Remarkable advocates: An investigation of geographic distance and social capital for crowdfunding

https://doi.org/10.1016/j.im.2016.09.001Get rights and content

Highlights

  • This study investigates crowdfunding projects using their advocates.

  • Crowdfunding projects could benefit from leveraging remotely located advocates.

  • Social capital accumulated from advocates’ social networking site (SNS) is conducive to the success of the project.

  • Findings support interaction effect between geographic distance and social capital.

  • Several practical suggestions for crowdfunding entrepreneurs are provided.

Abstract

This study investigates the advocates of crowdfunding projects. Advocates refer to individuals who have invested in a project, and the information of such endorsement is spread through their social networks. By using a combined set of sizable data, this research empirically examines the relationships between two attributes of advocates, namely their geographical distance and social capital, and funding performance. Results reveal that higher funding can be secured with advocates who are (1) of further geographical distance and (2) of higher social capital. Additionally, the relationship between advocates’ social capital and funding performance is further enhanced with a lower geographical propinquity.

Introduction

Entrepreneurship is a creative and thorny endeavor [57], especially at the very early stage of development of a new company [37]. Entrepreneurs constantly confront various challenges threatening their survival and development. Among many factors, financial capital is a central factor determining entrepreneurial growth [66]. Attracting and retaining talented people cannot be accomplished without money, and innovating products and services cannot proceed without monetary provisions [11]. For decades, entrepreneurs have acquired financial capital from conventional sources, which include venture capitalists, angel investors, government institutions, nonprofit organizations (NPOs), and private endowments from family and friends [22], [49], [64].

In recent years, online crowdfunding, as a form of e-business, has emerged as a viable alternative for entrepreneurs to raise funds, often during the early stage of their entrepreneurship. A recent Forbes article2 reported that US$34 billion would be crowdfunded in 2015, which surpassed the average amounts, i.e., US$30 billion, invested by venture capitalists per year. Through online crowdfunding platforms, entrepreneurs can appeal to the masses (i.e., the crowd) and accrue relatively small momentary tokens from individuals, which cumulatively can be a sizable amount of funding. Enticed by this emerging platform, several studies on crowdfunding have focused on contrasting crowdfunding mechanisms, such as asking people to preorder the product or requesting a fixed amount of money for a share of the future profits [6], or discussing their financial regulation [35].

Although seemingly promising, not all crowdfunding projects are able to attract the desired amount of funding [32], probably because migrating fundraising from the physical world to the online setting does not guarantee an easier way to get/raise money; in fact, the paradigm has changed. Crowdfunding platforms allow entrepreneurs to overcome physical boundaries and reach out to the global public [6], [27], [45]. To many, this ability means that the appeal for financial support has moved from focusing on a small, identified group of targets (e.g., institutions or agencies) to a wide and probably scattered people who contribute in smaller individual amounts [34]. Thus, either the entrepreneur promotes the project himself/herself or engages advocates to help with promotion; obviously, the latter (i.e., tapping the advocates) appears to be a feasible solution. Advocates are individuals who have invested in a project and spread this endorsement through their social networks. Different from the offline circumstance where spatial distance would restrain information proliferation, online information can be rapidly and diffusely propagated across netizens through social media [52], [44]. [43] argued that social media has a positive impact on promoting crowdfunding projects, i.e., increasing the success rate of fundraising. Several guidelines have been proposed for those fundraisers who expected to leverage social media for their crowdfunding campaigns, such as social media analytics or content analytics [69]. In our case, this process is performed when crowdfunding websites are linked to social media [72], thus spreading the fundraising information through the advocates’ social networks. To this end, a leading question is: What kinds of advocates (in terms of geographical distance (GD) and social capital (SC)) are advantageous to crowdfunding projects?

