RESEARCH AT WORK

The Informational Value of Crowdfunding to Music

Entrepreneurs

It's well known that crowdfunding brings much-needed Gnancial resources to startup entrepreneurs. Now that crowdfunding is part of mainstream entrepreneurship. research has uncovered additional advantages for entrepreneurs. Researcher Jordana Viotto da Cruz wanted to know how entrepreneurs respond to information obtained from backers gathered during a crowdfunding campaign. Specifically, will entrepreneurs release their products to the market even if the crowdfunding campaign was not successful?

Crowdfunding protocol is very clear. If you reach your funding goals, the funds are released to you. If you do not reach the goal and even if you have a significant number of backers, you still do not get the funds. The only way to get funds is to reach your stated campaign goal. An entrepreneur is faced with an important decision when she has a significant number of backers, positive feedback, but did not reach her goal. Does she continue?

Does she still try to bring her product to market?

Viotto da Cruz evaluated 1,505 U.S.-based projects on Kickstarter that aimed to produce a music album. Then she selected those whose albums were being sold elsewhere (such as Amazon or iTunes) after the campaign end date. This resulted in a final sample of 707 music entrepreneurs. Interesting results emerged regarding those music entrepreneurs with failed campaigns. First, contributions made by backers signal a possible market.

If the contributions were significant, and even though the goal wasn't reached, the musician could conclude there is a potential market. Second, the musicians gave increased attention to the feedback from backers and they were able to adapt their product (album) before release. Finally, many musicians used the failed campaign as a rationale for not continuing with the project. In other words, the market had spoken and it said "no"! viotto da Cruz summarized. "We empirically show that when not successful on crowdfunding, thus not accessing capital, project owners may decide to release the product in the market if contributions suggest positive valuation from the 'crowd."

Critical Thinking Questions

1. This research focused on music entrepreneurs. What type of information do you think other entrepreneurial types are seeking to gather from crowdfunding? Give examples.
2. What is crowdfunding protocol? Do you agree with the approach?
3. Are music entrepreneurs a good research sample? Why or why not?

Source: Viotto da Cruz. J. (2018). Beyond financing: Crowdfunding as an informational mechanism. Journal of Business Venturing. 33(3). 371-393.