Disrupting Entrepreneurial Finance: the importance of online communities for ICO success

(1)

Disrupting Entrepreneurial Finance:

the importance of online communities for ICO success

Author: Kayleigh van Doorn Student number: 12894792 Date of submission: 16/08/2018 Version: Final version

MSc Business Administration - Entrepreneurship and Innovation Track University of Amsterdam – Faculty of Economics and Business

Supervisor: Dr. G. T. Vinig

(2)

1

Statement of originality

This document is written by student K. van Doorn, who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are 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.

(3)

2

Abstract

This thesis adds to the scarce but growing literature on cryptocurrency and Initial Coin Offerings (ICOs). Blockchain technology has enabled individuals to make transactions on a decentralized system without the interference of any third parties. One of the major use cases of this technology is currency, and start-ups now use cryptocurrency offerings to raise financial resources. Entrepreneurial finance has thereby gained an interesting method to raise funds. ICOs share aspects with crowdfunding and Initial Public Offerings (IPOs), however the magnitude of funds raised has reached a new high with the upcoming of this entrepreneurial finance method. The focus of this study is the role that an online community plays when raising entrepreneurial finance using an ICO. This study therefore tests the relationship between the sense of online community and ICO success. A secondary data analysis gives insights in the cryptocurrency market and the variables that constitute ICO success, being funds raised and cycle time. With the use of an online survey, data on members of online communities is gathered. Contrasting expectations, the sense of online community resulted to be negatively related to ICO success. The cause of this negative relationship is attributed to integration and needs fulfilment, which is a component of the sense of online community.

Key words: ICO success, sense of online community, cryptocurrency start-up, entrepreneurial

(6)

5

Introduction

Essentially, money is a system of trust: we believe others to act as agreed upon. Money has two functions: it enables the facilitation of transaction flows in the form of a currency, and it serves as a storage of value in the form of an asset. Our banking and legal systems are the current mechanisms in ensuring and securing these two principles (Venegas, 2017). Time and again, banks have been failing to monitor currency in a fair and transparent manner, resulting in users losing their trust in the system. Think of the US housing crash due to flawed banking practices of the dominant players in the financial industries in 2008, resulting in a financial setback for both the United States and Europe (Altman, 2009). Now, peer-to-peer technologies are introduced to the financial system, with its most popularly known technology being the blockchain technology. It is referred to as a trustless system, for its decentralized system executes both transactions and contracts without the interference of any third parties (Venegas, 2017). One of the major use cases of this technology is currency (Yadav, 2017). Cryptocurrencies are both tokens and coins that are encrypted and used as a means of exchange in a peer-to-peer network (Baturin, 2018).

With the introduction of this technology and its application in the financial system come new opportunities for firms to raise capital. Start-ups using blockchain technology have embraced initial coin offerings (ICOs) as a method to gain financial resources (Venegas, 2017). ICOs are coin or token sales. To launch an ICO, a start-up produces a whitepaper that describes their business model and technical approach, thereby indicating the details and functional role of the coins offered, as well as the process of creating the coin (Conley, 2017).

Raising financial resources in the early stages of a new business venture is not a new phenomenon. Numerous funding methods exist, under which bootstrapping, bank lending, venture capital, angel investors, IPOs, and crowdfunding (e.g. Ahlers, Cumming, Günther & Schweizer, 2015; Mollick, 2015; Berger & Udell, 1995; Bhide, 1992; Higgins & Gulati, 2003;

(7)

6

Mollick, 2014; Wong, Bhatia, & Freeman, 2009). Perhaps most similar to ICOs are IPOs and crowdfunding. Initial Public Offerings (IPOs) are important to a firm because they represent the first time the firm raises funds from a diversity of investors (Higgins & Gulati, 2003). Crowdfunding is the method of funding new ventures by requesting financial resources from a large number of individuals, without the use of standard financial intermediaries (Ahlers et al., 2015; Mollick, 2014). ICOs are similar to IPOs in the way that investors often invest motivated by a certain expectation of return on investment. They differ in the way that actual equity is accredited to the investor in the case of an IPO (Higgins & Gulati, 2003), while this is not necessarily the case for ICOs (Yadav, 2017). When investing in an IPO, the investor receives a certain stake in the company (Higgins & Gulati, 2003). When investing in an ICO, the investor in some way supports the project the start-up is working on (Yadav, 2017). In that sense, ICOs also have roots in crowdfunding, since investors oftentimes want to support the project out of personal interest or beliefs (Ahlers et al., 2015; Mollick, 2014).

ICOs distinguish themselves from other funding methods in several ways. Firstly, ICOs raise money quickly and without many difficulties. Cycle time and the costs of raising funds is low. Secondly, instead of expensive prototypes or other proofs of quality, ICOs provide their vision and technological details in a whitepaper. Thirdly, the potential amount of funds raised is relatively high compared to other funding methods (Conley, 2017).

Several venture features are important when raising financial capital. Ahlers et al. (2015) included social capital as an aspect of venture quality. This capital is related to social networks. Networks and social relationships are channels through which start-ups can get access to financial resources (Baum & Silverman, 2004; Chung, Singh, & Lee, 2000; Hoang & Antoncic, 2003), as well as potential customers (Brüderl & Preisendörfer, 1998). Due to these benefits of financial support and early customers, having efficient networks is essential during the early stages of a business venture (Ahlers et al, 2015). Since networks are also a

(8)

7

source for information, advice, and general support (Hoang & Antoncic, 2003), they are still of importance for success in the later stages of start-up (Brüderl & Preisendörfer, 1998). Start-ups make use of social capital by supporting their customers to form online communities (Blanchard & Markus, 2004).

Sense of online community is associated with higher rates of member satisfaction (Ellison, Steinfield & Lampe, 2007). It refers to the extent to which some individual feels a certain belonging to an online community (Blanchard and Markus, 2004). It is measured through four components, being membership, influence, integration and needs fulfilment, and shared emotional connections (McMillan & Chavis, 1986). Based on community theories, it is expected that a sense of online community has a positive influence on ICO success, since the higher the sense of online community the higher the member satisfaction (Blanchard & Markus, 2004). High member satisfaction in turn is likely to result in them supporting the project or product.

