Crowdfunding: Determinants of Success and Failure

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With popular crowdfunding platforms reporting millions of euros raised in just one year’s time, crowdfunding success might seem to come easy. Yet more than half of projects submitted on Kickstarter, one of the most prominent crowdfunding platforms, fail (Kickstarter stats). Why?

Those who have crowdfunded know that to successfully raise the set amount of money is a goal requiring effort, time, some training and expertise. On top of that, there are also particular contexts and factors that can enhance or limit the campaign’s potential to succeed. What exactly these are and how much weight they each have in the fate of a campaign has largely gone undocumented, as academic inquiries have only recently begun. This is a serious draw back, as many potential crowdfunders would benefit greatly from valuable insights in crowdfunding mechanisms.

In this context, Ethan Mollick’s The Dynamics of Crowdfunding: An Exploratory Study  (2012) tries to answer one of the most heated questions circulating around this alternative finance model – what are the determinants of success and failure in crowdfunding and how do they inter-relate? The paper uses the database of Kickstarter (roughly 46,000 projects,  half successfully completed, half failed) to probe certain factors believed to play an important role in the process of raising money.

Some of  the tackled questions reveal the following findings:

Does the size of the campaigners’ social network affect the success of their campaign? Findings suggest that a network of merely 10 Facebook friends gives the campaign a 9% chance of succeeding, while a network of 100 friends takes that to a 20% chance and one of 1000 friends takes it to 40% . This confirms the intuition that the use of one’s social media network increases the money raised – the more friends, the better. Social capital plays an important role.

Can we discuss levels of “quality” in regards to projects? What are indicators of quality and does the crowd judge on them? The author looked into how well prepared the campaign pitches were and took the presence or absence of a video as the main indicator for quality. Findings: projects with no video have a 15% chance of success, those incorporating videos are 37% likely to succeed.

Does the geographic location of the project bear any relevance on its success? Mollick points out that projects stand a higher chance of success if the creative industry in their location is also well developed. Furthermore, he noticed that there is a cultural determinant involved as well: certain areas with strong history in either the film industry (LA), music (Nashville) or technology (San Francisco) increase the success chance of crowdfunding projects that fall in the same category.

Does being featured on Kicstarter’s homepage increase chances of success? An unfeatured project stands a 30% chance of success when compared to a featured project which stands a 89% chance of success. Mollick explains this by the increasing trust level that Kickstarter offers those project by choosing to support them.

Do big goal size projects stand less chances of success when compared to smaller budget projects? Increasing goal size is negatively associated with success – this is the case when comparing budgets over $5,000.

Does a longer time frame for raising money improve chances of success? Contrary to the initial assumption, findings suggest that longer duration decreases chances of success. This is something the author correlates with the crowd’s perception that worthy projects should reach target quickly as a validation of their value.

Other findings in the dynamics of crowdfunding include that:

  • failed projects roughly raised less than 10% of their goal, with very few reaching 50%
  • successful projects rarely raise more than the set amount. When they do, it’s generally about 10% more – the rare but strong overachievers (raising 10 times their goal) are almost solely projects in technology, product design, gaming and software.
  • 75% of successful crowdfunders deliver their products later than expected- especially if they were over-funded.

This research is valuable for anyone considering to crowdfund as it tests some of the previously assumed factors that influence success. By looking directly into data and mechanisms, it arguably offers much more useful information the usual crowdfunding guides or “tips and tricks” offered by the crowdfunding platform themselves.

Nevertheless, it also opens up space for new questions. What determines, for example, the campaign reaching the initial and critical 10-20% of funds? Given that other studies show how the final big amounts are raised in the last days of the campaign, can we assume there is pattern in how and when funders donate? How could know-how in this improve the efforts and tactics crowdfunders approach? How much time investment, on average, does a campaign require? What percentage of funders actually come from the immediate social networks of those crowdfunding and how are strangers approached?

Further research into crowdfundung dynamics, as needed as it is, also depends on availability of data. While Kickstarter does a good job at being open about its statistics, many platforms choose to disclose only some, if any, stats and inner-mechanisms.