Investigating the mix of strategic choices and performance of transaction platforms: Evidence from the crowdfunding setting

Research Summary: The platform literature offers keen insights on the pricing and non-pricing strategies that transaction platforms undertake. We supplement this work by studying how platforms mix together their strategic choices and the association with platforms’ performance. To that end, we focus on crowdfunding platforms; a prominent setting of transaction platforms. We present an inductive large-N study of the population of 788 crowdfunding platforms that operated in EU-15 countries up to 2018. Our contribution is threefold: (a) identifying common mixes of strategic choices; (b) tracking deviations from these mixes; and (c) associating these with platforms’ survival and growth. We discuss our findings and how they advance knowledge at the intersection of the platform and strategic management literatures. Managerial Summary: Notable transaction-platforms such as eBay, LinkedIn, and Tencent have an aggregate market-value in the hundreds of billions of dollars. We know that platforms’ success is driven by the strategic choices they undertake. Yet, we know less about how they mix together these choices and the association with platforms’ performance. Our study addresses this gap by focusing on a prominent setting: crowdfunding. Using data on the population of 788 crowdfunding platforms in EU-15 countries, we show that these platforms cluster around three common mixes of strategic choices. Moreover, crowdfunding platforms do not strictly adhere to the strategy mix they are affiliated with. Interestingly, there is a positive association between the degree to which a platform's choices differentiate from its strategy mix and platform's subsequent performance

Signalling in Donation Crowdfunding: The Role of Mixed Product and Ideological Bundling

Crowdfunding projects depend on signalling to demonstrate authenticity. However, literature on signalling has focused on investment and reward crowdfunding with lesser emphasis on donation crowdfunding. This study adopts the signalling theory and bundling concepts to explore the impact of two validation mechanisms on donation crowdfunding outcomes. Drawing from the literature on bunding and signalling, we investigate the impact of a mixed product bundling strategy (community pot mechanism) and ideological bundling strategy (third-party signalling) on donation project success. Based on data from Mchanga.com, our findings indicate that the mixed product bundling strategy positively influences project amount of funds raised and backer support. However, we also find preliminary evidence indicating ideological bundling can have undesirable and contrasting effects on project outcomes. Implications and future work are also discussed

Innovative online platforms: Research opportunities

Economic growth in many countries is increasingly driven by successful startups that operate as online platforms. These success stories have motivated us to define and classify various online platforms according to their business models. This study discusses strategic and operational issues arising from five types of online platforms (resource sharing, matching, crowdsourcing, review, and crowdfunding) and presents some research opportunities for operations management scholars to explore

Product-driven Entrepreneurs and Crowdfunding

Advancements in information technology is known for enabling new business models and newmarket mechanisms. Online crowdfunding is one such new mechanism through which entrepreneurscan advertise their potential products and attract investors from the mass. In this study, we advancethe existing theory on online crowdfunding markets by recognizing that online crowdfunding pro-vides not only a venue of fundraising to entrepreneurs but also a venue for them to obtain demand in-formation before production and to signal their intention. We formulate a spatial competition modelbetween profit-driven entrepreneurs and product-driven entrepreneurs. We find that, while, on aver-age, profit-driven entrepreneurs earn higher profits than product-driven ones, their advantage is con-strained by the mechanism of the crowdfunding campaign, and product-driven entrepreneurs earn asignificant fraction of the market. We also discuss model implications on consumer satisfaction andcrowdfunding platform design

The Decoy Effect in Reward-Based Crowdfunding: Preliminary Results from an Online Experiment

Rewards are one of the key mechanisms in crowdfunding, but we know little about how they influence fundraising success. This research-in-progress takes a behavioral-science perspective on crowdfunding and explores how to design reward menus to increase the chances of reaching funding targets. We show that backers’ preferences can be influenced with the help of “decoys”—asymmetrically dominated rewards that draw backers’ attention to more profitable rewards. We conducted an online experiment with forty participants to pre-test the effect of decoy rewards on crowdfunding success for three scenarios. Across all scenarios, the decoys increased the donations by approximately 11 percent. Mixed-effects logistic regression analysis confirmed the significance of the decoy effect. We are currently developing a mock crowdfunding website that will provide a more realistic environment in which to test alternative decoy-placement strategies in other crowdfunding scenarios with more participants and more rewards