Thus far, literature on blockchain technology and the cryptocurrency market is scarce, however there is a rise in academic activity on this topic. Cong, Li and Wang (2018) utilized a dynamic model to derive the token price as a function of user characteristics and platform utility, showing that tokens lead to accelerated platform adoption since it allows investors to become consumers simultaneously. Other researchers focused on the advantages tokens bring to platform adoption and its fundamental value (Li & Mann, 2018; Sockin & Xiong, 2018). According to Catalini and Gans (2018), ICOs could be beneficial for information extraction purposes, for the entrepreneur can test how much the platform is valued by the customers, or investors. In addition, ICOs allow for raising venture capital without losing the control rights over the product or project (Chod & Lyandres, 2018). As for empirical studies, Kim et al. (2016) tested the influence of comments in online environments on the number of transactions of cryptocurrencies. They found that the number of transactions made were related to daily

(9)

8

topics, very positive comments, and very negative topics. Furthermore, empirical research has been done on the return structure of cryptocurrency markets (Krueckeberg and Scholz, 2018; Stoffels, 2017) and transaction costs (Easley, O’Hara & Basu, 2017). Determinants of ICO success have been studied, as well as the return on investment under various circumstances (Benedetti & Kostovetsky, 2018; Momtaz, 2018). Besides cryptocurrency, there is literature on the implications of blockchain technology for areas such as corporate governance (Yermack, 2017) and electricity network (Saleh, 2017).

This thesis adds to the growing list of cryptocurrency literature by exploring how online communities influence the benefits entrepreneurs can reap from ICOs. It will do so by surveying individuals who are members of cryptocurrency groups on Reddit, a social media platform that contains social news aggregation, web content rating, and discussions. This is one of the online channels where cryptocurrency start-ups and individuals who have interest in the start-up and its cryptocurrency are active (Kostovetsky & Benedetti, 2018). These specific groups are called subreddits. The subreddits of interest will be those related to cryptocurrency. The focus of the survey will be on the sense of online community, meaning the extent to which members feel like they belong to the online community (Ellison et al., 2007).

Building on crowdfunding theories (Ahlers et al, 2015; Mollick, 2014), studies on communities and its influencers and components (Blanchard & Markus, 2004; Ellison et al., 2007; McMillan & Chavis, 1986) studies on communities affecting processes in the cryptocurrency market (Catalina & Gans, 2018; Kim et al., 2016; Kostovetsky & Benedetti, 2018), and studies on raising financial resources through ICOs (Benedetti & Kostovetsky, 2018; Chod & Lyandres, 2018; Conley, 2017; Momtaz, 2018; Venegas, 2017), this thesis aims to understand the effect of the sense of online community on the success of ICOs. The research question is therefore:

(10)

9

What is the effect of the sense of online community on the success of ICOs?

To understand the underlying processes, the following sub-question will be answered:

What is the relationship between member intensity and a sense of online

community in the Reddit communities of cryptocurrencies?

This thesis is organized as follows. Chapter 1 will briefly discuss entrepreneurial finance up to now, explaining several entrepreneurial funding methods. Chapter 2 will provide a basic understanding of the cryptocurrency market. Chapter 3 will explore the concept of the sense of online community, addressing its components as well as possible underlying mechanisms. Also, the conceptual model and hypotheses will be proposed in this chapter. Chapter 4 will describe the methodology applied in this research, which is twofold: secondary research of ICO data and a survey on the online community members of cryptocurrency subreddits. In chapter 5, the secondary data will be discussed and analysed. In chapter 6, the survey data will be discussed and analysed. Finally, chapter 7 will conclude and discuss this research.

(11)

10

1. Entrepreneurial finance

Over the last decades, new businesses and small start-ups have become increasingly important for economic development (Denis, 2004). Historically, large firms accounted for the majority of jobs created (Lerner, 1995). During the 1980s, Fortune 500 firms lost over 4 million jobs, while small firms with less than 100 employees amounted to 16 million jobs created (Birch, 1990). In addition to job creation (Romano, Tanewski & Smyrnios, 2001; Sherman, 1999; Storey, 1994), new and small firms are known to create more innovations than their large firm competition (Scherer, 1991). These upcoming trends skyrocketed during the internet boom in the late 1990s (Denis, 2004). One of the most important challenges an entrepreneur faces when transforming his or her ideas into a revenue-generating business is the acquirement of capital (Wong et al., 2009). Financing is a well-documented factor in new and small firm survival and growth (Cassar, 2004; Cooper, Gimeno-Gascon & Woo, 1994; Davila, Foster & Gupta, 2003). Along with the entrepreneurial activity that rose in the 1980s and 1990s came the interest in entrepreneurial finance from an academic perspective. Until the early 1990s, research on entrepreneurial finance was nearly non-existent. Since then, interest in this field in the form of published articles has increased (Denis, 2004). In this chapter, traditional funding methods will be discussed, after which crowdfunding and finally ICOs will follow.

1.1 Traditional funding methods

From a business perspective, entrepreneurs use methods to raise capital to start up business ventures. According to Bhide (1992), starting a venture with anything besides bootstrap-funds has nothing to do with the real world of an entrepreneur. ‘’It’s not raising money but having

the wits and hustle to do without it’’ (Bhide, 1992, pp. 109). He defines bootstrapping as

launching ventures with modest personal funds. A more inclusive definition states it is the collection of methods used to minimize the amount of outside debt and equity financing needed

(12)

11

from banks and investors (Harrison & Mason, 1997; Winborg & Landström, 2001). Bhide

(1992) compares bootstrapping to zero inventory and just-in-time management in its ability to identify problems fast. Since the entrepreneur is fully aware of the funds and cashflows, financial details are at the surface of operations and difficulties can be spotted and solved quickly. Benefits of bootstrapping include flexibility and control (Bhide, 1992), as well as low risk (Ebben & Johnson, 2006; Wright, 2017). According to Wright (2017), due diligence of bootstrapping often lies in the lack of outside interest in the company or the lack of efficient network or social connections of the entrepreneur. Information asymmetries are higher for start-ups since they lack public information (Carpenter & Petersen, 2002), which makes them risky for banks and investors (Shane & Cable, 2002). Thus, bootstrapping is often considered as being a result of financial constraints that small firms face due to information asymmetries and transaction costs (Ebben & Johnson, 2006). Still, Bhide (1992) and Ebben and Johnson (2016) state that bootstrapping reduces overall capital requirements, improves cashflows, and maximizes the benefits of personal resources invested.

When bootstrapping is not an option or preference, entrepreneurs can try to obtain their capital through intermediaries such as banks or venture capitalists (Berger & Udell, 1995). When entrepreneurs turn to banks for help, they agree to take on a loan that must be paid back within a certain period, including an interest rate (Cosh, Cumming & Hughes, 2009; Wright, 2017). Empirical data indicates that banks are more likely to supply capital to larger firms with more assets (Cosh et al., 2009), and are thus in general not favourable to start-ups (Bhide, 1992). Small firms often incur more problematic information asymmetries than large corporations, and this asymmetric information is even more present for start-ups (Berger & Udell, 1995; Bhide, 1992). To reduce information asymmetries, banks analyse information with use of investment criteria and the acquiring of private information (Berger & Udell, 1995; Cosh et al., 2009). They use this information to select their borrowers and to set loan contract

(13)

12

terms, such as interest rates or collateral required, to improve borrower incentives and decrease the risk of investment (Berger & Udell, 1995). The selection criteria and risk assessment utilized by banks are unfavourable for start-ups, which results in them often not receiving finance or merely a part of the desired amount (Bhide, 1992; Cosh et al., 2009; Wright, 2017). In addition, applying for a bank loan is a costly effort, both in terms of time and money, since extensive documentation is required (Berger & Udell, 1995; Wright, 2017). Finally, failure to pay back the loan often results in seizure of assets or even bankruptcy (Wright, 2017).

