To what extent is a successful reward-based crowdfunding campaign a guarantee for a successful business venture? : The role of outside funding, product delivery, staff increase and backers satisfaction

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To what extent is a successful reward-based crowdfunding campaign a

guarantee for a successful business venture? The role of outside funding,

product delivery, staff increase and backers satisfaction.

- A comparative case study of twelve Kickstarter projects -

MSc. Business Administration, specialization Entrepreneurship and Innovation Amsterdam Business School, University of Amsterdam

Student Susan van Dueren den Hollander

Student number 11923555

Date of submission 22/06/2018 | Final version

Supervisor dhr. dr. G.T. Vinig

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Statement of originality

This document is written by student Susan van Dueren den Hollander who declares to take full respon-sibility 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.

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Table of figures and tables

Table 1 Financing rounds in the early life of a company (Linde et al., 2000 & Schwienbacher &

Larralde, 2010) ... 13

Table 2 Types of entrepreneurial finance investors (Schwienbacher and Larralde, 2010) ... 14

Table 3 Crowdfunding forms (Collins & Pierrakis, 2012) ... 17

Table 4 Indicators for success in terms of survival and profitability ... 40

Table 5 Success of the companies in survival and profitability ... 41

Table 6 positive or negative contribution of Kickstarter in attracting outside investors ... 42

Table 7 Experienced positive or negative contribution of Kickstarter to product delivery ... 44

Table 8 Experienced positive or negative contribution of Kickstarter in attracting employees ... 46

Table 9 Experienced positive or negative contribution of Kickstarter in attracting and keeping satisfied backers ... 48

Tabel 10 Comparative cross-case contribution matrix ... 53

Figure 1 Start-up financing cycle (Gromov, 1995) ... 12

Figure 2 Role crowdfunding in the financial market (Lasrado & Lugmayr, 2013) ... 16

Figure 3 Conceptual Model ... 31

Figure 4 Contribution of other factors to business success after the Kickstarter campaign ... 52

Figure 5 Results proposition analysis ... 54

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Acknowledgments

In front of you lies my master’s thesis, which symbolizes the end of my career as a student. After my Bachelor Personeelwetenschappen at Tilburg University, I will be proud to graduate from the

Amsterdam Business School of the University of Amsterdam.

I would like to take the opportunity to thank a few people who have lend a hand to finalize this

thesis. Firstly, I would like to thank my supervisor Tsvi Vinig, who has encouraged me to raise

this thesis to a higher academic level. I would also like to thank all the interviewees who, despite

their busy schedules, have been so kind to make time available for me. I really enjoyed

conduct-ing the interviews and even got inspired by their entrepreneurial mindset and drive.

In particular I want to thank Lotte Vink and Kasper Brandi Petersen for helping me to find extra

respondents, it is highly appreciated. And a special thanks to Hans Doddema and Madelon Keij

for their grammar checks and constructive feedback. Last but not least, a big thanks to my dear

parents, sisters and friends who have supported me mentally, kept me grounded during the process and ‘forced’ me to relax from time to time .

Writing these 148 pages has been an interesting process, therefore I hope that this final thesis will

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Abstract

Aim:. The aim of this research was to investigate to what extent a successful reward-based crowd-funding campaign is a guarantee for a successful business venture; within this relationship the effect is estimated of outside funding, product delivery, staff increase and backers’ satisfaction.

Methodology. A comparative case study of twelve successful Dutch Kickstarter projects has been conducted to empirically test five propositions. Data is collected via semi-structured interviews.

Contribution. To date, a lot of research is conducted on motives and success factors of reward-based crowdfunding. However, no peer reviewed research has been done whether a successful reward-based crowdfunding campaign is related to successfully creating a business venture. This research contributes to the existing literature by providing data on this matter.

Results. It is shown in this research that launching a successful campaign is no guarantee for be-coming a successful business venture, but such a campaign contributes to such success: as a result of a successful campaign, a founder is more likely to attract outside funding and his company becomes more interesting to work for. The satisfaction of backers is positively related with the success of a venture. However, there is no direct relationship between delay in product delivery and the degree to which a project is overfunded. Product delay is due to insufficient stock and a lack of preparation in logistics. By communicating openly, this delay does not affect the satisfac-tion of backers.

Research implications and limitations: Theoretical and managerial implications are provided. The limitations of this study are presented, which may help scholars in future research.

Practical implications: This study should be of interest to analytical and empirical researchers in entrepreneurial finance, as well as entrepreneurs who are preparing to use reward-based crowd-funding. These entrepreneurs could take advantage of this research by noticing that running a suc-cessful business requires other qualities than running a sucsuc-cessful campaign. Full dedication, well-arranged networks and open communication with backers and customers is required.

Keywords. Entrepreneurial finance. Reward-based crowdfunding. Kickstarter. Business success. Outside investors. Product delivery. Staff increase. Backers’ satisfaction.

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1. Introduction

A question that is often asked is why some new business ventures fail, while others succeed?

Suc-cessfully creating a new innovative venture is challenging and is often a process full of difficulties

and failures (Reynolds and Miller, 1992; Van de Ven, 1992; Venkataraman, Van de Ven,

Buck-eye, & Hudsonet al., 1990). According to Headd (2003), new business failure rates over the first

two years of operations might be as high as 30%.

However, before the eventual success or failure of a new venture, the venture first needs

access to financial resources. This is fundamental to reach sustainable economic growth and to

address structural issues. Raising capital for innovation projects is a big challenge for

entrepre-neurs and small- and medium sized enterprises (Bradford, 2012; Kortum & Lemer, 2000). Beck

and Demirguc-Kunt (2006) illustrate that innovative financing instruments can help facilitate

small ventures’ access to finance. A young business needs money in order to finance the initial

stages of research, the product development phase and the marketing expenses. Even though

ac-cess to financing has a beneficial impact on business start-ups, which contributes to the economic

growth, raising outside capital still remains difficult for small ventures. This is called the ‘funding gap’ between small, young businesses, start-ups and the providers of financial resources due to asymmetric or imperfect information between the two parties on the potential viability and

profit-ability of a venture (Lam, 2010).

