Growthology

Lessons for Entrepreneurs from Crowdfunding Redux

A couple of weeks ago, Mindee Forman highlighted some key findings from Ethan Mollick's research on crowdfunding. I'm seeing more and more papers crop up on this topic, including what I will be highlighting today, "Crowdfunding Creative Ideas: The Dynamics of Project Backers in Kickstarter," a working paper from Venkat Kuppuswamy and Barry L. Bayus (available here). The paper is interesting throughout and has some factoids about Kickstarter projects that I will not call attention to here.

This paper corroborates many of the findings that Mindee wrote about--that being featured on Kickstarter, having a video, and having a shorter project duration increases the chances of having a successful fund raise. While this may seem redudant, it's important in terms of research for different analysis to draw the same conclusions. We also learn some new information from Kuppuswamy and Bayus about attracting backers:

1. Smaller goals are more successful at being funded.
2. Many reward categories increases the chances for being funded.
3. A project with a colon in the title is correlated with successful projects [amusing, I wish they spent more time theorizing on this one].
4. Prior Kickstarter experience helps a little.

They also investigate donations along the funding cycle. They find that after initial backers sign on, an average project experiences a lull in attracting new backers, but makes a comeback once the deadline nears.

The authors interpret this in terms of the buzz or excitement a project intially generates, followed by a decrease in interest, followed by a pickup when the deadline approaches. Alternatively, to me this sounds like it could be a good samaritan dilemma--I see that someone else is already helping, so I don't need to contribute here; oh wait, this is more urgent than I thought, I should help!

In any event, Kuppuswamy and Bayus find that posting private and public updates as the funding deadline approaches helps quite a bit, which is significant because this is something under the project creator's control.

Lessons for Entrepreneurs from Crowdfunding

There is a lot of buzz out there these days about crowdfunding. As Kauffman Dissertation Fellow Ethan Mollick at the University of Pennsylvania’s Wharton School puts it, "Crowdfunding has been drawing substantial attention from policy makers, managers, and entrepreneurs, but relatively little notice from academics, even though it touches on many topics of importance to scholars of entrepreneurship."

His paper from last July, "The Dynamics of Crowdfunding: Determinants of Success and Failure" (available here), examined almost 47,000 projects on Kickstarter that raised a combined revenue of $198 million. Mollick concluded that several factors influence whether a project will succeed or not:

1. The greater the size of the founder's social network, the greater the chance for success (particularly Facebook in this case; this is also known as the 'be popular' strategy).
2. The underlying quality of the projects – those with high-quality, polished pitches are more likely to be funded (e.g., use a video; as Kickstarter's website states, "Projects with videos succeed at a much higher rate than those without.").
3. A strong geographic component tie-in seems to increase success (pitching country music in Nashville, film in Los Angeles, etc.).
4. A shorter Kickstarter duration is better (35 percent chance of success for 30-day pitches, 29 percent for 60-day pitches). Mollick noted that a longer duration implies a lack of confidence in the project’s success.
5. Being highlighted on the Kickstarter website is hugely beneficial (89 percent chance of success vs. 30 percent for unfeatured projects).
6. A large number of creative individuals in the city where the project is based is associated with greater success (target these kinds of people).

Geographic Distribution of Projects by Success

The circles on this map represent counts of Kickstarter projects by city; the larger the circle, the more projects based in that area. The shading within the circle reflects the portion that were successful—dark green represents successfully funded projects while light green indicates the project was not funded. Based on Mollick's research, odds are that the successfully funded projects in given cities were a good fit culture-wise for that city.

The Kauffman Foundation will be writing some papers on crowdfunding in the near future – stay tuned!

Preliminary Look at 1 Million Cups

Yasuyuki Motoyama and I have a paper out today about 1 Million Cups (1MC), a program of Kauffman Labs for Enterprise Creation. 1MC brings together entrepreneurs weekly on Wednesday mornings--two startups talk about their businesses for about six minutes each, followed by Q&A for twenty minutes with the audience, which is compromised of anyone who wants to attend, typically other entrepreneurs, mentors, advisers, and other supporters of entrepreneurship. The program is free and as the name suggests provides ample coffee to attendees. We conducted a survey of attendees of the program back in November 2012, or roughly seven months after the program first launched in Kansas City.

There is a press release about the survey findings from Kauffman here; the paper is here; we have an article in Huffington Post about some high-level findings going up later today and I will update this post when it goes live. **Update: Huffington Post article is here. Last but not least, Jordan Bell-Masterson put together an interactive chart about some of the survey data about other Kansas City programs here.

