How Crowdfunding Influences Innovation

Crowdfunding is changing how entrepreneurs bring new products to market. It has allowed thousands of innovating entrepreneurs to raise money, build brand awareness, and join a broader conversation with large numbers of potential backers, all while still in the product development process. Examples of crowdfunded products include the Glif, whose creators raised more than $137,000 for the device, which allows smartphone users to prop their phones up at an angle or attach them to tripods, and the Oculus Rift, a virtual-reality gaming headset that raised $2.4 million via crowdfunding. Oculus VR was later acquired by Facebook Inc. for $2 billion.

We set out to better understand how crowdfunding affects innovation. To do this, we followed up with organizations that had developed products through funded Kickstarter campaigns (in other words, campaigns exceeding their preset funding goal) at least one year after a crowdfunding campaign. Kickstarter, a platform founded in 2009 to focus on funding creative projects in the arts, community initiatives, music, and publishing, is a prime example of a reward-based crowdfunding platform, in which backers do not receive equity but instead receive some other reward for their contribution, such as a preorder of the product. Since its inception, Kickstarter has also morphed into a funding platform for innovators creating technology products.

The more than 200 Kickstarter alumni providing data for our study collectively raised more than $17 million from roughly 239,000 backers during their Kickstarter campaigns. Since we were primarily interested in product innovations, our research focused on four categories: technology, product design, hardware, and video games. By combining data from the campaigns with survey data from the crowdfunding entrepreneurs (concerning their product’s market performance and their organization’s innovation tendencies), we gained insights into how crowdfunding campaigns can help — or hinder — innovation efforts.

The ostensible goal of all crowdfunding campaigns is to raise money. Important as raising capital is, our research into crowdfunding campaigns has shown us that the most important benefits are not, strictly speaking, financial. Rather, successful crowdfunding campaigns offer enormous potential for fostering word of mouth about new products. Crowdfunding campaigns also provide a forum through which backers can provide valuable feedback and ideas to the originators of the campaign.