Crowdfunding is a relatively new way of financing innovation projects by raising money

via the internet. It represents its own unique category of raising funds, facilitated by a growing

number of Internet sites devoted to this topic. This way of financing is a solution for small, young

ventures to overcome funding gaps. Originally, the term crowdfunding is derived from the

broad-er concept of crowdsourcing, which refbroad-ers to using the ‘crowd’ to gain ideas, feedback and

solu-tions to develop corporate activities (Belleflamme, Lambert, & Schwienbacher, 2014). Mollick

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indi-9 viduals 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 (p.2)”. The people who fund the ventures are called funders or

backers.

One of the four models of crowdfunding is reward-based crowdfunding. In this approach,

the most dominant form at present is that the backers receive a reward for their contribution to a

project. Research implies that the reward-based crowdfunding is likely to be more successful than

donation-, lending- and equity-based crowdfunding (Belleflamme, Lambert, & Schwienbacher,

2013). Due to its popularity and success, this research focuses on reward-based crowdfunding. In today’s collaborative economy, crowdfunding is one of the standouts for growth. 99 million US$ were generated by crowdfunding on a single reward-based crowdfunding website in 2011

(https://www.kickstarter.com/). This amount has more than quadrupled in three years, up to 529

million US$ in 2014. Kickstarter is an American global reward-based crowdfunding platform. To

date, $ 3,726,254,772 has been pledged to Kickstarter projects. 14,766,372 backers from almost every country helped to successfully fund 145,289 Kickstarter projects (Kickstarter, 2018). Crowdfunding consists of two different major phases, the raise of capital and the implementation

of the project. In other words, the success of crowdfunding involves two dimensions: whether the

crowdfunding project reaches its financial goal, and whether the entrepreneur implements the

project successfully. Research on the first dimension investigates the determinants of

crowdfund-ing performance in raiscrowdfund-ing capital (Lambert & Schwienbacher, 2010; Mollick, 2014). The second

dimension has attracted little attention from scholars. Mollick (2014) found, in an independent

survey of nearly 500,000 Kickstarter backers, that the extent to which a project is overfunded

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10 The aim of this research is to establish both scientific and practical relevance. Concerning

scientific relevance, Mollick (2014) states: “One of the unanswered questions about the

crowd-funding model is whether successful crowdcrowd-funding leads to the successful development of goods

and services, and potentially, ongoing ventures (P.11)”. Besides his study, there is only one study

that examined ongoing ventures after launching a reward-based campaign. Mollick and

Kuppus-wamy (2014) show in a quantitative study that reward-based crowdfunding seems to support more

traditional entrepreneurship. However, this study is only a draft and has not been published as a

peer-reviewed article. Therefore, this study contributes to the current literature by filling in the

gap in the existing literature: it aims to provide data concerning the lack of (qualitative) research

between reward-based crowdfunding and successful business ventures.

Secondly, from a managerial point of view, there is uncertainty for the entrepreneurs

themselves about the future of their venture after successfully having completed their campaign

on the platform. This research will make entrepreneurs, who want to raise capital via

reward-based crowdfunding campaigns, aware to what extent a successful campaign can contribute to

creating a successful venture and subsequently whether this relation is explained by attracting

outside investors, the delivery of products, attracting employees and the satisfaction of backers.

In conclusion, the overall aim of this study is to solve an empirical problem and fill the

gap in the literature by examining the relation between a successful crowdfunding campaign and

the creation of a successful business venture. Following from the empirical problem as well as the

theoretical urgency, the central question in this research has been formulated as follows:

“To what extent is a successful rewarded-based crowdfunding campaign a guarantee to a

suc-cessful business venture?”

To answer this research question, a multiple case-study is conducted among twelve

com-panies that successfully launched a project on Kickstarter. Based on the all-or-nothing approach of

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11 given time. Success of the business venture is defined in terms of survival and profitability. Four

factors are considered in the studied relation: outside investors, product delivery, staff increase

and backers’ satisfaction.

In the next chapter, a theoretical framework will be provided, including an elaboration on

the construct of crowdfunding, the research gap and the measurement of business success. A

con-ceptual model and corresponding propositions are designed based on existing literature.

Subse-quently, the methodology for testing the propositions is described in chapter 3. In chapter 5 the

empirical results will be presented. Theoretical and managerial implications, followed by

limita-tions and recommendalimita-tions for future research are provided in chapter 5. In conclusion, a

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2. Theoretical framework

Chapter 2 provides an overview of the literature regarding this subject. By explaining

entrepre-neurial finance in general and crowdfunding in particular, this theoretical framework helps to fill

the existing research gap. Subsequently, the construct of business success is given. In conclusion

the conceptual model will be presented.

2.1 Existing sources of entrepreneurial finance

Start-ups obtain money in different ways from various sources at succeeding stages of

development by debt financing and equity financing. Financing through debt means borrowing

funds from creditors with the obligation of repayment of the borrowed funds plus interest at a

specific time in the future. The reward for those lenders is the interest. Equity financing contains

receiving a part of the companies’ ownership in return for a financial investment in this company.

After having invested in the company as shareholder, its allowed to share in the profits of the

company. Equity involves an enduring investment within a company. This investment is not paid

back by the company at a later moment in time, unless the company is liquidated. An overview of

the different phases of a start-up and the available sources of equity financing can be found in

figure 1.

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13 In figure 1, debt financing is missing. Table 1 gives an overview of the various stages for

both equity and debt financing. The table is derived from the Venture Support Systems Project, a

joint effort between the Harvard Business School and the Massachusetts Institute of Technology

(MIT) (Linde, Prasad, & Morse, 2000). The forms of debt financing are derived from the sources

of funding for start-ups given by Schwienbacher and Larralde (2010).