I think the paper is particularly relevant for community organizers who are starting new programs, especially in small to medium-sized regions. I'm tempted to write more but it would just be regurgitating what is written elsewhere, so I'll just say check out the paper if you're interested in learning more.

Venture Capitalists Prefer Vegetables

Very quickly before I start, I want to point out this research would conceivably extend to all investors that take a sizable chunk of preferred stock in a startup, not just venture capitalist (my opinion, not stated by the authors).

VCs have to work with founding teams and other common stock shareholders when they want to exit their investment, and as initial public offerings have decreased, trade sales, which were already common occurrence, have become even more prevalent in recent years. In a new paper, "Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups," (available here) Brian J. Broughman and Jesse M. Fried analyze 50 trade sales of VC-backed startups located in Silicon Valley.

Broughman and Fried investigate how VCs choose to persuade the entrepreneurial teams and common stockholders to make the sale—either through bonuses or carve-outs to common shareholders (carrots), or through force by terminating the entrepreneurial team, professionally blacklisting the founders, or trying to manipulate shareholder voting (sticks).  They find that VCs rarely overtly use sticks but do use carrots with some frequency—at least one carrot was provided to the entrepreneurial team in 45 percent of sales, and on average amounted to 9 percent of the deal value.

The practical application here is that you can hold out on a sale. The infrequent overt use of sticks suggests that VCs don’t want to hurt their reputation by being forceful. There are a couple of other discussion points in the paper you can check out for yourself. I give credit to the authors for writing in an understandable and non-technical manner.

Hat tip to Robert Strom for pointing out this paper.

LegalZoom and Kauffman Annual Survey

In 2012, the Kauffman Foundation partnered with LegalZoom to conduct a survey series of new business owners in an effort to establish a broader range of metrics than are available in more traditional data sets. Q1-Q4 saw confidence surveys that helped shine light on entrepreneurs’ particular take on consumer confidence and overall economic health.

At year’s end, we followed up on these confidence indexes with a final survey of 1,431 newly incorporated businesses focused on identifying founder and venture characteristics. The official report already offers a good summary of the important details gleaned from the data, so let’s instead explore some of the data’s limitations and what they mean for this survey and entrepreneurship statistics beyond it.

The scope of the survey starts coming into focus with a breakdown of the financing. When respondents were asked where they obtained startup capital, personal funding dominated all other external sources (83% of ventures used personal funding; 59% used it as the sole source). Investors backed just 7% of ventures in the sample, and only 5% of owners secured bank loans. With most funding coming out-of-pocket, we should anticipate these businesses to be relatively small, and the data back up this expectation. 82% of companies in the sample had revenues between 0 and $49k, and 70% had no employees other than the owner(s).

Given our sample’s slender financial profile, it is unsurprising that the top business type among respondents was “Consulting” (followed by “Other” and “Service: Other Services”).  First, we should account for the possibility of selection bias here – self-employed consultants are likely to have more time and therefore greater inclination to answer a survey than do owners with responsibilities to multiple employees and complex revenue streams. Nonetheless, we should not expect selection bias to account for the entirety of such a heavy weighting toward this type of business activity.

Accordingly, we should be wary not only of our own data’s limitations, but also of any statistics on small business which do not specify revenue or employment. For example, should a city or state boast responsibility for having “x” new businesses started in 2012, it’s worth the deeper dive to see how many of those will truly be impact businesses that bring jobs and money to the region. The research of Davis et al. demonstrates that nonemployers can and do migrate to the employer-universe, becoming a substantial source of revenue and growth in the period surrounding the transition.  Nonetheless, only 3% of nonemployers ever make this transition, meaning that our sample’s economic footprint is bound to be very limited given the size of the survey.  Nonemployers of all stripes play a role in the economy, but policymakers will want to focus primarily on those with growth aspirations, making “new businesses” with no further distinction a crude, weak metric.

Finally, perhaps more interesting than any information contained in the survey was the information that couldn’t be included. Among the respondents, 91% worked on their business for more than a month before incorporating. 60% worked on it for more than 6 months, and 35% did so for over a year. This is the black box of entrepreneurial studies, and the biggest problem facing the field: how do we obtain information about businesses in that crucial planning and preparation period? Could we only obtain information about that window of time with retrospective surveys, and if so would the data be tainted by the imperfections of memory? If we were able to contact entrepreneurs as they toiled through the development phase, would the very act of observation change their actions and invalidate the experiment? We may be no closer to answering these questions today, but our respondents have soundly reaffirmed the need to try.