We propose that advocates could differ in their consequences on funding performance. In this study such impact is based on the remoteness of the advocates (e.g., further GD in order to reach out to more people) and the appeal to a large pool of people (i.e., of high SC). The former (offline), that is, the GD, denotes the physical terrestrial spread of the advocates, whereas the latter (online), that is, SC, reflects the ability of an advocate to disseminate project information to people on the Internet [17]. An empirical study involving a combined set of sizable data from a crowdfunding platform and a microblogging website in China was conducted in a longitudinal manner. The combined dataset contains 442 crowdfunding projects with 6494 funding records that occurred between 2010 and 2013.

This research affords several important contributions to e-business research and managerial practice. First, as discussed earlier, this study investigates crowdfunding projects using their advocates – an angle that reflects an important trait of crowdfunding on the Internet but has yet to gain due attention – instead of the mechanisms and financial regulations. Through this study, we hope to add another dimension to crowdfunding knowledge by considering the advocates’ attributes rooted in the offline context (i.e., GD) and the online context (i.e., online SC). Second, previous studies on entrepreneurship and business ventures suggest that investors may find it difficult to support geographically distant entrepreneurs due to reduced quality of communication, low sharing of knowledge, and poor capability to monitor entrepreneurs [56]. Thus, people are traditionally interested in firms that are created by those they know because a trusting relationship exists or the entrepreneurs are geographically closer to them [18], [51]. This tradition has resulted in an unequal distribution of funding between developed and less-developed regions, which is a problem that the online crowdfunding platform seeks to address [2]. Has online crowdfunding somewhat addressed the enduring problem of GD (or even changed the paradigm)? This research, which explicitly considers the factor of GD, could answer this question by concretely deliberating on whether projects that are more distant from their advocates are able to economically benefit from higher funding. Third, to measure SC, we meticulously traced the projects’ advocates, extracted data on their number of followers (operationalized variable for SC) from the largest microblogging website in China, and integrated this set of data with the data obtained from the crowdfunding platform. This approach departs from many studies on SC, which measures the variable by perceptual survey, and highlights the value of secondary data [71]. We are able to provide an alternative, objective operationalization of SC and obtain a wider approximation of SC in a crowdfunding project through the specific focus on advocates’ SC. Finally, this work contributes to the novel solutions for using social media analytics on secondary data, as in the focal context of crowdfunding [40], [71]. In particular, many previous studies confined themselves to a single platform but paid little attention to unveiling how impetuses from the external environment such as social media influenced crowdfunding activities in the focal platform [2], [14], [45]. By integrating and probing the social media data of millions of users, we are capable of understanding how online fundraising is influenced by the small fluctuations stemming from important individuals in social media.

The remainder of this article is organized as follows. In Section 2, the theory and related hypotheses are developed. In Section 3, the empirical method for validating the hypotheses is described. The results of hypothesis testing are reported in Section 4. Section 5 outlines and discusses a series of post hoc analyses that were conducted to increase the robustness of our findings. In Section 6, we highlight the contributions to research and practice in detail. Lastly, short, concluding comments are provided in Section 7.

Section snippets

Theory and hypothesis development

This Section develops our theory on crowdfunding projects and their funding performance based on two attributes of the advocates, namely, their GD and SC. The research model is depicted in Fig. 1. Our thesis states that a wider GD between a project and its advocates (Section 2.1) or a project with advocates with higher SC (Section 2.2) could be advantageous to funding performance. Furthermore, these two advocate attributes could complementarily enhance funding performance (Section 2.3).

Method

As a computational social science study [16], we collected our empirical data by integrating project data from Demohour.com and the advocates’ social network data from Weibo.com; together they constitute a sizable secondary data. This integration is consistent with the suggestion of “combining data from different sources” [24] p. 31 in big data research. Demohour.com is one of the largest crowdfunding platforms in China. As a Kickstarter-like crowdfunding site, Demohour.com supports 10 major

Data analysis

The primary objective of this study is to examine whether two advocate factors, namely, GD and SC, influence the funding secured by crowdfunding projects. The base equation can be written as follows:yjt=β1GDjt1+β3GDjt1×SCjt1+γ1Xjt1

In this model, yjt represents the amount of funding that project j receives during its tth day. The independent variables, GDjt1 and SCjt1 are the GD and SC, respectively, of the focal project j on the t1th day. Xjt1 includes several control variables. First,

Robustness check

Post hoc robustness checks of the findings obtained above were also conducted.

