In this piece, Dr Daniela Defazio talks about her research into crowdfunding platforms and reveals the surprising reason why some entrepreneurs struggle to secure funds. The study was conducted in partnership with Dr Chiara Franzoni and Professor Cristina Rossi-Lamastra of the Polytechnic University of Milan’s School of Management.
As the climate crisis deepens, austerity worsens, and global challenges multiply, the expectation that companies take steps to contribute to the social good has increased. This is particularly apparent in relation to environmental issues, where organisations are scrutinised for their carbon footprint and polluting behaviours and expected to take steps to reduce their impact.
However, our new study shows something surprising. While it is essential to highlight how a new business idea contributes to the social good, we found that it’s best to downplay such credentials or aims when seeking investment on a business-focused platform. Our research suggests that it can be detrimental to over-emphasise the social or environmental benefits of a product or start-up, when using fundraising platforms that are not explicitly intended to support social enterprises.
Digital investment platforms
Crowdfunding platforms have emerged as important tools for entrepreneurs seeking to obtain resources for their enterprises. On crowdfunding platforms, entrepreneurs can describe their idea, post it, and generate pledges of money from a wide audience.
As such, crowdfunding platforms provide entrepreneurs with the opportunity to bypass traditional funding institutions and gather support directly from the public. Potential investors are given the opportunity to decide which companies, and what values and ideas they want to promote.
Given the growing concerns of the public about companies’ contribution to the social good, our study investigated whether a project description that emphasised doing-good would increase its chances of getting funding.
This question is particularly relevant in platforms that are not specifically oriented to support “pro-social” enterprises, such as Kickstarter or Indiegogo.
How can entrepreneurs attract investors in such a context? Should entrepreneurs focus only on the individual benefits, potential for profits, and functionalities of their product, or should they also highlight its social benefits? And crucially, how much attention should be paid to social benefits?
The importance of language
To answer these questions, our study focused on the language used in the description of almost 9000 technology and design projects on Kickstarter. Our results show that while a moderate emphasis on doing-good is beneficial and increases the chance of success, projects that over-emphasise the social good are less likely to receive financial support from the crowd
While this might seems puzzling, there are two possible explanations for these results.
First, evidence suggests that in a market context, even the most socially conscious individuals are still driven by their self-interest. They appreciate products’ “pro-social attributes” but only when they are provided in combination with – and not at the expense of – product functionality.
Second, too strong an emphasis on social benefits may also raise questions in investors’ minds about the credibility and financial prospects of a project. This effect emerges in the context where functional attributes or financial returns are a central focus, so projects that stress the social impact might leave the customers or investor with the feeling that something relevant is missing. So, to maximise potential investment, language emphasising the social benefit must be limited.
Besides analysing the descriptions of projects, our study also considered the language used in the title and blurb – i.e. the short description of the project visible on the landing page of Kickstarter. Here, the space to describe a project is limited - only around ten words are allowed in the title and blurb section.
Again, the results confirmed that projects that featured the social good in their title and blurb were less likely to succeed in their crowdfunding campaign. This means that a strong emphasis on the product or business’ ethical attributes will likely overshadow other project attributes, as well as obscuring key messages about the project’s financial effectiveness.
It is important to mention that this pattern does not appear to apply to micro-lending platforms like Kiva.org, whose mission is to specifically fund deprived communities. Previous research has shown that language emphasising the social good of a project is actually highly effective on such platforms. But, on platforms like Kickstarter that don’t prioritise social conscience, investors’ self-interest seems to trump their altruism.
The study’s results should help entrepreneurs seeking funds. Our main advice to such entrepreneurs is that blending social and functional goals is valuable, but the social benefits should be expressed as an additional feature of the project, not the main one.
Our findings can also be helpful for the managers and administrators of crowdfunding platforms. For them, the message is that crowdfunding campaigns succeed due to the ability of entrepreneurs to craft a message that is consistent with the aims of the platform and those of the market to which the start-up is aiming to operate.