Putting your money where your mouse is, the case of rewards-based (pre selling) crowdfunding: Antecedents, consequences and cognitive effects of failure

Globally crowdfunding is experiencing rapid growth, expanding by 167% in 2014 to reach $16.2 billion raised, up from $6.1 billion in 2013 (Massolution, 2015). Unsurprisingly, there has been much media and practitioner attention devoted to rewards based crowdfunding. Yet the emergent research suffers from selection bias, insofar as the focus has been mainly on firms that have succeeded in raising the target finance. Consequently, the general understanding of how firms undertaking rewards based crowdfunding fail remains deficient. This gap in our understanding is addressed in the context of a potential International New Venture (INV). We seek to understand the antecedents to failure, and the subsequent consequences and cognitive impacts on the entrepreneurs utilising a single in depth case study built from both primary and secondary sources. This case focus on one firm (Alpha)who had internationalisation intentions for their educational game offering, and who failed to close the Kickstarter project. Key issues were identified with respect to rewards based crowdfunding failure. Alpha sought crowdfunding to overcome an impending funding scarcity and bring their educational game to the market. Arguably, the entrepreneurs did not fully evaluate the pros and cons of crowdfunding as a financing option and under estimated the risk resulting in an overly optimistic crowdfunding attempt. The offline rules with regard to understanding the market dynamics for products/ services should still apply to companies contemplating rewards based crowdfunding. Alpha clearly had several key resources/knowledge absent (key production skills, key marketing resources, the right team in place) and ultimately low exposure failed to build the right crowd. We suggest that rewards based crowdfunding is a high risk strategy with an extremely high chance of failing, and that increased understanding of failure in this context is urgent, as until this is the case, many more small firms may jump on the crowdfunding bandwagon, to their detriment. It was evident that failure held severe consequences for the firm. Undoubtedly rewards based crowdfunding brings many non-fiduciary benefits, however these also have the potential to cause operational and reputational damage to the firm when projects fail. The information was freely available to potential funders, clients, partners and the wider industry, allowing the wide dissemination of the failure and the attendant reputational damage. The outworking was that this firm did not attract any further funding and almost failed entirely, eventually changing its business model to survive. The cognitive processes at work after rewards based crowdfunding failure were similar to those experienced after a venture failure. The entrepreneur’s attribution processes sought to recognise if the causes were beyond their control or due to some internal reason. The internal attribution of blame was associated with effective post-failure learning as the actions taken by the entrepreneurs were identified as possible causes of the failure.
Finally a set of questions are posed for those contemplating rewards based crowdfunding are posed:
1. Are you willing to gamble your reputation?
2. Is it the Funding or Crowdfunding
3. How much do you really need?
4. Have you researched other projects in your industry
5. Have you enough experience?
6. Do you assume the crowd will come?