Research suggests that venture capitalist firms are more skilled than banks at screening potential investees and thereby provide greater value added (Keuschnigg & Nielsen, 2004; Ueda, 2004). Venture capital is defined as equity or equity-linked investment in privately held start-ups by investors. In comparison to banks, venture capitalist firms have advantages in mitigating information asymmetries and agency costs and will therefore be more likely to venture high-risk and high-potential returns businesses such as start-ups (Berger & Udell, 1995). Thus, venture capitalists are more likely to finance riskier firms with high growth objectives than banks (Berger & Udell, 1995; Cosh et al., 2009). Investors play an active role in the firm they invest in, often as director, advisor, or manager (Kortum & Lerner, 2001). Start-ups being mentored by venture capitalist have been proven to be more successful (Kaplan & Strömberg, 2000). On the downside, getting access to venture capital comes with a few hurdles. For one, venture capitalists use criteria to decide which entrepreneurial start-ups to support. Where some state that business models are the main criteria for selection (Macmillan, Zemann, Subbanarasimha, 1987; Kaplan & Strömberg, 2000), others define track record and leadership of the entrepreneur as the most important aspects when making the funding decision (Vinig & de Haan, 2002). Furthermore, entrepreneurs are often required to disclose an extensive amount of information, with the risk of the venture capitalists executing the project themselves, without the entrepreneur (Ueda, 2004). Therefore, a trade-off must be made in

(14)

13

terms of the information being disclosed, balancing between disclosing enough to decrease information asymmetries to gain access to the capital, but not enough to become invaluable to the venture capitalists (Anton & Yao, 1994; Bhattacharya & Ritter, 1983; Yosha, 1995). Also, venture capitalists expect an equity stake in the start-up, which dilutes the entrepreneur’s ownership (Cosh et al., 2009; Sahlman, 1990).

Similar to venture capital firms are angel investors. Angel investors are individual, high net worth investors, who invest their own money in firms (Cosh et al., 2009; Wong et al., 2009). Their investment patterns are similar to that of venture capitalists: they often finance small, young, currently unprofitable businesses, with strong management and high-quality leaders (Cosh et al., 2009). They tend to take even larger risks than venture capital firms (Wong et al., 2009). Angel investors are often referred to as informal venture capitalists. They are seen as the space in between funding from family and friends and funding from venture capitalists, both in terms of criteria required and investment amount (Chemmanur & Chen, 2001; Wong et al., 2009). They are different from venture capitalists since they invest their personal money, instead of the money raised from other investors (Wong et al., 2009). Angel investors typically invest in projects that are familiar to them (Wong et al., 2009), or in which they personally believe (Wright, 2017). Also, they do not necessarily acquire an equity stake in the firm (Wong et al., 2009). Another benefit of the angel investor is that they sometimes fund start-ups all the way through the growth stage, whereas other investors only support the start-up through the early stages (Chemmanur & Chen, 2001). Angel investors are therefore often an intermediary between the entrepreneurs and more formal venture capital firms (Chemmanur & Chen, 2001; Wong et al., 2009; Wright, 2017).

The final traditional funding method to be discussed is that of Initial Public Offerings (IPOs), which is the first time a firm goes public by offering equity stakes (Higgins & Gulati, 2003). According to Higgins and Gulati (2003), IPOs are one of the most critical events in the

(15)

14

lifetimes of young firms. Researchers have found that young firms have a higher chance of acquisition when their IPO is successful, while this is often not the target or most desirable outcome of going public (Higgins & Gulati, 2003; Ragozzino & Reuer, 2017). Reasons for this interest of the merger and acquisitions markets is that the IPO process produces information on the entrepreneurial firm, for instance public demand (Demers & Lewellen, 2003; Higgins & Gulati, 2003). Entrepreneurial firms benefit from powerful underwriters in the IPO process, for instance prestigious firms such as a high-status investment bank (Stuart, Hoang & Hybels, 1999). Having support from prestigious firms favours the entrepreneurial firm’s reputation (Higgins & Gulati, 2003), and enables it to survive and grow (Baum & Oliver, 1992). It is argued that high technological quality firms easier attract attention of prestigious investments banks and obtain a substantial IPO (Deeds, Decarolis & Coombs, 1997). At the same time, firms with technology that is highly complex and uncertain have a harder time finding support (Higgins & Gulati, 2003). IPOs are often affiliated with underpricing (Demers & Lewellen, 2003), with possible explanations including information asymmetries (Rock, 1986), rewards to investors for sharing private information about the IPO (Benveniste & Spindt, 1989), signalling by the issuing firm (Welch, 1989), prospect theory (Loughran & Ritter, 2002), and advertising and marketing benefits (Demers & Lewellen, 2003).

1.2 Crowdfunding

In recent years, crowdfunding has become an alternative for the traditional funding methods for entrepreneurs (Belleflamme, Lambert & Schwienbacher, 2014). Crowdfunding refers to requesting funding from a large number of individuals, without the need for standard financial intermediaries (Belleflamme et al., 2014; Mollick, 2014). Schwienbacher and Larralde (2010) define crowdfunding as an open call for the donation of financial resources, which can be in the form of a donation or in exchange for a reward. It seems to combine features of concepts

(16)

15

such as micro-finance and crowdsourcing, however it also represents a unique category of fundraising.

Crowdfunding campaigns are most prominent on the internet, with an increasing number of online platforms facilitating this funding method (Schwienbacher & Larralde, 2010). Apart from funding, crowdfunding serves several other purposes. It has been used by entrepreneurs to demonstrate demand for a proposed product, which in turn might lead to additional funding from traditional sources. On the other hand, a lack of demand offers founders the opportunity to ‘fail quickly’, allowing them to renounce the project without wasting additional capital. Another purpose of crowdfunding is marketing, as it has proven to be able to create interest in novel projects in the early stages of development. Extraordinary successful projects may receive press attention, often resulting in more benefits for the founders. Funders of crowdfunding projects can also be seen as the first customers. In case of a range of complimentary products, these early customers may evolve into a loyal customer base (Mollick, 2014).

Research suggest that potential investors often cope with high uncertainty on crowdfunding project quality, since performance measures do often not yet exist at this stage (Baum & Silverman, 2004; DiMaggio & Powell, 1983; Podolny, 1993). Entrepreneurs can reduce uncertainty and thereby increase funds by effectively signal the quality of their project (Ahlers et al., 2015; Baum & Silverman, 2004; DiMaggio & Powell, 1983; Podolny, 1993). Providing detailed information about equity and risks proved to be effective signals for fundraising (Ahlers et al., 2015).