Table 1 Financing rounds in the early life of a company (Linde et al., 2000 & Schwienbacher & Larralde, 2010)

Financing stage Definition Typical amounts Usual contributors Seed Prove a concept /qualify for

start-up capital

$25,000 - $500,000 Business Angels, Friends & Family, Entrepreneur and team, Bootstrap

Start-up Complete product develop-ment and initial marketing

$500,000 - $3,000,000

Business Angels, Early-stage Venture Capitalists, Banks, Trade credit

First Initiate full-scale manufac-turing and sales

$1,500,000 - $5,000,000

Venture Capitalists, Custom-ers/Suppliers

Second Working capital for initial business expansion

$3,000,000 - $10,000,000

Venture Capitalists, Private Placement Firms

Third Expansion capital to achieve break-even

$5,000,000 – $30,000,000

Venture Capitalists, Private Placement Firms

Bridge Financing to allow company to go public in 6-12 months

$3,000,000 - $20,000,000

Mezzanine Financing Firms, Private Placement Firms, Investment Bankers

According to Denis (2004), the seed stage is an early phase in the development of a

ven-ture, in which the need for funds manifests itself for the first time. By funding in this stage, the

company is able to develop a prototype and gain interest from investors to raise funds in

subse-quent financing rounds. In the seed stage, multiple sources of financing are accessible. The most

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14 team. For debt financing, bootstrapping is the most important source. An important source for

both equity and debt financing are friends and family.

More financing options become available in the start-up phase. Moving into this stage

means that the company is completing its product development and is going to sell its products.

Next to financing by business angels, venture capital becomes an important equity finance source.

Banks, trade credits and leasing companies become assessable for debt financing. After the

start-up phase, the company is looking for larger amounts of financing to scale their business. Bank

financing or venture capital financing usually provide these financing. If a company reaches this

stage, the option is available to base its financing on debt by growing through its retained

earn-ings. Otherwise, if a company strives for fast growth, it can try to initiate a public offering. By

doing so, many parties may be involved including venture capitalists, investment banks and

pri-vate placement firms. Descriptions of the afore mentioned financing sources are given in table 2,

grouped by debt and equity.

Table 2 Types of entrepreneurial finance investors (Schwienbacher and Larralde, 2010)

Equity

Investor Description

Business Angels Wealthy individuals willing to invest in small

pro-jects

Entrepreneur and team members The entrepreneur invests his own money in the company, or money he obtained through a person-al loan

Friends and Family The entrepreneurs’ friends and family

Venture Capitalists Specialized investors gathering money from

non-specialists and placing it into bigger projects for a period of 5-7 years.

Debt

Banks Loans

Leasing companies Provide equipments and office space to

entrepre-neurs against lease payments

Customers/suppliers e.g. trade credit

Bootstrapping Use of trade credit, credit card, second mortgages

and other methods, including working capital man-agement

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2.2 Crowdfunding

In this paragraph, the history and definition of crowdfunding will be discussed, followed by a

description of the different forms of crowdfunding. Next, factors determining crowdfunding

suc-cess and the motives of founders and funders will be discussed. This discussion shows a research

gap and a conceptual model is presented on how to close this gap.

2.2.1 History and definition

Despite the described sources of entrepreneurial finances, entrepreneurs still face

prob-lems to attract outside capital at the founding stage of their companies. This is a result of

signifi-cant information asymmetry between investors and the absence of sufficient and stable cash flows

(Cosh, Cumming & Hughes, 2009; Berger & Udell, 1998). Whereas the venture capital funds and

banks usually provide larger amounts of capital, the entrepreneur only needs a small amount of

money to start his initiative; mainly available from his savings, friends and family or

bootstrap-ping techniques. Lately, several entrepreneurs are using the Internet to directly seek financial help from the ‘crowd’ (general public) instead of addressing investors (Lambert & Schwienbacher, 2010). This way of obtaining funds is called crowdfunding, a relatively new way of financing

innovation projects by raising money via the internet in a fixed amount of time (generally a few

weeks) by a group of individuals instead of by professional parties. Originally, the term

crowd-funding stems from the broader concept of crowdsourcing, which was first introduced in Wired Magazine by Jeff Howe and Mark Robinson (2006). Crowdsourcing refers to using the ‘crowd’ to gain ideas, feedback and solutions to develop corporate activities (Belleflamme, Lambert, and

Schwienbacher, 2014). Kleemann, Voß, and Rieder (2008) identified the large role Web 2.0 has

played in the development of crowdsourcing. Where a company is located geographically is no

longer a limitation, so the diversity of participants highly increases. While crowdsourcing

pro-vides companies with feedback, solutions and ideas, crowdfunding focuses mainly on collecting

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16 alternative for the financial sources mentioned earlier in this chapter. Figure 2 illustrates the

po-tential role crowdfunding can take in entrepreneurial finance.

Figure 2 Role crowdfunding in the financial market (Lasrado & Lugmayr, 2013)

Belleflamme et al. (2014) define 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 in order to support initiatives for specific purposes (p.588)”. Though Mollick (2014) argued that for researchers who investigate new ventures and

entrepreneurial finance, a more narrow definition of the concept is preferable, because

crowdfund-ing is particularly prominent in these research areas. This led to the followcrowdfund-ing definition:

“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 (p.2)”.

According to Mollick (2014) this definition should provide specificity, but also gives

room for improvement of the concept. In this research, the definition of Mollick (2014) will be

used to define crowdfunding. Crowdfunding can typically be seen as a two-sided market, bringing

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17 two-sided network consists of a subsidy-side and a money side. The first side contains a group of

investors, the funders or backers. The second side contributes to the money-side, i.e. the founder.

2.2.2 Forms of crowdfunding

Four main types of crowdfunding can be categorized based on what investors receive for

their contributions: donation-based, reward-based, lending, and equity. The asymmetric

infor-mation between the fundraiser and investor and the legal complexity differ significantly between

the different types of crowdfunding (Hemer, 2011). Table 3 provides a detailed overview of the

characteristics of each of the four types of crowdfunding.

Table 3 Crowdfunding forms (Collins & Pierrakis, 2012)

Type Contribution Reward Motivation of crowd

Donation crowd-funding

Donation Intangible benefits Intrinsic and social motivation

Reward crowd-funding

Donation/ pre-purchase

Rewards but also intangible benefits

Combination of intrinsic and social motivation and desire for reward

Crowdfunded lend-ing

Loan Repayment of loan with interest.

Some socially motivated. Lending is interest free.

Combination of financial, social and intrinsic motivation

Equity crowdfund-ing

Investment Return on investment in time if

the business does well. Some-times also rewards offered. In-tangible benefits another reason for many investors

Combination of financial, social and intrinsic motivation

Since this research focuses on reward-based crowdfunding, the other types will not be

dis-cussed any further. The literature provides excellent overviews of these types (Collins &

Pier-rakis, 2012; Harrison, 2013; Hemer, 2011; Lasrado & Lugmayr, 2013).

