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3.1 Introduction

Breaking down a large and complex task into smaller and simpler tasks has been associated with much of the last century’s progress in industrial productivity (Maier 1970). This breaking down of tasks enabled adjustments in resource allocation to each of the new subtasks, as well as the capability to manage the new simpler tasks more closely, measuring productivity, and eventually paving the road for the development of “scientific management” in the daily operations of organizations (Kelly 1982). This approximation to organizing work successfully resonated not just with industrial organizations but also with other process-intensive organizations which gained in simplicity, effectiveness, and efficiency by adopting it. At some point, when internal resources were observed to be less efficient than external alternatives, the distribution of tasks and work crossed the boundaries of the organization, giving shape to the idea of outsourcing noncore activities to other organizations.

At the same time, the rapid development and adoption of information technologies started to open a new array of possibilities for organizations that were interested in adjusting their activities, within and outside their firm boundaries. For the last few decades, the concept of outsourcing has fully permeated all types of functions and processes in organizations, allowing not only tangible production activities but also all types of knowledge-intense and information-based services to be outsourced (Quinn 1999). Nevertheless, in both the industrial and knowledge areas, this course of change has been arranged as the externalization of a clearly defined task, with a measureable and a priori defined output. All this changes when outsourcing or externalization of tasks arrives at the organizational domains of creativity and innovation management processes.

This chapter explains how the large-scale outsourcing of two key functions such as the creative identification of solutions to innovation problems (crowdsourcing) and the funding for innovation projects (crowdfunding) have changed how organizations innovate. Crowdsourcing and crowdfunding leverage their disruptive power by using the “crowd” as a lever to build a new type of large-scale outsourcing. Specific emphasis is given to how the multiple roles of the participants, from provider of ideas to users, customers, investors, or brand ambassadors, create unintended impacts on the market structure and might introduce new opportunities and challenges for innovation management.

The chapter is structured as follows: first, a description of the origins and development of crowdsourcing is provided, identifying the different types and uses, and how they have become embedded in innovation management. Then, the concept of crowdfunding is introduced, describing the common elements with crowdsourcing, to then go into detail of how it is changing the way companies access resources and build markets for their innovative product or innovation projects. Lastly, an overview on how these phenomena have changed innovation management is given, together with a reflection on how the changes go beyond the intended effects of leveraging the crowd to solve a defined problem, suggesting the long-term transformative impact of crowdsourcing and crowdfunding.

3.2 Building Innovation Using the Power of the Crowds: Crowdsourcing

Breaking down a task and outsourcing it is not a novel concept, but doing it as an open call with an undefined audience is. As Howe (2006) defined, crowdsourcing “represents the act of a company or institution taking a function once performed by employees and outsourcing it to an undefined (and generally large) network of people in the form of an open call”. From this early conceptualization of the concept derive some of the key singular elements of crowdsourcing. First, it still needs a leading actor that would open up the process. Second, compared with outsourcing, the crowdsourcing call is not sent to a single recipient but to a larger audience (network of people/organizations). Third, it is an open call, meaning that the objective or deliverable is not clearly predefined a priori; it will be the participants in the crowdsourcing call that will have to come up with potential alternative solutions to the proposed challenge.

Besides the open design difference of the crowdsourcing calls compared to outsourcing, an as-yet-untapped source of value is the capacity to leverage the “crowd”. Why does opening up the participation to a larger audience make such a difference? Being able to capture the contributions from a diverse group of participants, where each individual possesses knowledge or information that another individual might find valuable, is the first building block (Howe 2008; Surowiecki 2004). Then, the design of a contribution structure that allows for large participatory efforts, respecting the diversity of opinions, provides the additional block that helps to generate value in crowdsourcing (Seltzer and Mahmoudi 2013).