Social capital is an important aspect of venture quality, since crowd sentiments are crucial in a crowdfunding campaign (Ahlers et al., 2015; Baum & Silverman, 2004). Belleflamme et al. (2014) imply that, in order to benefit from crowdfunding, the entrepreneur must build a community of individuals with whom he or she must interact. Crowdfunding is associated with

(17)

16

community-based experience that generate benefits for the participating members, implying crowdfunders often support project because they believe they will become consumers and benefit from community-benefits. Research suggests that individuals are motivation to participate is also related to their desire to be recognized by the firm (Gerber, Hui & Kuo, 2012; Jeppesen & Frederiksen, 2006).

1.3 ICO

According to Adhami, Giudici and Martinazzi (2018, pp. 2), Initial Coin Offerings (ICOs) can be defined as “open calls for funding promoted by organizations, companies, and

entrepreneurs to raise money through cryptocurrencies, in exchange for a “token” that can be sold on the Internet or used in the future to obtain products or services and, at times, profits.”

Note that this description is very similar to the description of crowdfunding by Belleflamme et al. (2014). Blockchain start-ups use ICOs as a method to raise early capital (Adhami et al., 2018; Conley, 2017; Kostovetsky & Benedetti, 2018; Venegas, 2017). Before launching an ICO, a company produces a whitepaper that describes the business model and technical approach. Each company has its own unique token in line with its technological vision. It includes details about the token or coin offered as well as the process of token creation. In general, tokens can have two functions: either being a utility or a security token. Utility tokens provide holders access to the company’s product or service, whereas security tokens refer to tradeable assets that represent shares of the company stock and is therefore similar to the shares issued in an IPO. Besides these tokens, there are coins that serve as currencies (Conley, 2017).

ICOs have potential in being a very successful way for raising financial resources (Kostovetsky & Benedetti, 2018). Instead of having the work and expenses of making an Initial Public Offering (IPO) or of convincing banks or venture capitalists, blockchain companies are embracing this new funding method (Conley, 2017; Venegas, 2017).

(18)

17

The first ever ICO took place in August 2013, when J. R. Sweezy introduced MasterCoin, later renamed OMNI. MasterCoin is a protocol built on top of the Bitcoin blockchain. MasterCoin tokens were created via a fundraiser, during which interested investors could send Bitcoins to an account and receive MasterCoins in return. Approximately $500,000 worth of Bitcoin was collected. Other blockchain start-ups started using this fundraising model for the creation of their cryptocurrencies. Ethereum raised over $15 million in August 2014, and they further streamlined the ICO process with their introduction of a standard for implementing tokens (ERC20). Since then, the yearly number of ICOs kept rising, with 9 offerings in 2015, 74 offerings in 2016, and more than 1000 ICOs in 2017 (Kostovetsky & Benedetti, 2018).

Kostovetsky and Benedetti (2018) make the comparison between ICOs and IPOs, although the two concepts differ in the assets being offered. ICOs offer a token, whereas IPOs offer an equity stake. Furthermore, ICO firms differ from IPO firms since they are often much younger and smaller forms, typically in the earliest stage of the firm’s lifecycle. Also, ICO firms do not use prestigious firms as endorsers to attract investors and determine value (Stuart et al., 1999). However, they do make use of expert advisors to signal the quality of their product and project, which in essence is similar to the use of prestigious endorsers. At the same time, IPO underpricing (Demers & Lewellen, 2006) and post-IPO underperformance (Ritter, 1991) are similar to ICO underpricing and underperformance when listed on exchange platforms (Kostovetsky & Benedetti, 2018). According to Kostovetsky and Benedetti (2018), the pricing of ICOs below their market value results in a return of at least 82% to the general ICO investor. Underpricing becomes less when a pre-sale is done, primarily because the demand for the tokens can be measured and a more accurate price can be asked during the ICO. Furthermore, underpricing does not seem to be related to information asymmetries, as it is for IPOs.

(19)

18

As mentioned before, ICOs have their roots in crowdfunding. ICOs and crowdfunding differ in several aspects, the most important ones being the regulations that come with both funding methods and the money raised by the different methods. As for regulations of ICOs, these are currently close to non-existent (Venegas, 2017; White, 2015). To provide context to the amounts of money being raised: the most successful crowdfunding campaign at the time of writing (June 2018) raised $20.3 million (Metz, 2018), whereas Block.one raised over $4 billion with its ICO in June 2018 (DeFranco, 2018). It is therefore stated that ICOs take crowdfunding to a new level (Yadav, 2017).

There are more dissimilarities in addition to the above-mentioned differences between ICOs, IPOs and crowdfunding. In comparison, ICOs raise money quickly and without many difficulties (Conley, 2017). The cycle time for gathering the funds is relatively low compared to IPOs, crowdfunding campaigns, and other funding methods. In addition, the early stages of the start-ups look differently. Whereas one needs to have either a prototype (Ahlers et al., 2015; Mollick, 2014) or another type of proof of quality or potential (Berger & Udell, 1995; Cosh et al., 2009), all that is needed to start an ICO is a whitepaper. Even this is not a necessity, since ICOs without whitepaper do exist, however a whitepaper is a strong potential signal of quality (Conley, 2017). Besides the magnitude of funds raised, these features make ICOs into an attractive funding method for entrepreneurial start-ups.

ICOs create several additional benefits. Firstly, since the ICO environment is still largely unregulated, national laws and economic regulations are currently not established. This gives entrepreneurs the freedom to design any model of token sales they desire. Several alternatives in ICO models are (Buterin, 2017):

- Capped versus uncapped token numbers, which means the number of tokens distributed in the sale either has a limit or not.

(20)

19

- Capped versus uncapped capital, which means that the amount of money raised either has a limit or not.

- Time-based, which means the ICO will last for a pre-established period of time. Secondly, the bought tokens or coins are available to be traded in the marketplace on online exchange platforms. Unlike crowdfunding, this allows investors to trade early and not face a lock-in period, which is the period until the launch of the product. In other words, the liquidity of the investment remains high. For investors, this means freedom from both a lock-in period as well as a project exit. For entrepreneurs, this means the valuation of their project is often based on crowd sentiments instead of project potential. Signalling project quality to positively influence the crowd is therefore very important (Kostovetsky & Benedetti, 2018; Yadav, 2017).

Signalling might be even more important for ICOs than for regular crowdfunding projects, since all to show at this stage for blockchain entrepreneurs is an idea in the form of a whitepaper (Conley, 2017; Venegas, 2017), whereas crowdfunding project often already show a prototype or other proof of concept (Ahlers et al., 2015; Mollick, 2014). Potential investors use social capital as a signal for project quality (Ahlers et al., 2015; Baum & Silverman, 2004). Social capital might therefore be important when launching an ICO and will be discussed in chapter 3.