2.2.3 Reward based crowdfunding

The reward-based crowdfunding model provides funders both material and immaterial

compensation for backing a project and is currently the most dominant model (Mollick, 2014).

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18 is in the form of social acknowledgement (Kraus, Richter, Brem, Cheng, & Chang, 2016). The

funders have the advantage of pre-selling or pre-ordering and also receive the financed product or

project before market entrance or publication, and mostly at a better price (Hemer et al., 2011) or

even only at the price of acknowledgment (Belleflamme et al., 2013). The potential of

crowdfund-ing connects innovative and new, small ventures with (specific) providers of external capital.

Within reward-based crowdfunding, the providers of external capital can also be described as

backers. Backers are people who pledge money to creators, the person or team behind the project

idea, in bringing projects to life (Kickstarter, 2018b). The oldest, largest, most cited and analyzed

reward-based crowdfunding platform is Kickstarter. Kickstarter was created in 2009 and has

re-portedly received pledges worth more US$ 3.7 billion and to date has successfully funded 145.289

projects (Kickstarter, 2018). Kickstarter applies the “All-or-Nothing’ approach: project creators

choose a deadline and a minimum funding goal. The project must reach its funding goal in time,

otherwise the money will not be collected. This is the opposite of the “Keep-it-All” approach used

by other platforms where the money raised is kept regardless of whether the funding goal is

reached (Cumming, Leboeuf & Schwienbacher, 2015). In return for their contributions, backers

receive a reward. Typically, these are one-of-a-kind experiences, limited editions, or copies of the

produced creative work, e.g. a product or service. This is the chance for the founder to share a

piece of his project with its backers. In other words, in reward-based crowdfunding the backers

are treated like early customers.

2.2.4 Factors contributing to crowdfunding success

Factors determining the success of reward-based crowdfunding projects can be divided into two

parts. The literature analyzes factors of success in the preparation of the campaign as well as

dur-ing the crowdfunddur-ing project.

Regarding the factors determining success related to the preparation of the project,

Mol-lick (2014) concludes that project quality as well as social network size is related to project

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19 devided into the delivery timeliness and the quality of the product: the results indicate that these

two factors are the most important criteria for backers to evaluate a crowdfunding project when

considering a contribution.

Different geographical effects on funding are recognized. Proximity to funders is intensely

connected with received funding (Argrawal Catalini, & Goldfarb, 2011; Chen et al., 2009; Stuart

& Sorenson, 2003). Mollick (2014) suggests that geographical closeness of founders and backers

influences crowdfunding success, where this proximity results in more successful projects.

How-ever, Kang, Jiang and Tan (2016) found that the greater the physical distance between backers

themselves, the more funding can be secured, because projects with more geographically

distrib-uted backers involves a broader and more varied group of people.

Belleflamme et al. (2012) found that the type of project influences the success rate.

Ac-cording to them, projects launched by a non-profit organization are more successful than those of

profit organizations. The researchers use the argumentation of Glaeser and Shleifer (2001) who

suggest that attracting outside capital for non-profit organizations is easier, as a result of the

re-duced focus on profits. According to Mollick (2014) projects that set their target goal too low or

too high are not likely to successfully raise the desired amount, it seems potential backers are

more likely to choose project with realistic funding goals. Allison, Davis, Webb, and Short (2017)

found other relevant issues e.g. the education of the entrepreneur is important for backers to

moti-vate a decision whether to fund or not. Being aware of the entrepreneurs’ education, gives backers more security about the entrepreneurs’ managerial skills. Xu et al. (2016) describe managerial skills as an entrepreneurs’ activeness, including planning and updating backers in the different

phases. Anxiety can occur due to the risk and uncertainty in the process, but Xu et al. (2016) show

that the entrepreneur's activeness seriously decreases the anxiety of backers.

The following paragraph provides an overview of the literature on the factors determining

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20 According to Wheat, Wang, Byrnes, and Ranganathan (2013) a video is the most

im-portant tool to appeal to potential backers. Mollick (2014) concluded that the lack of a video on

the crowdfunding page is associated with minimum preparation. Wheat et al. (2013) stress the

importance of introducing a project through the video. However, Cholakova and Clarysse (2015)

identify no positive relationship between the recognition by backers of the project owners and the

success of the project. Zheng et al. (2014) stimulate to use of media to provide information about

the project to improve understanding by and communication between the project founders and its

backers. Sharing personal information, including personal pictures, about the project owner leads

to serious support and more trust from backers (Boeuf, Darveau, & Legoux, 2014). This is

sup-ported by Colombo, Franzoni, and Rossi-Lamastra (2015), who compared social environments

and crowdfunding platforms. As a result of the social environment, a picture of the project owner

emphasizes the social capital angel and contributes to a successful project. According to Zheng et

al. (2014), the entrepreneur’s social capital and social network ties between backer and

entrepre-neur have significant effects on the performance of crowdfunding. Agrawal, Catalini and Goldfarb

(2010) found that social network ties are positively related with crowdfunding. Mollick (2014)

found that the role of social networks within the funding of new businesses is becoming more

important. This is related to the rise of Web 2.0, which makes it possible to access different

web-sites which provide more information about the project and its owners (e.g. direct linkages to

Fa-cebook pages). Awareness can be created easily if interested backers like or share a page. This is

likely to have an effect on a project’s success (Belleflamme et al., 2014). Lu, Xie, Kong and Yu

(2014) state that social networking contributes to a successful campaign. Social network sites (e.g.

Facebook, Twitter) are of great importance to entrepreneurs to connect with family, friends and

fans who potentially want to support them financially and provide project feedback (Bechter,

Jentzsch, & Michael, 2011; Mollick, 2014). In contrast, Belleflamme et al. (2014) showed that

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21 network ties can influence the success not only during the campaign, but also in the preparation

phase.

