Connect with us

Top Stories

CUHK Business School Research Reveals Large Early Contributions from Family and Friends May Affect Crowdfunding Success

Published

on

CUHK Business School Research Reveals Large Early Contributions from Family and Friends May Affect Crowdfunding Success

HONG KONG, CHINA – Media OutReach – Raising money from family and friends is a common and effective way for start-ups. However, will it affect the success of crowdfunding initiatives?

Entrepreneurs are increasingly relying on internet crowdfunding — the use of online platforms to raise money from multiple contributors. It is reported that active global crowdfunding platforms generated more than US$34.4 billion in 2015. The World Bank estimates that the crowdfunding industry will reach US$90 billion by 2020. In terms of scale, crowdfunding has become a viable alternative to venture capital and angel investment.

For most entrepreneurs, seeking funding from family and friends is a popular and effective way to round up their initial capital for business. The reason is simple: These are the people who are more likely than anyone else to believe in your ability and fund your dream.

However, is there any downside of this source of funding? Will early contributions from family and friends be a good signal for other potential funders?

A study conducted by Assistant Professor Tingting Fan and Associate Professor Leilei Gao from Department of Marketing at The Chinese University of Hong Kong (CUHK) Business School, and their collaborator Yael Steinhart, Professor and Head of Marketing Department of Coller School of Management at Tel Aviv University in Israel, looks into the effect of early contributions from family and friends on subsequent contributions to a crowdfunding project.

Success Factors for Crowdfunding
When it comes to what contributes to the success of crowdfunding projects, a lot of literature in marketing and management focuses on characteristics of the project (e.g. description of the project, information disclosure and fundraising goal), the entrepreneur (e.g. previous successful initiatives, education, geographic locations, social connections), and of the backers and their affiliations. However, there isn’t enough research looking into other factors such as how funders perceive the contributions from friends and family, according to Prof. Fan.

“Existing research tells us that early contributions from friends and family — what we call the ‘seeding investment’, establish a positive signal regarding the trustworthiness of a project. For example, a past study revealed that the more Facebook friends you have, the higher success rate is your crowdfunding project,” says Prof. Fan. “Yet, few studies adopted the perspective of potential funders.”

“Little is known regarding whether consumers are aware of the fact that entrepreneurs raise seed money from their friends and family, and how they might react upon such seed financing,” she adds.

The Study
The study aims to explore the role of friends and family contribution by considering consumers’ reactions to potential seeding behavior at the early stage of a crowdfunding campaign launch.

The researchers conducted five studies, including a field study, which collected real-world crowdfunding data from over 900 projects comprising 116,153 contributions from 68,036 funders. The data was utilised from DemoHour between July 31, 2011 and August 30, 2014.

One of the largest reward-based crowdfunding platforms in China, DemoHour enables an entrepreneur to create a webpage to introduce his or her project, set its funding goal within a certain period (usually 30 to 40 days). A potential funder can visit any projects with profiles on DemoHour and observe individual funders’ contributions before deciding which project and how much to contribute.

The data shows the average funding goal per project was US$3,089 while the average funding period was 43 days. Moreover, 56 percent of the projects succeeded in attaining their fundraising objects. Each project had 115 funders, with each of the funders contributing US$32 on average.

Then the researchers looked at how small contributions differed between successful and unsuccessful projects on the first launching day of these projects.

Consequently, they revealed several important findings: Firstly, friends and family of entrepreneurs contributed more money in the early stage of a crowdfunding campaign as compared to strangers; secondly, a potential funder is more likely to contribute to a newly-launched crowdfunding campaign when the majority of the existing contributions are relatively small amounts; thirdly, this positive effect of small prior contributions on prospective funders’ likelihood to contribute to a crowdfunding campaign will be weakened at the later stage of the campaign.

To understand these findings, Prof. Fan explains, we will have to understand the ‘friendship-giving lay belief’.

Friendship-Giving Lay Belief
It is common sense that we are more likely to feel indebted to our friends than to complete strangers, and that we’d feel obligated to helping them. Such ‘friendship-giving lay belief’ manifests itself in crowdfunding in a way that people would generally believe friends and family of entrepreneurs are more likely to contribute to their projects large rather than small amounts of money than strangers.

“In the early stage in crowdfunding, potential funders will only see limited information of a project, such as the funding goal and contributions. Based on the ‘friendship-giving lay belief’, they will tend to infer that large contributions would probably come from friends and family of the entrepreneur, and small contributions would be from strangers. Such inference will influence their funding behavior,” says Prof. Fan. “They will be more willing to fund a project with small contributions in the early stage,” she continues.
Why is that the case?

Psychologists have long believed that people are more likely to adopt the opinions and behaviors of their peers rather than of people they don’t affiliate with.

“In the case of a potential funder who doesn’t know the entrepreneur, he or she will consider the other funders (who also don’t know the entrepreneur) his or her peers, thus following their behavior to contribute to the project,” she says.

Implications
The study carries important implications for entrepreneurs, particularly those who would like to make use of crowdfunding to launch their projects.

“We demonstrated that consumers may rely on the amount given by early funders as a signal of their relationships with the entrepreneur and such inference has significant influence to their funding behavior,” she says.

“When the majority of early funders contribute large amounts, potential funders are more likely to infer that they are the friends and family of the entrepreneur, and thus be less willing to contribute to the crowdfunding project,” she says.

“Hence, from a practical perspective, entrepreneurs may want to devise effective strategies to leverage the help of their friends and families when promoting a crowdfunding campaign. For example, it may be better to gather small rather than large contributions to improve the likelihood of achieving the fundraising goal,” says Prof. Fan.