Several signals were studied by Adhami et al. (2018), who found that ICO success is higher if the code source is available, when a token pre-sale is organized, and when tokens allow investors access to a specific service or share in profit. Available codes add on the open source characteristic of the blockchain, which implies that the resources belong to the community rather than to the issuing firm. Thereby, open-source implies that there is no restriction on who can use the code protocols, which in fact makes them a public good (Brabham, 2008). Also, disclosure of programming codes allows assessment of the technical validity of the coin offer and project. Furthermore, developers can use the programming codes for further development

(21)

20

of applications, increasing the overall value the project and its components (Adhami et al., 2018).

Even though the ICO environment is nicknamed the wild west of crowdfunding due to a lack of regulations and a presence of scams and frauds, it allows relatively small start-ups to raise a high amount of funds quickly and with few costs. The willingness of investors to take risks in this highly volatile market enables start-ups to explore the possibilities of this technology and strive for innovation (Conley, 2017).

While researchers are still exploring crowdfunding and comprehending all mechanisms involved, a new financing method has emerged. Research on ICOs is relevant since it is a fast-developing concept that has received little academic attention thus far. The durability and adoptability of ICOs by the mass public have yet to be proven, however one cannot deny the possibilities and magnitude of this funding method in terms of financial resources and project timespan. The rise of ICOs is a phenomenon that is happening right now, and only time will tell whether it is here to stay. In the meantime, ICOs are an important research topic since the research gap leaves space for all types of studies.

(22)

21

2. Cryptocurrency market

The cryptocurrency market is a market of unredeemable digital assets secured by cryptography (White, 2015). Cryptocurrency is built upon a decentralized ledger called the blockchain, supported by blockchain technology. Blockchains such as Bitcoin and Ethereum realize trust-minimized cashflows. The decentralized nature of this technology makes it possible to make transactions without the need for a third party or intermediary (Venegas, 2017).

2.1 Cryptocurrency

In 2008, a person or group published the paper ‘’Bitcoin: A Peer-To-Peer Electronic Cash system’’ under the pseudonym Satoshi Nakamoto (Crosby, Pattanayak, Verma & Kalyanaraman, 2016; Nakamoto, 2008). To this day, despite countless theories, the identity of this person or group is unclear. A few months after publishing the paper, an open source program implementing the new protocol was released, beginning with the Genesis Block including 50 coins. This program is free for anyone to install and thereby become part of the Bitcoin peer-to-peer network. Bitcoin as an open source program has increased drastically ever since, along with a large variety of other cryptocurrencies and even non-financial applications of the open source program (Crosby et al., 2016). Bitcoin became the first decentralized cryptocurrency. Cryptocurrencies are both tokens and coins that are encrypted and used as a means of exchange in a peer-to-peer network (Baturin, 2018).

Bitcoin does three things: it validates entries, safeguards entries, and preserves the historic record on a distributed and decentralized ledger. It thereby fulfils the role of a trusted third party such as a banking system. Bitcoin is completely trustless, since it uses cryptographic proof instead of a third-party mechanism. The transaction is protected through a digital signature: it is both sent to the “public key” of the receiver and signed by the “private key” of

(23)

22

the sender. To start the transaction, the owner of the cryptocurrency needs to prove its ownership by signing the transaction with the private key, whereas the receiver of the cryptocurrency verifies this private key by using the public key. Then, the transaction needs to be verified by a verifying node. The verifying node ensures two things: firstly, the spender needs to prove ownership of the cryptocurrency by providing a digital signature (this is the private key). Secondly, the transaction needs to be checked against the account to ensure the spender has sufficient cryptocurrency in its account (this is the public key). After verification, the transaction is broadcasted to every node in the Bitcoin network and recorded in a public ledger (Crosby et al., 2016).

One of the problems solved by Bitcoin is the problem of double spending. Instead of the need for legal forces or central authorities, the problem is solved by the decentralized verification process, making it impossible for a coin to be transitioned in more than one way at the same time. Every transaction needs to be approved by verification before happening and being allowed in the public ledger (White, 2015). The transactions are ordered based on the time of verification, and the blocks are linked through the Blockchain in a linear and chronological order. Every block contains a hash of the previous block (Crosby et al., 2016).

There arises a problem of different nodes verifying and approving different transactions at the same time. The order of the blockchain will become unreliable, since different blocks are added at the same point in time. Different orders at different points in the network will form. This problem is solved by introducing a mathematical puzzle, ensuring the block will only be accepted in the chain if it contains the answer to the specific mathematical problem. This is also known as “proof of work” (Crosby et al., 2016). Verifying nodes that solved the puzzle get rewarded in revenue by producing or mining new coins (White, 2015).

One feature of blockchain technology is that it is an open source, meaning that the codes are open for everyone to see. Developers can build upon the technology that is already there,

(24)

23

thereby creating a coin with improved or different characteristics than the original one. They have the advantage of being able to improve upon the original codes, that were created over 8 years ago (White, 2015). This is where altcoins come in. Under altcoins we understand all cryptocurrencies other than Bitcoin. Cryptocurrencies are digital or virtual currencies that are secured using cryptography (Dolce, 2017). Following the philosophy behind Bitcoin, the first ever developed altcoins are non-profit projects. (White, 2015). Cryptocurrency start-ups have a wide range of functions. Some simply provide a digital currency alternative of the Bitcoin or even fiat money. Most of the start-ups however see an opportunity to enter new markets or make existing markets more efficient (Conley, 2017).

Litecoin was introduced in October 2011. One improvement introduced was a faster transaction confirmation compared to Bitcoin, with 2.5 minutes of time needed against the 10 minutes of Bitcoin. In August 2012, an even faster coin came to the market. Peercoin increased the speed of transaction confirmation by offering a new protocol: proof of stake, rather than Bitcoin’s proof of work. Proof of stake is less computationally demanding, which increases the speed of transaction. In addition, its protocol is perceived to be less vulnerable to attacks by 51 percent of miners, because it does not promote the use of large mining pools. DarkCoin, later renamed Dash, is an altcoin launched in April 2014. It enabled payments to be confirmed within seconds. It also alters the Bitcoin code to provide greater anonymity to its users by clouding the transactions instead of putting the transactions on public view in a decentralized ledger. BlackCoin, first launched in February 2014, improved the proof of stake protocol for an even faster verification (White, 2015).

Ethereum, perhaps the most successful altcoin, with a market cap being second to Bitcoin, has created excitement with the development of smart contracts (Crosby, 2017). Smart contracts are programs that can establish and enforce agreements and relations between parties, such as transactions (Venegas, 2017). In addition, the Ethereum blockchain holds its own

(25)

24

cryptocurrency which can be used to pay for serviced on the programmable platform. The Ethereum blockchain is already adopted by early movers in areas such as governance, autonomous banks, crowdfunding and financial trading. In these areas, smart contracts create numerous possibilities (Crosby, 2017).