Colombo et al. (2015) focus on early contributions to the campaign shortly after its launch

in relation with the success of a campaign. If potential backers see that a project is already

sup-ported by other backers, they are more likely to donate as well, especially when the quality of the

product is uncertain. Xu et al. (2016) found that updates are crucial, frequent updates nearly

dou-ble the possibility to get funding for a project. This is confirmed by Kuppuswamy and Bayus

(2014) who found that frequent updates, especially at the end of the project, have a positive

influ-ence on reaching the goal. As mentioned before, backers either receive immaterial or material

rewards after supporting a project. Steinberg (2012) found that receiving rewards is the most

im-portant motivation for backers to support a project. Wheat et al. (2013) suggest that backers are

most likely to support a project if they receive public acknowledgement if material rewards are

lacking, making material incentives a second motivator. Not offering any incentives is the least

popular. The importance of intensive communication, as well as a quick response to questions and

frequently providing status updates, has a positive impact on successful projects (Antonenko, Lee

and Kleinheksel, 2014).

2.2.5 Motives founder

In contrast to many other ventures, crowdfunding projects have an extensive variety of

goals. Various crowdfunding projects intend to start a one-time project, for example an event, by

raising a small amount of capital. In these cases, the amount is usually below US$ 1,000 that is

most likely provided by family and friends (Mollick, 2014). However, crowdfunding seems to

become more and more a viable source for attracting start capital in the seed stage of larger

pro-jects (Schwienbacher & Larralde, 2010).

Raising capital is not the only goal of crowdfunding, even in the context of

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22 in funding from more traditional financing forms (Mollick, 2014). An interesting example is the ‘Pebble smart watch’. Initially this project did not qualify for venture capital. Therefore, the founders launched a Kickstarter campaign which turned out to be successful. Then the founders

were able to secure a large amount of funding via venture capital (Dingman, 2013). In contrast, if

the demand is not high enough and entrepreneurs see little interest in the project, a project will fail

before investing additional effort or capital.

Marketing is a third motive for entrepreneurs to use crowdfunding for example to generate

interest in a project at the early stage of development. The marketing motive is mainly important

in environments where projects are looking to collaborate with companies selling complimentary

products. For example, several developers wrote applications to apply to the videogame ‘Ouya’ to

help gaining a competitive advantage even before the project was publicly launched. Besides,

attention from the media can be beneficial to project owners. According to Lambert and

Schwien-bacher (2010), crowdfunding seems to be used to create a marketing campaign where consumers

are able to participate, generating a hype around a new product. This approach can provide an

indication whether there is demand for the product or not.

Reward-based crowdfunding is also called active crowdfunding, since the backers must

actively contribute to the development phase by paying a fee. Different forms of backers’

partici-pation are: contributing to ideas, testing early prototypes, viral marketing and providing feedback

(Lehner, 2012). Participation is important for crowdfunding projects, since it can help an

entre-preneur to develop his projects. Schwienbacher and Larralde (2017) show how the involvement of

the backers can help entrepreneurs to develop their projects.

Besides the traditional way of raising capital, crowdfunding provides other resources which can

be beneficial to the entrepreneur (Ferrary & Granovetter, 2009). However, Franke and

Klaus-berger (2008) point out that crowdfunding is a concept currently under construction : the ‘crowd’

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2.2.6 Motives funder

Crowdfunding distinct itself from other forms of entrepreneurial finance by the variety in

founding goals as well as the range in potential projects. The relationship between the founder and

the funders is characterized by the nature of the financing effort and the context (Belleflamme et

al., 2014). The context refers to the four main contexts wherein individuals support (e.g. donation

and reward-based) projects. The goals of the funders within the intrinsic, social and financial

con-texts is shown in table 3. In general, the different forms are all based on the same principles,

fun-ders are investing in a project and expect a successful outcome in return. According to Lambert

and Schwienbacher (2010) other motives besides financial ones appear to be important for funders

of crowdfunding: many projects do not offer a reward to their funders, but rather live from

dona-tions.

Agrawal et al. (2010) argue that funders of crowdfunding can be seen to some extent as

investors. The investors base their decisions whether to support a project on their underlying

ap-peal and expectation for success of the project. High quality crowdfunding projects seem to be

likely to attract backers (Burtch, Ghose & Wattal, 2011). Mollick (2014) found also support that

backers, irrespective of their expectations for financial return, are responding to signals about the

quality of the project.

As explained before, backers actively contribute during the crowdfunding process. This

involvement can help founders to develop their projects. While, on the other hand, backers

expe-rience a so called ‘community benefit’ by having fun and the joy belonging to the crowdfunding

community (Belleflamme et al., 2014; Gerber, Hui & Kuo 2012), motivating other backers also to

invest in projects (Gerber et al., 2012; Ordanini et al., 2011). This is how most of the

crowdfund-ing platforms consist of online communities where entrepreneurs and backers are allowed to share

ideas to maintain their development behavior (Yi & Gong, 2013). Value creation of consumers is

defined as value co-creation (Zwass, 2010). In other words, crowdfunding can be seen as a type of

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satis-24 faction with the service. Customers experience more excitement if they are actively involved in

value co-creation activities (Vega-Vazquez & Revilla-Camacho, 2014; Zhang & Chen, 2008).

2.3 Research Gap

Besides the increasing popularity of crowdfunding in society, the academic interest in this

topic increases as well. Over the past years, a lot of researchers have investigated different aspects

of crowdfunding. A lot of research has been done in the fields of management and economics.

Researchers investigated crowdfunding versus traditional financing sources (Belleflamme et al.,

2011). Most scholars did research on factors predicting crowdfunding success. Paragraph 2.2.4

described a series of studies. Scholars investigated success factors in the preparation of the

cam-paign (Agrawal et al., 2011; Allison et al., 2017; Belleflamme et al., 2010; Mollick, 2014; Xu et

al., 2016.) Success factors during the campaign itself have been extensively examined in literature

(Antenenko et al., 2014; Boeuf, et al., 2014; Cholakova & Clarysse, 2015; Colombo et al., 2015;

Mollick, 2014; Wheat et al., 2013; Zheng et al., 2014). Motivations to use crowdfunding, both for

founders (Schwienbacher & Larralde, 2010; Mollick, 2014; Dingman, 2013; Lambert &

Schwien-bacher, 2010; Lehner, 2012; Franke et al., 2008) and funders (Belleflamme et al., 2014; Lambert

& Schwienbacher, 2010; Agrawal et al., 2010; Burtch et al., 2011; Mollick, 2014; Gerber et al.,

2012; Ordanini et al., 2011; Zwass, 2010; Zhang & Chen, 2008) have been of interest to

research-ers as well, as illustrated in paragraph 2.2.4 and 2.2.5.

