A recent academic study looked at theater projects on Kickstarter, including one titled “Thanks For Playing: The Game Show Show!,” found that projects picked only by crowds were as likely to deliver on budget — and achieve commercial success and positive critical acclaim — as projects favored by experts.
Hug wants to raise $34,000 to build an app and sensor band that wraps round your water bottle to track daily hydration. Van Eko is targeting €150,000 (about $200,000) for an eco-friendly electric scooter made of hemp fibers. PetTunes is seeking $196,000 to build a personal music player that optimizes sound frequency for dog and cat ears.
A catchy, even irrelevant idea is seemingly all an aspiring entrepreneur needs these days to raise money on crowdfunding sites like Kickstarter — a point driven home this summer when a Columbus, Ohio, developer, Zack Brown, raised $55,492 to make a potato salad.
Now, researchers are tapping into the growing data on crowdfunding to take stock of the phenomenon. A central question: Do crowds — driven by a herd mentality, crowd euphoria or sheer silliness — gravitate toward funding seemingly irrelevant ideas? Or can crowds make rational funding decisions and, better yet, exceed venture capital investors and other traditional gatekeepers in identifying promising projects?
A recent academic study explored those questions by looking at theater projects on Kickstarter. In that study, researchers tracked 120 theater-related campaigns on Kickstarter between May 2009 and June 2012 that aimed to raise at least $10,000. Researchers also asked 30 professionals, all with experience in evaluating applications for grant-making organizations like the National Endowment for the Arts, to evaluate those same campaigns.
Their findings: Crowds and experts agreed substantially on what makes promising theater. Where crowds and experts disagreed, crowds were generally more willing to fund projects. Yet projects picked only by the crowd were as likely to deliver on budget — and achieve commercial success and positive critical acclaim — as projects favored by experts. The crowd, in effect, picked strong projects that experts might not have recognized.
“The crowd is often thought as being crazy. There was a sense that they would back musicals about Internet cats, and experts would back serious work,” said Ethan R. Mollick an assistant professor of management at the University of Pennsylvania’s Wharton School. “It turns out the crowd does consider the quality of projects and outcomes pretty well.”
One reason crowds might do as well, or even better, at picking promising projects is that they tend to be more diverse and might avoid, for example, some of the gender biases that have long directed the bulk of the venture capital funding to male entrepreneurs.
Two recent studies of Kickstarter projects have found that crowndfunding is indeed opening entrepreneurship and investing to more women. A recent study of 16,000 Kickstarter projects, by researchers at the University of California, Berkeley and the Hebrew University of Jerusalem, found that female investors were more likely to invest in female entrepreneurs, and that these female entrepreneurs enjoyed higher rates of success in reaching their funding goals.
Another study by Jason Greenberg at New York University’s Stern School of Business and Mr. Mollick also found higher proportions of female funders led to higher success rates in capital-raising for women.
Venture capital investors are scrambling to tap the wisdom of the crowd, financing projects that found their first legs in crowdfunding. In the last quarter of 2013 alone, 10 previously crowdfunded hardware start-ups raised a total of over $150 million, according to a report published on Monday by CB Insights.
In March, Oculus VR, the virtual reality company that raised $2.4 million on Kickstarter, was acquired by Facebook for $2 billion. And with 19 deals through July, investor deal activity to crowdfunded hardware companies is on pace to break 2013’s record this year, the report said.
Crowdfunding platforms have become “a valuable source for dealflow” for venture capital investors, the report said.
Still, what explains the success of potato salad guy? Or projects like the first-ever all-pug production of Hamlet, successfully funded this month?
The Wharton School’s Mr. Mollick shrugs off those examples. “Sometimes, there’s just weirdness on the Internet. The Internet likes strange things.”
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Via Marc Kneepkens