Within cryptocurrencies, there are coins and tokens. Tokens are different from altcoins because of their structure. While altcoins are completely separate currencies operating on their own separate blockchain, tokens operate on top of an existing blockchain that enables creation of decentralized applications. This makes tokens much easier to create than altcoins, since the protocols already exist and the blockchain does not have to be developed from scratch (Dolce, 2017). The tokens offered by start-ups have varying roles: were some serve as an internal unit of account to keep track of services and processes within a company, others serve as a medium to enable transactions between buyers and sellers. Tokens can also be used for alternative functions, such as privileges given to the holders of tokens in specific interactions on an online platform or rights to certain revenue streams (Conley, 2017). Tokens can represent anything that is tradeable. Confusingly, both altcoins and tokens belong to the category of cryptocurrencies, while only altcoins are used as real currencies (Dolce, 2017).

2.2 Market

According to Velde (2013), Bitcoin enjoys a quasi-monopoly in the cryptocurrency markets due to the first-mover advantage. Bitcoin is believed to have a large market share simply because it created the market. One well-known danger of a monopoly is that the monopolist firm may restrict output to raise the price above marginal costs. This can never be the case for Bitcoin, since the maximum number of Bitcoins ever to exist is predetermined by a program, impossible to be manually altered (White, 2015).

According to Friedman (1960), the open market of an irredeemable currency asks for the setting of an external limit on its amount. He emphasized the importance of an authority to

(26)

25

preserve the currency’s value, since open competition would drive the value of an irredeemable currency all the way down to zero if an x amount of that irredeemable currency could be introduced at no higher cost. In some way, this could be compared to for instance Bitcoin monopolizing the world of cryptocurrency, since the introduction of multiple or even unlimited cryptocurrencies would mean the diminishing value of all of them. This would mean that Bitcoin was the authorized issuer and the only available cryptocurrency. Klein (1974) pointed out that Friedman (1960) did not add trademarks to his view of the market. For example, when all fake Chanel perfume is banned, this does not imply that Chanel receives a monopoly on the perfume market. It simply means that Chanel has the monopoly on selling Chanel-branded perfume. Competing perfumes can still be produced and sold under different trademarks. When applied to the cryptocurrency market, this example demonstrates how numerous cryptocurrencies can co-exist without the introduction of a new one diminishing the value of the total market (White, 2015). According to DeLong (2013), it is possible that the value of Bitcoin and all cryptocurrencies will fall to zero, due to competition from more and more altcoins expanding the total amount of circulating cryptocurrencies in the market without limit. White (2015) argues that even if the number of altcoins being introduced is infinite, this does not mean that the value of Bitcoin or any established altcoins will tend to zero. In practice, inferior or unestablished altcoins do not cannibalize Bitcoin’s market share. Only valued and established altcoins can do so, since they have done since May 2013, reducing Bitcoin’s market share from 95% in 2013 to 43% in 2018. At the same time, Bitcoin’s market cap grew from $1.26 billion in May 2013 to $195.08 billion in March 2018, with its peak thus far at more than $325 billion (CoinMarketCap, 2018).

Coase (1972) identified a solution to the problem of price-drops due to limitless introduction of alternatives. To illustrate the solution, take for example an artist that sells her prints for $200 per piece. The marginal cost as in material cost for the piece might be just $1.

(27)

26

For the artist to ask this kind of money for a piece, she must convince the buyer of the value of the piece. To commit herself to the piece and its value, the artist produces the piece in a numbered edition with a pre-established maximum (this print is #22/100). This way, the buyer is sure that the value of all pieces produced are sold for the same price, and no cheaper reproductions will be made afterwards. This example is applicable to cryptocurrencies in the way that caps are put on the supply of the coins, initiating a maximum possible amount circulating in the market. Bitcoin was the first to introduce the limitation of quantity to private currency. The limit of coins in the market is not enforced by a contractual promise of an issuing company, but rather by a limit programmed into the system’s protocol (White, 2015). Putting a limit on the coins refers to the quantity of the coins and not the value, although these variables are often interrelated (DeLong, 2013). The conceptual limit on the value of for instance Bitcoin is when it would achieve 100 percent of the market share value of all money balances in the world (Luther & White, 2014). Most altcoins make use of this limitation, as it is a strong quality signal for investors, decreasing to the risk of deflation (Yadav, 2017). The limit to the coins makes it able for them to maintain value compared to internal coin supply of one sort, for instance Bitcoin. However, it does not explain how a coin can maintain value when there is a possibility of unlimited introduction of other coins, say altcoins. Still, since different coins enjoy different characteristics, they are not to be seen as interchangeable. The value of different coins is therefore ultimately established through the value and demand given to it by buyers and investors. The technology and team behind one coin can make the value of the coin different than other coins (White, 2015).

Limiting the quantity available thus solves the problem of over-issuing. This theory might work for the arts, however a shortcoming arises when applied to currencies. Unlike a piece of art with a pre-established and committed price, quantity limits enable the price of currencies to fluctuate with demand. This explains the volatility of prices of cryptocurrencies

(28)

27

(Luther & White, 2014). It also explains how it is possible that several altcoins declined to a value near to zero (Venegas, 2017). This volatility of prices is one of the reasons why crypto-critics claim cryptocurrencies to be a bubble. A bubble is defined as value given to an asset without this value being valid, or a market valuation based on expectations only (White, 2015). In this case, claims are made of cryptocurrencies being valued above the fundamental value of the asset. It is said that the demand for cryptocurrencies is unsupported by its usefulness (White, 2015). It can be stated that official fiat money or commodity money trades above its fundamental value as well (Venegas, 2017; White, 2015). It is true that fiat money as an irredeemable currency has the sole purpose of being spent at some point, and it serves no purpose separate from its market value. An irredeemable currency therefore has a positive market value, but only to the extent that it has positive expectations for the future market (White, 2015).

Upcoming cryptocurrencies do offer fundamental value, either economic or other types of value like pleasure (Luther, 2016; Murphy, 2013; Selgin 2015). The value of an asset can be seen as separate from its economic value, since the value lies in the opportunities and functions an asset provides. In the case of currencies, the functions of solving a medium-of-exchange coordination problem raises the value of the asset. The function of the asset results in surplus of value, or added value, on top of the fundamental value of that asset. This explains how money of any kind can be of higher value than the marginal costs, like any asset, tangible or intangible. In this sense, bubbles are not a negative phenomenon, since an asset traded at a price higher than its fundamental value implies the added value in forms of benefits or contributions made possible by that asset. In the case of cryptocurrencies, this added value may be the possibility of trustless exchanges or social contributions as a medium of exchange (Venegas, 2017). According to Venegas (2017) and White (2015), the social contribution of cryptocurrencies arises through voluntary trade rather than legal consumption, and the value of

(29)

28

this contribution arises only after the costs of generating and maintaining the asset in question are met. Many cryptocurrency start-ups are non-profit: the founders are not looking for personal profit. Also, no part of the asset value is based on legal compulsion. This philosophy adds to the value of social contribution.