Online articles, and papers in management journals show that the main focus lies on the

factors which make crowdfunding successful. Surprisingly, no peer-reviewed work was found about the period after the campaign became successful. This gap is recognized by Mollick (2014),

who stated: “One of the unanswered questions about the crowdfunding model is whether

success-ful crowdfunding leads to the successsuccess-ful development of goods and services, and potentially,

on-going ventures (p.11)”. However, Mollick (2014) has attempted to answer this question in

collab-oration with Kuppuswamy and the Kauffman Foundation by investigating the outcomes of

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entre-25 preneurship. Over 90% of successful projects seem to remain as ongoing ventures. Of these

ven-tures up to 32%1 reported yearly revenues of over 100,000 US$2 a year since their Kickstarter campaign and added an average of 2.23 employees per successful project. 10% of the projects with a revenue of over 100.000 US$4 were campaigns launched by existing organizations. These results were obtained by a survey within large design, technology and video games projects

be-tween 2009 and mid-2012 (Mollick & Kuppuswamy, 2014). However, as highlighted before, this

is only a draft report and has not been published as a peer-reviewed article.

Obviously there is a research gap in the crowdfunding literature. Since crowdfunding is

emerging as a viable method of funding new ventures (Mollick, 2014), the importance to focus on

the period after the crowdfunding campaign increases. Therefore, this study aims to make the

research gap smaller by conducting a qualitative study among founders of existing start-ups,

which initially launched a successful campaign to find an answer to the following research

ques-tion:

“To what extent is a successful rewarded-based crowdfunding campaign a guarantee to

become a successful business venture?

2.4 Business Success

To answer the research question, it is important to elaborate first on the concept successful

busi-ness venture as described in the literature and subsequently explain what variables will be

investi-gated in order to determine success in this study.

Business success has been researched in many different contexts; for example, the relation

between human capital – including knowledge, education, experience and skills - and success has

been of interest to entrepreneurship scholars for more than three decades. It has been argued to be

a critical resource for success in entrepreneurial firms (Florin et al., 2003). Ibrahim and Goodwin

1_{Mollick & Kuppuswamy (2014)}

2_{Mollick & Kuppuswamy (2014)} 3_{Mollick & Kuppuswamy (2014)} 4

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26 (1987) investigated what factors contribute to the success of small firms. They defined successful

firms as having an above average rate of return and being in business for five or more years. In

addition, entrepreneurial behavior and managerial skills were identified as key success factors in

small businesses. Entrepreneurial behavior refers to the personality traits of the entrepreneur (e.g.

extrovert, risk taking). Managerial skills refer to effective management of the cash flow, an

effi-cient budgetary system, a niche strategy, pre-ownership experience, education and a simple

organ-ization structure. Duchesneau and Garner (1990) developed a framework to gain a profile of

vari-ables associated with new venture success and failure. This framework consists of three types of

factors, (1) the characteristics of the lead entrepreneur, (2) startup processes undertaken during the

company creation and (3) behaviors after start-up, including strategic behaviors and management

practices. The researchers suggest that venture success is influenced by many factors in complex

interrelationships. Results show that entrepreneurs in successful firms had more prior experience,

have longer or more working days, are good communicators and have personally invested in the

company. Successful companies start with ambitious goals and spent more time planning

com-pared to unsuccessful companies. Help from advisors and professionals to solve specific problems

during the startup was of great importance. In addition, the information and advice given by other

participants in the industry, especially suppliers and customers, was important for success. To

conclude, the founders of successful firms invest more time in communicating with employees,

suppliers, partners and customers compared to the founders of unsuccessful firms.

2.4.1 Business success in terms of survival and profitability

It is believed that new companies have high closure rates and in addition, these closures

are thought to be failures (Headd, 2003). It was thought that nine out of ten new ventures close in

their first year. However, using Dun and Bradstreet data, Phillips and Kirchhoff (1989) found that

up to 76% of new firms were open after two years, up to 47% after four years and up to 38% after

six years, which is in contrast with what is commonly believed. Headd (2003) found similar

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27 since one-third of new companies closed under circumstances that founders reflected as

unsuc-cessful. Factors that led to closing were being young and having no start-up capital. This was the

case for businesses that were both successful and unsuccessful. Success in his study is defined as

survival. According to Headd (2003) businesses with more resources rare more likelihood to

sur-vive. Factors leading to survival are having employees, a good starting capital and an owner who

is educated, older and had previous experience (Headd, 2003). For a long time survival has been

regarded as a critical measure of success, since many challenges are faced by new ventures (Van

de Ven, Hudson & Schroeder, 1984). Moreover, survivability is often used as a measure of

suc-cess for commercial entrepreneurs. Another commonly used measure is profitability (Robinson &

Sexton, 1994; Schutjens & Wever, 2000).The aim of this research is to examine to what extent a

successful reward-based crowdfunding campaign is a guarantee for a successful business venture.

In order to be able to answer the research question, the measurement of success needs to be

de-fined. Success in this study will be measured in terms of survival - is the startup still an ongoing

entity - and profitability. The following proposition is formulated:

Proposition 1: A successful reward-based crowdfunding campaign is positively related with a

successful business venture.

However, four other variables – outside investors, product delivery, staff increase and backers

satisfaction – are also contribute to the explanation of the relationship between a successful

re-ward-based crowdfunding campaign and successful business venture. The choice for each of these

mediators is explained in the following paragraphs, followed by corresponding propositions.

2.4.2 Outside funding

From an ecosystem perspective it is always good to have more funding options. There is

no one-size-fits-all funding concept. Any startup should make an informed choice between the

available options. Financial resources are necessary to reach sustainable growth. However, getting

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28 able to develop a prototype in the seed stage and to gain interest from investors to raise funds in

subsequent financing rounds. Figure 2 presents the role of crowdfunding in the seed stage.

Launching a successful campaign by using crowdfunding generates the first funding from

back-ers. According to Agrawal et al. (2010) backers can to some extent be seen as investors. More

financial options become available in the next stages (Denis, 2004). Moreover, Mollick and

Kup-puswamy (2014) indicate that raising additional funds from outside the business are potential

ben-efits beyond the crowdfunding money itself after the successful campaign. The authors state that

projects with successful campaigns are more likely to gain outside funding than those that do not.