The role of crowdfunding in promoting entrepreneurship

Crowdfunding is a collaborative initiative, usually via internet, where people network to collectively raise funds in order to invest in and support projects delivered by other people or organizations. Tools such as crowdfunding are born and thrive in a grassroots environment, with a strong potential to positively disrupt the entrepreneurial generation setting and grow to a position of significant relevance in society, namely at a time when alternatives to traditional forms of finance are welcome and the technology to deliver them is abundant. Entrepreneurship is the act of transforming ideas and projects into economic products or services. Entrepreneurship related to starting new businesses is better known as start‐up ventures. Entrepreneurs face a series of challenges, from idea conception and business plan design, to obtaining finance, promoting new products and services, generating revenues and profits and generally growing and sustaining a business for the long‐run. These challenges can be overwhelming, namely in the start‐up phase of a new venture, leaving several ideas on paper without them having a chance to “grow legs and walk”. This paper and its analysis offer important insights about the contribution of crowdfunding to facilitate the attainment of critical factors for successful entrepreneurship. With extensive use of real practical examples, leveraging previous analytical studies of other crowdfunding implications and reviewing expert literature, by interviewing entrepreneurs, crowdfunding platform owners and by benefitting from hands on experience of working in such an organization, we intend to clarify the impact of crowdfunding in what we considered to be 7 key entrepreneurial requirements detailed further in the introduction section and later in the body of the paper. The findings have implications for entrepreneurs, naturally, and for business generation theory, extending current entrepreneurial guidelines with innovative tools and methodologies capable of sustaining successful ventures in a newly highlighted cooperative world. We live in innovative times where the channels for the transfer of funds and resources suffer disruptive changes with the potential to significantly improve the ability to generate new initiatives for the well‐being of entrepreneurs and all related communities

Risk-reducing options in crowdinvesting: An experimental study

Financial constraints are a striking difficulty of entrepreneurial ventures in the early stages of their development. Recently, emerging crowdinvesting platforms try to fill this finance gap by involving an anonymous crowd into the funding process. Due to high information asymmetries, platform providers and start-ups alike try their best to reduce the risk for investors. We therefore examine existing and thinkable mechanisms of option-based risk reduction in crowdinvesting. We use a 2x3x3 mixed subject design to manipulate the availability and characteristics of risk-reducing options and the project attractiveness. With 210 participants, we are able to show that the introduction of different risk-reducing options in crowdinvesting solely favors high quality projects and increases capital concentration in a market that was originally built to make start-up funding available to a broader range of capital seekers. We also suggest reasonable prices for options and prove them to be accurate relatively to each other. Further implications for theory and practice are discussed

Essays on FinTech

FinTech typically describes the application of novel technologies in the financial services sector. These technological innovations aim to compete with traditional financial technologies and improve user experience on a broad range of financial applications. Examples range from peer-to-peer investing services and new settlement procedures to the use of smartphones for mobile banking. Each chapter of this dissertation deals with one of these examples with the goal to draw conclusions for broader economic questions. In the first chapter, Crowdfunding and Demand Uncertainty, I analyze the potential of reward-based crowdfunding to elicit demand information and improve the screening of viable projects vis-à-vis traditional external financing. Crowdfunding allows entrepreneurs to sell claims on future products directly to consumers to finance their investments. At the same time, this peer-to-peer sale of claims generates demand information that benefits the screening process for viable projects. I provide a characterization of the profit-maximizing crowdfunding mechanism when an entrepreneur knows neither the number of consumers who positively value the product nor their reservation prices. Using mechanism design theory, I show that the entrepreneur can finance all viable projects by committing to prices that decrease as the number of pledgers increases. This pricing strategy grants ex-post information rents to consumers with high reservation prices. However, if these information rents are large, then the entrepreneur prefers fixed high prices that lead to underinvestment since consumers with low valuations never participate. The second chapter, Building Trust Takes Time: Limits to Arbitrage in Blockchain-Based Markets, is a joint project with Nikolaus Hautsch and Stefan Voigt. We analyze the potential implications of distributed ledger technologies, such as blockchain, for cross-market trading. Distributed ledgers replace trusted clearing counterparties and security depositories with time-consuming consensus protocols to record the transfer of ownership. We argue that this settlement latency exposes cross-market arbitrageurs to price risk and theoretically derive arbitrage bounds that increase with expected latency, latency uncertainty, volatility in the underlying asset, and arbitrageurs' risk aversion. We then use Bitcoin order book and network data to estimate arbitrage bounds of, on average, 121 basis points, which in fact explain 91% of the observed cross-market price differences in our sample period. Consistent with our theoretical framework, we also find that periods of high latency-implied price risk exhibit large price differences, while asset flows across exchanges chase arbitrage opportunities. Our main conclusion is that blockchain-based settlement introduces a non-trivial friction that impedes arbitrageurs' activity. The third chapter, Perceived Precautionary Savings Motives: Evidence from FinTech, is coauthored with Francesco D'Acunto, Thomas Rauter, and Michael Weber. We use data from a European FinTech banking app provider to study the consumption response to the introduction of a mobile overdraft facility. In addition, we use the banking app to elicit consumers' preferences, beliefs, and motives. We find that users increase their spending permanently, lower their savings rate, and reallocate spending from non-discretionary to discretionary goods. Interestingly, users with a lot of deposits relative to their income react more than others but do not tap into negative deposits. We demonstrate that these results are not fully consistent with conventional models of financial constraints, buffer stock models, or present-bias preferences. We hence label this channel perceived precautionary savings motives: users with a lot of liquidity behave as if they had strong precautionary savings motives even though no observables, including the elicited preferences and beliefs, suggest they should