First, the funding number was used to replace the amount of funding as the dependent variable. Funding number counts the number of project advocates that fund the focal project on a focal day. A negative binomial estimation provides a better fit for data count because the dependent variable is a counted value. The results are shown in Table 6. The results did not change qualitatively from the original model

Discussion

This study presents a holistic investigation of the impact of advocates’ GD and SC on the performance of Internet fundraising, that is, crowdfunding. By using a large-scale dataset composed of two data sources in China, we unveil several interesting findings.

First, different from the conventional viewpoints accentuating the beneficial role of geographical proximity on investment appeals, our findings revealed that such detrimental constraints on fundraising resulting from GD gradually vanished

Conclusion

Complementing previous studies that focused on the mechanisms or financial regulations of crowdfunding platforms or projects, this study investigated the impact of advocates’ characteristics on fundraising performance. In particular, two explicit and significant dimensions representing offline and online contexts, namely, GD and online SC were examined to understand fundraising performance in a crowdfunding platform. Considering that crowdfunding offers a distinctively alternative option for

Acknowledgment

The work described in this paper was fully supported by the following grants: the National Natural Science Foundation of China (NSFC 71273125, NSFC 71532015, NSFC 71471157, and NSFC 71371144), the Fundamental Research Funds for the Central Universities (2850219028), and the City University of Hong Kong’s CSMR (CityU 9360147, Centre for Social Media Marketing and Business Intelligence), and the Program for Youth Excellent Talents in Tongji University (2014KJ002), and the Innovation Program of

Lele Kang is an assistant professor in School of Information Management at Nanjing University. He holds PhD from the Department of Information Systems at City University of Hong Kong, and MS and BS degrees from the School of Business, Nanjing University. His research interests include internet finance, open innovation, electronic commerce, and collaboration technologies. His work has appeared in Journal of Organizational Computing and Electronic Commerce (JOCEC), Information Systems Frontiers

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    Lele Kang is an assistant professor in School of Information Management at Nanjing University. He holds PhD from the Department of Information Systems at City University of Hong Kong, and MS and BS degrees from the School of Business, Nanjing University. His research interests include internet finance, open innovation, electronic commerce, and collaboration technologies. His work has appeared in Journal of Organizational Computing and Electronic Commerce (JOCEC), Information Systems Frontiers (ISF), International Conference on Human–Computer Interaction (HCII), Australasian Conference for Information Systems (ACIS), and Pacific Asia Conference on Information Systems (PACIS).

    Qiqi Jiang is an assistant professor in the Department of Management Science and Engineering at Tongji University. He holds PhD from the Department of Information Systems at City University of Hong Kong, MS from ETH Zurich, and BS degrees from Nankai University. His research interests include open innovation, electronic and mobile commerce, and knowledge management. His work has appeared in Journal of Management Information Systems, Information and Management, International Journal of Information Management, International Conference on Human–Computer Interaction (HCII), Australasian Conference for Information Systems (ACIS), and Pacific Asia Conference on Information Systems (PACIS).

    Chuan-Hoo Tan is an associate professor in the Department of Information Systems at National University of Singapore. His articles have appeared in the top-tier information systems journals and conferences such as Information Systems Research, MIS Quarterly, Journal of MIS, IEEE Transactions on Engineering Management, Information and Management, Decision Support Systems, and Long Range Planning. His current research interests include IT solution design and behavioral analysis, organizational IT innovation and implementation, digital commerce, and open source software. He also serves as an Associate Editor of MIS Quarterly.

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    The first two authors are joint first authors with equal contribution.

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