Outside funders can be venture capitalists, angel investors, banks, other companies and/or friends

and family. Venture capital firms have enough resources to understand new technologies and they

can provide financial resources and coaching in the early stages of a start-up (Kortum & Lerner,

2000). Due to the investment criteria of investors, it is expected that start-ups get more easily

ac-cess to new investments after they have proven the demand for their product or service by running

a successful reward-based crowdfunding campaign (Mason & Stark, 2004). Therefore the

follow-ing proposition is formulated:

Proposition 2: The relationship between a successful reward-based crowdfunding campaign and a

successful business venture is positively mediated by outside funding.

2.4.3 Product delivery

An independent survey with nearly 500,000 Kickstarter backers, has shown that the extent

to which a project is overfunded predicts the delays in product delivery Mollick (2014). Mollick

(2014) also found that despite the general success of this platform, up to 9% of the Kickstarter

projects failed to deliver rewards and up to 65% of the backers agreed or strongly agreed with the

statement that the reward was delivered. The satisfaction of a backer increases if the reward

matches the specifications as mentioned in the crowdfunding campaign (Mollick, 2014; Xu et al.,

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29 in the delivery time could negatively affect the process of creating a real business. Therefore, the

following hypothesis has been formulated:

successful business venture is negatively mediated by outside investors.

2.4.4 Staff increase

Davila, Foster and Gupta (2003) found that the number of employees increases in the

months prior to the venture capital funding event and further increases during the months after the

event. Thus, it seems that venture capital funding events are important signals about the quality of

the start-up. Crowdfunding is also an event where entrepreneurs are approached by backers

be-cause of the launching campaign. Assuming similarities in the organization of a reward-based

crowdfunding project and the organization of a venture capital event in terms of workload and

gaining popularity as company, it can be expected that employee growth is positively related with

a successful crowdfunding campaign. Being able to have employees on the start-ups’ payroll

indi-cates that the cash flow allows taking the risk of paying wages on a monthly basis. Therefore,

according to Headd (2003), having employees is positively related with survival. Besides, the

number of employees is often a prediction for success (Mollick, 2014). Hence, the following

proposition is formulated:

successful business venture is positively mediated by employee growth.

2.4.5 Backers satisfaction

Client satisfaction is an important measure of project implementation success. It refers to

the level of acceptance by clients of the project with its intended benefits (Mahaney & Lederer,

2006; Tasevska & Damij, 2014). Looking back at the past years, researchers decided to expand

research on how the delivery of high-quality goods and services impacts profitability through

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satisfac-30 tion and loyalty (Anderson, Fornell, & Lehmann, 1994). Reichheld and Sasser (1990) discuss how increasing customer loyalty should lead to higher profitability.

Anderson, Fornell and Lehmann (1994) found that companies that achieve high customer

satisfaction also enjoy superior economic returns. However, whether these economic returns were

derived from improving customer satisfaction is not immediately clear, because the effort to

in-crease the satisfaction of the customer primarily affects future purchasing behavior. Thus, a

long-run perspective is needed to evaluate the effectiveness of efforts to improve customer satisfaction.

The research of Anderson et al. (1994) also implies a shift by companies to align the company

processes, resources, performance measures and organizational structure for treating customers as

an asset. In other words, implementing a customer driven organization by improving quality and

customer satisfaction should be seen as an investment rather than an expense. Loyal and satisfied

customers are a revenue-generating asset to the company; however, the cost to acquire, retain and

develop a good customer base needs to be taken into account. In addition, Duchesneau and

Gar-ner (1990) found that the information and advice given by other participants in the industry,

espe-cially suppliers and customers, was important for success. Xu et al. (2016) have measured the

satisfaction of the backers on the Chinese crowdfunding platform DemoHour. They found backer

satisfaction to be an important measure of crowdfunding project success since it positively affects backers’ reinvestment and loyalty to the crowdfunding platforms. Delivery timeliness and product quality are the most important criteria for backers to evaluate campaign and thus critical to

back-ers satisfaction (Xu et al.,2016). Assuming backback-ers will be satisfied when a crowdfunding project

turns out successful, the following propositions can be stated:

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2.5 Conceptual model

In this paragraph, a conceptual model is presented based on existing literature. The model

will be used to investigate whether a successful reward-based crowdfunding campaign guarantees

a successful business venture. Four mediators are identified, outside investors, product delivery,

staff increase and backers satisfaction. A priori propositions have been derived from the literature.

It is expected that three mediators have a positive relation between a successful reward-based

crowdfunding campaign and business success, except for product shipment which is expected to

affect success negatively. Business success will be measured in terms of survival and profitability.

Figure 3 Conceptual Model

3. Methodology

Chapter 3 describes the methods used in this research. An overview is provided of the research

design and the sampling logic, followed by a description of how the data is collected and

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3.1 Research design and sampling logic

This explorative research is qualitative by nature and can be considered as a

theory-supported inductive study. The research is characterized as cross-sectional, since the data reflect a

moment in time (Saunders, Lewis & Thornhill, 2012). This method is chosen because of its

flexi-bility, the richness of data and the fit with the research purpose: qualitative methods can disclose

the underlying nature of the phenomenon in question when little is known about it (Strauss &

Corbin, 1990).

To examine whether successful reward-based crowdfunding campaigns became successful

ventures, a reward-based crowdfunding platform must be chosen first. This research focuses on

start-ups that launched a successful Kickstarter campaign before starting a company or after the

company had already been established. The platform Kickstarter is chosen because it is the first

and most used and cited platform worldwide. A Kickstarter dataset (https://www.kaggle.com/) is

used with over 378.657 projects worldwide to select the cases. First, projects that did not achieve

the funding goal were eliminated from the dataset, so only the successful projects remained. The

database consists of projects launched in 2014 up till 2017. For this research, projects launched

after April 2017 were eliminated to make sure the survival period of the company is at least one

year or longer. After narrowing down, projects launched outside the Netherlands were excluded,

as well as projects with a funding goal below € 5,000,-. Finally, the decision was made to

investi-gate only projects in the fashion category. Hence, a manageable number of projects remained.

