Opening the Floodgates: The Implications of Increasing Platform Openness in Crowdfunding

Abstract

Managing platform ecosystems requires providers to govern the permeability of platform boundaries in order to strike a balance between openness and control. But is it worthwhile for platform providers to conduct screening processes for third-party offerings, or should they rather apply a laissez-faire approach and let the market determine winners and losers? In this study, we compare the market conditions on Kickstarter, one of the world's largest crowdfunding platforms, before and after a policy change that relaxed the previously stringent screening process for new campaigns. By analyzing over 230,000 crowdfunding campaigns with a combined funding of over $1.9 billion that cover a 4-year period around the policy change, we find that increasing platform openness was a double-edged sword for the platform's ecosystem. While Kickstarter's revenue from commissions surged after the policy change due to an increase in the number of campaigns available on the platform, funding conditions for project creators and backers deteriorated. Project creators have to cope with lower success rates and an intensified competition due to a growing disproportion of backers to campaigns, while backers face higher uncertainties as project creators invest less in reducing information asymmetries. Our evidence from this natural experiment therefore suggests that increasing platform openness for third-party offerings can destabilize a platform's ecosystem. We thus extend the literature on platform openness and on the implications of policy changes on platform ecosystems. Our findings also provide practical insights for different platform stakeholders into possible “ripple effects” that are triggered when policy changes alter platform openness.

Following the Crowd—Does Crowdfunding Affect Venture Capitalists’ Selection of Entrepreneurial Ventures?

“…Given this research question, our study contributes to advancing signaling theory against the background of the microfinance literature by showing that the effectiveness of quality signals is similar for individual backers and venture capitalists in some aspects regarding the campaign, whereas it differs in others. For example, our analysis finds that a campaign endorsement provided by Kickstarter not only positively influences the campaign’s chances of success in terms of backers funding the project (Wessel et al ), but also increases the likelihood of post‐campaign follow‐up investments from a venture capitalist. This finding is particularly remarkable as a quality signal for the crowdfunding campaign itself still seems to work as a positive signal for venture capitalists’ investment decisions at a much later point in time.…”

“…Signaling in crowdfunding is an important concept since campaign initiators are often first‐time entrepreneurs (Vismara ), and the commercialization and financing of new products and services via crowdfunding is also subject to information asymmetries between campaign backers and entrepreneurs (Belleflamme et al ). Crowdfunding in its present form comprises various forms, yet reward‐based (see e.g., Colombo et al ; Mollick ; Wessel et al ; ) and equity‐based crowdfunding (see, e.g., Ahlers et al ; Lukkarinen et al ; Vismara ) have been subject to increased research attention lately.…”

“…However, reward‐based campaigns may also be subject to an endorsement process in which platform‐staff assesses a campaign’s quality (Mollick ; Wessel et al ). These so‐called staff picks represent campaigns that are of exceptional quality in terms of degree of innovation, campaign description, and the use of multimedia technology (Kickstarter ).…”

“…In other words, a “staff pick” can help a potential backer to distinguish good campaigns from bad ones. Mollick () and Wessel et al () provide empirical evidence that a “staff pick” has a positive influence on campaign success and the number of backers, respectively. By relying on a “staff pick,” backers can assume that the campaign is more likely to reach its funding goal and provide the promised reward in exchange by demonstrating the seriousness of the project.…”

“…Further, we use the ratio of the actual funding received in relation to the funding required (Funding Ratio) and the respective squared term (see H2). For campaign endorsement, we follow Mollick () and Wessel et al (), as we use a binary variable (Staff Pick) whether the campaign was a so‐called staff pick (see H3). As mentioned before, being endorsed by the platform provider entails several advantages (e.g., the exposure on a separate list of campaigns recommended by Kickstarter) and is reserved for campaigns that are selected by Kickstarter staff because they are particularly compelling (Kickstarter 2016).…”