Along with the view of cryptocurrencies having value because of demand and social contribution (Venegas, 2017; White, 2015), arises the question of why individuals invest in cryptocurrencies. Research suggest that investors can be divided in two distinct categories (Cocco, Concas & Marchesi, 2017; White, 2015). To illustrate the difference, consider again the example of an artist’s print. Some print buyers are genuine art lovers and plan on hanging the piece on the wall to enjoy its aesthetic value, whereas other print buyers will store the piece and hope for its price to rise (White, 2015).

Applying this example to the cryptocurrency market, Cocco et al. (2017) divide investors based on a distinction between random traders and speculators. Random traders represent any investor that enters the cryptocurrency market for any reason except speculative purposes. Motivation for investing in cryptocurrency may be linked to their needs or an aversion to the fiat system. These investors are the anti-statists who like what cryptocurrency stands for (White, 2015), tech enthusiasts who enjoy the protocols, or developers who support their own project by buying some coins (Luther, 2016; Murphy, 2013; Selgin, 2015). As the name suggests, random traders issue orders in a random way and in line with their personal available resources. Because of this randomness, the random trader provides a certain stability to the system, particularly to the price of the coins. More specifically, and in line with basic economics, an increase in buy orders implies an increase in price, whereas an increase in sell orders implies a decrease in price. This results in a balance of sell and buy orders that stabilize the market (Cocco et al., 2017).

(30)

29

On the other hand, speculators are investors whose main motivation to invest is to have an economic gain as an outcome. In general, they speculate that prices that rise will continue rising, whereas prices that fall will continue falling. Therefore, they usually issue buy orders when the price is rising and sell orders when the price is falling. Speculators are the main cause for large fluctuations in the market, and to the extending rise or fall of market prices (Cocco et al., 2017).

Since the market for cryptocurrencies is still in its infancy and rapidly evolving, it is still full of surprises and uncertainties. Governments are trying to get a hold on the market by setting up rules and regulations. According to White (2015), policymakers should be careful with restricting the market, since the opportunities for improving economic welfare might be at stake. He claims that the interventions of entrepreneurial innovations will prevent the realization of potential breakthroughs. Strict regulations might deviate us from improving the economy in a radical way (White, 2015). Regulatory uncertainty around the world has recently slowed the explosive growth of ICOs (Kostovetsky & Benedetti, 2018). On the other hand, it is shown that blockchain technology enables criminal activity such as dealing of illegal goods or theft by hackers. A need for some mechanism to prevent these things from happening is present. Whether this mechanism needs to take the form of governmental regulations or whether there is another solution to this problem has yet to be discovered. Right now, the cryptocurrency market is seen as a wild west, where one must rely on the goodness of others. Ideally, humankind would be able to live in this cryptocurrency ecosystem without the need for legal or governmental interference.

(31)

30

3. Online community

The importance of online communities has been well-studied and well-document in the field of crowdfunding. Research on the online communities of cryptocurrency start-ups is scarce. Some empirical research has been done on the relationship between Twitter users and the cryptocurrency’s market cap, which is suggested to be positive and convex (Kostovetsky & Benedetti, 2018). Analysis of the online community of cryptocurrencies on Twitter implies that start-ups still active on Twitter 120 days after the ICO account for nearly all ICO capital raised. Also, daily messages posted on Twitter by the start-up seem to be positively related with returns on the same day, but negatively with returns in the future. This suggests that the over-use of interacting with the community results in overreacting and reversals (Kostovetsky and Benedetti, 2018). This chapter will discuss online communities and its potential underlying processes and components, thereby establishing the conceptual models and hypotheses of this research.

3.1 Sense of online community

Communication technologies like the internet allow for the forming and maintaining of a network of weak ties online (Hampton, 2003; Haythornthwaite, 2002). The more centralized the connection, the more fragile the weak-tie networks (Haythornthwaite, 2002). Building weak-tie networks online supports community building (Pinkett, 2003). According to Shen, Huang, Chu and Liao (2010), online communities are essential to a business since an online community that satisfies the user has effects similar to a successful e-service. In addition, loyalty to an online community can cause community members to promote the community, attracting new members by positive word of mouth (Lin, Hung & Chen, 2009; Srinivasan, Anderson & Kishore, 2002). Furthermore, community loyalty is crucial for the successful

(32)

31

online community in terms of member interaction (Flavián, Guinalíu, & Gurrea, 2006; Lin et al., 2009; Srinivasan et al., 2002).

In the working environment, a sense of community has led to an increase in job satisfaction and improved organizational citizenship behaviour. For instance, it resulted in higher degrees of loyalty and courtesy (Burroughs & Eby, 1998). Also, organizations benefit from the social networks their employees use since this increases the flow of information internally as well as externally (Pickering & King, 1995; Constant, Sproull & Kiesler, 1996). Besides an increase in information flows, organizations can capture value from online social networks in terms of economic benefits (Blanchard & Markus, 2004). The creation of online communities has become a key to business success (Hagel & Armstrong, 1997). To build a working online community, businesses need to both create the online meeting place and facilitate the community-like behaviours and processes (Blanchard & Markus, 2004). Building a community refers to creating a sense of belonging (Sergiovanni, 1994).

According to Blanchard and Markus (2004), and in line with McMillan and Chavis (1986), the sense of virtual community and feelings of belonging are not present in all virtual social groupings. However, when it does occur, these virtual groupings are defined as virtual communities. A sense of community is defined as a human phenomenon of the feeling of belonging to a group and having collective experiences with this group (McMillan & Chavis, 1986; Peterson, Speer & McMillan, 2008). Sense of community brings beneficial outcomes (Blanchard & Markus, 2004). When the sense of virtual community is present, this simultaneously means that several social processes and behaviours are present, such as support, development and maintenance of norms and boundaries, and social control. McMillan and Chavis (1986) established a framework of virtual communities with four dimensions that have later been supported by various empirical behavioural studies:

(33)

32

- Feeling of membership: feelings of both belonging to and identifying with the community, as well as the feeling of personal relatedness (e.g. Baym, 1995, 1997; Markus & Agres, 2000).

- Feeling of influence: feelings of both having influence on and being influenced by the community, as well as the sense of mattering or purpose (Baym, 1997; Markus, 1994; Pliskin & Romm, 1997).

- Integration and fulfilment of needs: feelings of receiving support from other community members while at the same time giving support, as well as feeling the personal needs are met by the resources received from being a member of the group (Baym, 1997; Preece, 1999; Rheingold, 1993).

- Shared emotional connection: feelings of relationships and a community spirit, as well as the feeling that members have shared important history or similar experiences and will do so in the future. (Preece, 1999; Rheingold, 1993).

