Study on the Impact and Mechanisms of Backers' Generated Content on the Crowdfunding Market

Abstract

Startups and small businesses play an important role in stimulating the growth of the economy, providing employment opportunities, and promoting urban development. These entities, however, find it hard to access funds through conventional financing avenues, such as bank loans, angel investment funds, and venture capital, due to the absence of a robust market reputation and adequate collateral guarantees. As part of Internet finance, the advent of online crowdfunding markets has provided new opportunities for financing businesses. Crowdfunding utilizes the latest information and communication technologies to enable fundraisers to collect small capital contributions from a large pool of crowd backers, thereby reducing transaction costs, lowering investment thresholds, and breaking down geographical barriers. Due to this resounding success, crowdfunding has attracted substantial scholarly interest. However, while there has been a considerable amount of research on the crowdfunding phenomenon over the last decade, there are still critical research gaps that need to be addressed.

This thesis draws empirical evidence from two prominent crowdfunding platforms, Kickstarter.com in the United States and Jingdong Crowdfunding in China to illustrate the critical role of backers' online-generated content, facilitated by ICTs, in solving fundamental challenges within the crowdfunding market and fostering its sustainable development. Below are the specific research topics and contents:

(1) The first essay in this thesis, entitled "Product Sampling on Reward-based Crowdfunding Platforms," investigates how crowdfunding product sampling strategies can address the distinctive information asymmetry that is prevalent in crowdfunding markets. Even when entrepreneurs are honest, the information asymmetry that arises as a result of production delays and the novelty of the project significantly impairs the efficiency of crowdfunding fundraising transactions. To solve this dilemma, online product sampling has emerged as a promising tool for incentivizing crowd backers' participation and stimulating backers' online-generated content. Nevertheless, the exact effects of this strategy and the mechanisms of influence remain unclear.

This essay examines how the product sampling strategy contributes to fundraising activities, as well as how the effectiveness of this strategy varies depending on the level of experientiality of the campaign. Based on empirical findings, crowdfunding product sampling can effectively reveal the real quality of a crowdfunding campaign and assist subsequent backers in understanding its novelty, thus increasing the performance of a crowdfunding campaign. However, it is crucial to acknowledge that the online-generated content stimulated by product sampling might inadvertently diminish backers’ perceived experiential utility. As a result, as the level of project experientiality increases, the strength of the strategy's impact diminishes. Fundraisers can utilize the aforementioned conclusions and incorporate specific project characteristics to develop proper strategies that harness the potential value of backers' generated content. Additionally, platforms can enhance the credibility of transactions within the market by offering relevant functional designs.

(2) The second essay in this thesis, entitled "I've Got Your Back: How Social Support Fuels Crowdfunding Relaunch Success," examines the role that backers' social support plays in the success of crowdfunding relaunches. Crowdfunding has been plagued by intense competition, leading to a high failure rate. Due to fundraisers' dedication and the digital nature of crowdfunding projects, which allows them to be easily edited, modified, and re-enacted cost-effectively, the crowdfunding relaunch has emerged as a prominent trend. Despite the great need for a better understanding of campaign relaunch, little research has been carried out to date. Aiming to fill the research gap, this essay identifies and empirically documents key factors and pathways that lead to successful crowdfunding relaunches. We are particularly interested in the role of social support provided by backers through ICTs, due to the profound socio-cultural characteristics of crowdfunding. In particular, our study examines how backers' informational and emotional support impacts fundraisers' problemistic search pace and search distance following initial failures, thus influencing crowdfunding relaunches. Using empirical data from 2,296 business ideas that failed-relaunched within the Kickstarter technology category, we have derived the following significant conclusions.

Firstly, using a composite index, this essay empirically captures the problemistic search distance of fundraisers and confirms its pivotal role in determining relaunch success. Secondly, the essay reveals the multifaceted effects of search pace. Scheduling adequate time for problemistic search, rather than rushing a relaunch, contributes to relaunch success by facilitating longer search distances. On the other hand, in the rapidly evolving crowdfunding market, an extended search time can be detrimental to the success of relaunches. Third, analysis of the content generated by backers reveals that informational support significantly increases the problemistic search distance of fundraisers. In addition, backers' emotional support encourages fundraisers to address existing issues, which allows them to allocate sufficient time to problemistic search and prevent rushed relaunches. Fundraisers who have experienced more severe failures also additionally benefit from emotional support, as a result of which they return to entrepreneurship in a timely manner, preventing missed opportunities as a result of excessively slow search time. The purpose of this essay is to suggest how fundraisers can embrace initial failures and improve their preparations for crowdfunding relaunches. It discusses the importance of backers' social support and how it can help turn failed business ideas into successful ones. Furthermore, we recommend that fundraisers and platform designers implement functional designs or communication strategies to encourage backers' online content contributions, fully leveraging crowdfunding's unique dynamics.

Overall, the backers' generated content stands out as a distinctive feature of the crowdfunding market, which distinguishes it from traditional financing methods. This thesis examines how backers' generated content effectively deals with the unique uncertainties that are prevalent in crowdfunding markets and facilitates the success of relaunches following initial failures. It examines the importance of backers' generated content in increasing market transparency, trustworthiness, and efficiency. The research findings also suggest strategies that can be developed to foster deep engagement from backers, thereby contributing to the market's sustained growth.

Date of Award	9 Feb 2024
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Kai H. LIM (Supervisor), Yulin FANG (Supervisor), Jingjun David XU (Supervisor) & Qiang Ye (External Supervisor)