After identifying which projects were currently still in business as a company, the creators of the

projects were contacted. Google was used to find contact information about the companies’

founder(s); subsequently a combination of phone calls, e-mails and LinkedIn InMail has been

used to schedule interview appointments, leading to six founders who were willing to give an

interview. To select twelve projects, it was necessary to use the researcher’s network to select the

remaining six cases. This was done using the same criteria, except the criterium ‘category

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addi-33 tion, to enrich the research, one respondent was sought who had launched a successful campaign, but now no longer has a business (C12). An overview of the cases under study can be found in appendix C. The company descriptions can be found in appendix D.

According to Saunders et al. (2012), a sample size of twelve is sufficient to generate

meaningful results. Each selected project is considered as a single case, which makes this study a

multiple case study. According to Baxter and Jack (2008), making use of multiple cases improves

the generalizability and reliability by copying data across cases. By only using one method of

qualitative data collection by conducting interviews, this research can be indicated as mono

meth-od study. As described above, choices based on criteria were made to select the appropriate cases

from the database, so the non-probability technique purposive sampling as opposed to probability

sampling is used in this study. In addition, snowball sampling has been used by asking partici-pants’ to identify other founders. This can be seen as purposive sampling because one particular subgroup was studied, i.e. founders of companies with a successful launch of their Kickstarter

campaign. The sampling was heterogeneous (maximum variation), because the research focuses

on projects in different categories, e.g. fashion, gadgets, product development and food (Saunders

et al., 2012).

3.2 Data collection

This research depends on primary, qualitative data. This data is collected at twelve

differ-ent companies. Each founder of a company and thus a creator of a project was interviewed for

about 45 minutes. Interviews were semi-structured with open-ended questions. The interview

guide method of Patton (2002) and supporting techniques for semi-structured interviews of Leech

(2002) have been used to conduct the semi-structured interviews. The questions were based on

constructs derived from theory in the literature review (chapter 2). The interviews were held in

Dutch. A Dutch and English version of the interview protocol can be found in appendix A. Most

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34 were conducted via face-time or Skype. During the interview field notes were made, an example

of these can be found in appendix B. Semi-structured interviews were chosen because that they

give the interviewer the opportunity to ask extra questions if it is considered necessary, all within

the constraints of the conceptual model. For this reason the technique is appropriate for

theory-supported inductive research. In order to prevent errors in documenting the interviewees’ answers,

each interview has been recorded with a voice recorder after asking the respondents’ permission.

Afterwards they were structured and transcribed by the researcher (see appendix K and the

at-tachments for transcripts).

3.3 Data analysis

The interview data were analyzed and coded to recognize common themes and

evolv-ing patterns (Strauss & Corbin, 1990). Codevolv-ing is one way of analyzevolv-ing qualitative data. Saldana (2012) defined a code as “a word or a short phrase that symbolically assigns a summative, sali-ent, essence-capturing, and/or evocative attribute for a portion of language-based or visual data

(p.4)”. To code systematically, the software system NVivo12 Pro was used. With this data system,

the researcher gets the opportunity to structure data from interviews in a thematic way. Analyzing

the data involved different steps. Selective coding was used to divide data among the main codes.

These main codes were derived from theory (§2.4) in a deductive approach and form the

founda-tion of the coding process. However, the selective codes needed to be redefined after the analysis.

By doing so, open codes were created to label concepts and categorize the data with an open

mind-set. Afterwards, axial coding is applied to make connections between the categories and

subcategories by using inductive and deductive approaches. In appendix I an overview of the

dif-ferent codes is provided. The codes are placed in hierarchical order which contributes to going

from open to axial coding. Anonymity of the interview results is guaranteed to the participants and data is only used with participants’ consent. Conclusions are drawn on company level.

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3.4 Validity and reliability

To safeguard that the research and results meet the quality and rigor standards, validity and

relia-bility are inherently linked to research design. Therefore they are taken into account throughout

the entire research.

3.4.1. Validity

The validity of a study determines whether the results of the research are in line with the

objectives (Yin, 2009). The core of the topic is included in a valid research (Golafshani, 2003).

Internal validity refers to the presence of causal relationships between variables and results

(Gib-bert & Ruigrok, 2008). To guarantee internal validity and at the same time increase the quality

and rigor a few steps are taken throughout the research process. To begin with, the topics of the

interview were derived from a review of the literature. By communicating briefly the purpose and

scope of the research beforehand, interviewer and interviewee bias is avoided.. However, the

an-swers of the founders can be influenced by their position, which in turn can be a threat to internal

validity. Additionally, summarizing questions were asked to the respondents to make sure the

researcher interpreted the answers correctly. Furthermore, the internal validity is guaranteed by

pattern matching: comparing observed patterns with the predicted patterns from previous studies

(Denzin & Lincoln, 1994).

The external validity, which refers to the ability to generalize the findings and main

con-clusions of a study across other settings or contexts (Saunders et al., 2012), cannot be guaranteed

in this study. According to Eisenhardt (1989) this study could be a starting point to develop theory

because this is a multiple case study with twelve cases. The given rationale for the case study

se-lection with detailed sampling choices contributes to the external validity (Cook & Campbell,

1979). However, the cases are limited to one single reward-based platform, Kickstarter and the

cases do not cover all categories. Besides, this study focuses on Dutch cases only, which makes

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There-36 fore, the theoretical model can be seen as contribution to the field, but further qualitative research

is required.

3.4.2 Reliability

Reliability is defined by Denzin and Lincoln (1994) as the degree to which other scientist

will come to the same results when their research is repeated following the same steps. The

relia-bility in this research is warranted by working transparently throughout every critical step. All

methods used were scheduled and drafted in advance, e.g. the interview protocol guiding the

em-pirical data collection. Furthermore, to secure the reliability of this study, subject and observer

bias are limited. By using the interview protocol with neutral, open-ended questions socially

ac-cepted answers are limited and thus subject bias is minimized. To avoid observer bias, feedback is asked on given answers and the interviewer’s’ interpretation (Saunders et al., 2012). In addition to tht, all interviews are recorded and carefully transcribed according to Silverman’s method (2005).

To what extent is a successful reward-based crowdfunding campaign a guarantee for a successful business venture? : The role of outside funding, product delivery, staff increase and backers satisfaction