Research suggest that successful crowdfunding campaigns benefit from building a community and interacting with this community frequently (Belleflamme et al., 2014; Gerber et al., 2012; Jeppesen & Frederiksen, 2006; Mollick, 2014). Since crowdfunding and ICOs overlap on many areas, it is expected that the online community is important for cryptocurrency start-ups issuing ICOs. According to Ellison et al. (2007), a sense of online community is associated with higher rates of member satisfaction. It is expected that a sense of online community has a positive influence on ICO success, since the higher the sense of online community, the higher the member satisfaction (Blanchard & Markus, 2004; Ellison et al., 2007). High member satisfaction in turn is likely to result in members supporting the project or product, in this case by investing in an ICO.

Based on crowdfunding theories on online communities (Belleflamme et al., 2014; Gerber et al., 2012; Jeppesen & Frederiksen, 2006; Mollick, 2014) and studies on sense of

(34)

33

community and member satisfaction (Blanchard & Markus, 2004; Ellison et al., 2007), the following is hypothesized:

H1. The sense of online community positively influences the success of an ICO.

3.2 Member intensity

Member intensity refers to the frequency and duration of use of a social network platform, as well as the emotional connectiveness and integration into the member’s daily activities (Ellison et al., 2007). It refers to member participation in an online community environment. According to Brown (2001), participation in an online learning environment resulted in students’ increased feelings of belonging to the community. Members who participated in discussions felt worthier and more accepted by the community. Participation is associated with the intensity and engagement of the member’s attitude towards the environment. Brown (2001) found that time spent in the online environment positively relates to the sense of community. Students who felt embedded in the community spent more time in the online environment and interacted with other members more intensely.

The communities of cryptocurrency start-ups share similarities with the online learning environment Brown (2001) studied. Both are online environments where participants engage in discussions and share knowledge and opinions. Members of both online environments have similar interests or goals: for the cryptocurrency communities this is cryptocurrency, for the online learning environment this is learning objectives. Therefore, it is expected that member intensity will also have a positive influence on sense of community, as was the case for the online learning environment:

(35)

34

3.3 Social presence

Another potential underlying variable influencing the sense of online communities is social presence. Social presence has a multitude of definitions, such as being with others (Heeter, 1992), the level of awareness of the co-presence of another human, being or intelligence (Biocca & Nowak, 2001), and the degree of salience of the other person in the interaction (Short, Williams & Christie, 1976). It is associated with the concept of intimacy (Argyle & Dean, 1965), and the concept of immediacy (Wiener & Mehrabian, 1968). The degree of intimacy one experiences is depends on factors such as eye contact and smiling. Therefore, television offers more intimacy than audio or text-based communication. (Argyle & Dean, 1965; Short, Williams & Christie, 1976). Immediacy measures the psychological distance between the person that is communicating and the object of his or her communication. A person can express immediacy in a verbal or non-verbal manner, for instance with physical distance or facial expression. Immediacy enhances social presence (Wiener & Mehrabian, 1968; Gunawardena & Zittle, 1997). Social presence is a both a factor of the medium, as well as the participating communicators and their presence (Short et al., 1976).

The introduction of new communication technologies keeps improving the quality and possibilities of social contact across space and time (Brown & Green, 2012). Social presence of mediated communication is increased via improving technologies such as emoticons or video telephony (Biocca & Harms, 2002). Social presence in computer-mediated and text-based communication is extremely low in comparison to face-to-face communication (Gunawardena & Zittle, 1997). However, empirical research has indicated the development of online communities and warm friendships online, suggesting positive relational behaviour (Walther 1992; Baym 1995; Gunawardena & Zittle, 1997). According to Gunawardena and Zittle (1997), the social presence is a strong predictor of satisfaction while in a

(36)

computer-35

mediated environment. However, besides the characteristics of the communication medium, moderators and the online community of the computer-mediated communication platform are to a large extent responsible for the social presence perceived by users (Eastmond, 1993).

Social presence depends partly on the participating communicators and their presence (Short et al., 1976). It is also a predictor for member satisfaction (Gunawardena & Zittle, 1997), which may result to members being loyal to a community (Flavián et al., 2006; Lin et al., 2009; Srinivasan et al., 2002). It is therefore hypothesized that the relationship between member intensity and the sense of online community is higher when social presence exists.

H3. The relationship between member intensity and the sense of online community is positively mediated by social presence.

3.4 Bridging social capital

Generally, individuals want to be part of a community because being a member of a community brings benefits (Belleflamme et al., 2014; Lin, 2017). One of the causes of individual benefits of communities is social capital. Social capital is defined as the investment in social relations with expected returns, it is thus value captured from embedded resources in social networks (Lin, 2017). It has been linked to numerous positive social outcomes, such as lower crime rates and more efficient financial markets (Adler & Kwon, 2002). Social networks will benefit individuals due to four reasons: firstly, social networks facilitate the flow of information. Secondly, social connections can influence agents who play a critical role in decisions, for instance a recruiter who can influence the hiring process. Thirdly, social tie resources and their relationship to the individual may improve an individual’s social credentials. This means that when someone has a powerful network, the status of the individual will be high. Finally, social relations reinforce identity and recognition. As a member of a social

(37)

36

group, an individual has access to both emotional support as public acknowledgement of being a group member. Also, the individual has access to the groups resources (Lin, 2017).

Social capital on a group level refers to the collective asset produced by individuals interacting and networking. Social capital can thus be perceived as being both a collective and individual good, since the resources provided by the network benefit both the collective and the individual within the collective. At a group level, social capital is to some extent an aggregation of the resources possessed by its members and shared by interaction within the network (Ellison et al., 2007). It has a positive effect on the interaction among its group members and therefore increases the commitment to a community (Helliwell & Putnam, 2004).

There is a difference in resources available in the network between networks with strong ties and networks with weak ties, a distinction Putnam (2000) calls “bonding social capital” and “bridging social capital” respectively. Bonding social capital is found between strong social connections such as family or close friends that can offer emotional support (Bourdieu, 1986), whereas bridging social capital relates to weaker tied networks whose members provide information but not necessarily emotional support (Ellison et al., 2007; Granovetter, 1982; Putnam, 2000). For information flows to prosper, it is important that bridges are present in the networks, and weak ties are therefore significant (Granovetter, 1977; Burt, 1992). Since the focus of this study is on online communities formed on similar interests and information flows, which concerns the investment in cryptocurrencies, the concept of bridging social capital will be further explored.

With the upcoming of the internet, it has become easier to maintain a large social network online (Ellison et al., 2007). Research suggests that social network sites can possibly build social capital among its users (Putnam, 2000; Williams, 2006; Ellison et al., 2007). Bridging social capital is utilized by network sites such as Facebook, since it enables users to build and maintain a large social network of weak ties from which they can obtain social benefits (Donath

Disrupting Entrepreneurial Finance: the importance of online communities for ICO success