunding context.
3.3.1 Dependent variables
Project success. Within Voordekunst, the condition of project success applies to an AON (All-or-Nothing) mechanism, which is similar to most of the crowdfunding campaigns on any other platforms (Wash & Solomon, 2014). Once the collected funding of a project meets its funding target during the campaign, it is regarded as a successfully funded project, namely project success. However, an additional condition of project success applies on the Voordekunst. That is, if the pledged amount has reached a certain amount (usually more than 80% of a funding target, but not yet 100%) during the campaign, the project founder could discuss with Voordekunst and modify the funding target to a lower one (or an already-reached amount), so that the project would sooner or later succeed. This type of project success is a conditional success, and must be approved by Voordekunst, meeting several criteria such as the pledged money is sufficient for conducting the basic project and the project founders have the credibility to conduct the project with appropriate quality. In our sample, there are only 5% of projects meet this conditional project success (N=27; average funding percentage = 83.6%). Although there are two conditions for a project to be a success, we treat these two conditions as one in our analysis because they lead to the same consequence that the project founder was able to collect money pledged in the campaign and the project can be realized owing to the financial support.
3.3.2 Independent variables
1. Expert endorsement. This variable is a dummy variable, where dummy =”1” if a million) is almost twice as much as 2013 (€32 million euro). www.douwenkoren.nl