Reference:
Tingting Fan, Leilei Gao, and Yael Steinhart (2017), “When Small Predicts Large: The Effect of Initial Small Contributions on Subsequent Contribution to a Crowdfunding Project,” R&R at Journal of Consumer Research.

This article was first published in the China Business Knowledge (CBK) website by CUHK Business School: https://bit.ly/2KliaYS.

Top Stories

Sunak to use budget to expand apprenticeships in England

Published

on

Sunak to use budget to expand apprenticeships in England 1

LONDON (Reuters) – British finance minister Rishi Sunak will announce more funding for apprenticeships in England when he unveils his budget next week, the government said on Friday.

Employers taking part in the Apprenticeship Initiative Scheme will from April 1 receive 3,000 pounds ($4,179) for each apprentice hired, regardless of age – an increase on current grants of between 1,500 and 2,000 pounds depending on age.

The scheme will extended by six months until the end of September, the finance ministry said.

Sunak will also announce an extra 126 million pounds for traineeships for up to 43,000 placements.

Sunak’s March 3 budget will likely include a new round of spending to prop up the economy during what he hopes will be the last phase of lockdown, but he will also probably signal tax rises ahead to plug the huge hole in the public finances.

Sunak is also expected to announce a “flexi-job” apprenticeship scheme, whereby apprentices can join an agency and work for multiple employers in one sector, the finance ministry said.

“We know there’s more to do and it’s vital this continues throughout the next stage of our recovery, which is why I’m boosting support for these programmes, helping jobseekers and employers alike,” Sunak said in a statement.

(Reporting by Andy Bruce, editing by David Milliken)

Continue Reading

Top Stories

UK seeks G7 consensus on digital competition after Facebook blackout

Published

on

UK seeks G7 consensus on digital competition after Facebook blackout 2

LONDON (Reuters) – Britain is seeking to build a consensus among G7 nations on how to stop large technology companies exploiting their dominance, warning that there can be no repeat of Facebook’s one-week media blackout in Australia.

Facebook’s row with the Australian government over payment for local news, although now resolved, has increased international focus on the power wielded by tech corporations.

“We will hold these companies to account and bridge the gap between what they say they do and what happens in practice,” Britain’s digital minister Oliver Dowden said on Friday.

“We will prevent these firms from exploiting their dominance to the detriment of people and the businesses that rely on them.”

Dowden said recent events had strengthened his view that digital markets did not currently function properly.

He spoke after a meeting with Facebook’s Vice-President for Global Affairs, Nick Clegg, a former British deputy prime minister.

“I put these concerns to Facebook and set out our interest in levelling the playing field to enable proper commercial relationships to be formed. We must avoid such nuclear options being taken again,” Dowden said in a statement.

Facebook said in a statement that the call had been constructive, and that it had already struck commercial deals with most major publishers in Britain.

“Nick strongly agreed with the Secretary of State’s (Dowden’s) assertion that the government’s general preference is for companies to enter freely into proper commercial relationships with each other,” a Facebook spokesman said.

Britain will host a meeting of G7 leaders in June.

It is seeking to build consensus there for coordinated action toward “promoting competitive, innovative digital markets while protecting the free speech and journalism that underpin our democracy and precious liberties,” Dowden said.

The G7 comprises the United States, Japan, Britain, Germany, France, Italy and Canada, but Australia has also been invited.

Britain is working on a new competition regime aimed at giving consumers more control over their data, and introducing legislation that could regulate social media platforms to prevent the spread of illegal or extremist content and bullying.

(Reporting by William James; Editing by Gareth Jones and John Stonestreet)

 

Continue Reading

Top Stories

Britain to offer fast-track visas to bolster fintechs after Brexit

Published

on

Britain to offer fast-track visas to bolster fintechs after Brexit 3

By Huw Jones

LONDON (Reuters) – Britain said on Friday it would offer a fast-track visa scheme for jobs at high-growth companies after a government-backed review warned that financial technology firms will struggle with Brexit and tougher competition for global talent.

Finance minister Rishi Sunak said that now Britain has left the European Union, it wants to make sure its immigration system helps businesses attract the best hires.

“This new fast-track scale-up stream will make it easier for fintech firms to recruit innovators and job creators, who will help them grow,” Sunak said in a statement.

Over 40% of fintech staff in Britain come from overseas, and the new visa scheme, open to migrants with job offers at high-growth firms that are scaling up, will start in March 2022.

Brexit cut fintechs’ access to the EU single market and made it far harder to employ staff from the bloc, leaving Britain less attractive for the industry.

The review published on Friday and headed by Ron Kalifa, former CEO of payments fintech Worldpay, set out a “strategy and delivery model” that also includes a new 1 billion pound ($1.39 billion) start-up fund.

“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.

Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.

The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance, all mean the sector’s future in Britain is not assured.

It also recommends more flexible listing rules for fintechs to catch up with New York.

“We recognise the need to make the UK attractive a more attractive location for IPOs,” said Britain’s financial services minister John Glen, adding that a separate review on listings rules would be published shortly.

“Those findings, along with Ron’s report today, should provide an excellent evidence base for further reform.”

SCALING UP

Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.

“It’s a question of knowing who to call when there’s a problem,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.

A UK fintech wanting to serve EU clients would have to open a hub in the bloc, an expensive undertaking for a start-up.

“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” Swinburne said.

The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).

“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.

($1 = 0.7064 pounds)

(Reporting by Huw Jones; editing by Jane Merriman and John Stonestreet)

 

Continue Reading
Editorial & Advertiser disclosureOur website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.

Call For Entries

Global Banking and Finance Review Awards Nominations 2021
2021 Awards now open. Click Here to Nominate

Latest Articles

Newsletters with Secrets & Analysis. Subscribe Now