Thus, compared to outsourcing, the degree of control from the organization that acts as issuer of the call or challenge is much lower. As the objective is to generate unexpected solutions, part of the expected success relies on the audience reach of the call, but another substantial part relies on the dynamics across participants’ contributions. The advent of the Internet has helped to potentially open the crowdsourcing calls to anyone with access to a computer (Seltzer and Mahmoudi 2013), and has also become a process mediator with close to real-time support to the interactions among the participants (Prpić et al. 2015).

As a result, crowdsourcing gets positioned as a process that can enable individuals or organizations to find unexpected solutions to known problems, with the help of a large group of participants that take advantage of information technologies to contribute as they engage in the participatory effort.

3.2.1 Fitting Crowdsourcing in Innovation Management

As the organizations learn from the possibilities of crowdsourcing, a natural fit appears with the functions or tasks that are more uncertain and subject to the creativity of the individuals involved. An example is the use of crowdsourcing to substitute brainstorming, one of the most usual idea-generation techniques (for example, see My Starbucks Idea mystarbucksidea.force.com). Thus it becomes usual practice to introduce crowdsourcing in the early stages of the innovation management process, taking advantage of the known rules of the brainstorming technique, but getting additional protection against potential thinking constraints introduced by the presence of subjective evaluation of known peers.

Even in the simplest application of crowdsourcing as a substitute for brainstorming, it is possible to overcome the issue of “groupthink” (Prpić et al. 2015). For example, reducing the common problems observed in group-based creative innovation efforts such as the absence of diversity in the group (participants share backgrounds and/or cultural perspectives), the potential constraints as participants perceive that they are conditioned by previous participants’ comments and their peers’ observation, and the hierarchical structural differences among the participants in the group. As a result, crowdsourcing calls provide a better context to activate ideas and solutions that in other contexts would be counterintuitive or could jeopardize the interests of the participants, effectively loosening the constraints on the potential mobilization of knowledge competences and skills (Zhao and Zhu 2014). Additionally, large groups of participants have been observed to generate ideas equally novel and innovative to those generated by groups of experts (Poetz and Schreier 2012), reinforcing the use of crowdsourcing in innovative activities such as new product development.

The prominent role of the participants in crowdsourcing could motivate attempts to compare or assimilate it to user innovation. However, there are differences: in crowdsourcing calls, users and nonusers participate (Seltzer and Mahmoudi 2013). As previously described, the objective is to draw from a large audience and to generate participatory dynamics that could foster unexpected ideas as solutions. This marks a difference from user innovation where the contributions are proposed by users that suggest ideas that could meet their own needs (Bilgram et al. 2008).

Similarly, although crowdsourcing is an open process, it is different from open innovation (Laursen and Salter 2006) or open source (Seltzer and Mahmoudi 2013; Zhao and Zhu 2014). The directed nature of the crowdsourcing calls and the contribution boundaries to participants, both in content and form, limit the transformative impact creating a difference with open innovation efforts. At the same time, crowdsourcing projects are naturally limited in time and the outputs or contributions are owned by the issuer of the call, something that does not happen with open source projects (Hippel and Krogh 2003), where private and collective elements coexist and can be sustained over time.

The definition of crowdsourcing and its functional boundaries provides the needed reference to advance to the next section where further details and a function model are presented.

3.2.2 A Model for Crowdsourcing

As described by Zhao and Zhu (2014), a simple modelization of crowdsourcing identifies three key actors: (1) the organization that aims to benefit from the work of the crowd, also described as the issuer or assigner of the call for participation; (2) the crowd depicted by the participants that expect to be part of the work call, that are identified as the provider; (3) the platform that puts together the organization and the crowd and acts as intermediary (see Fig. 3.1). The role of the platform as a mediator of the relationship between the organizations that exposes the problem and the crowd has changed as information interfaces have benefited from technological advances. The platform is also defined by the rules and mechanisms that allow participation and interaction between the participants; it can be regarded as the enabler of the crowdsourcing initiative (Zhao and Zhu 2014). There are many active platforms for crowdsourcing projects; an example that shows the linkages with concepts such as open innovation is Ideaken (see www.ideaken.com).

Fig. 3.1
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Model for crowdsourcingSource: adapted from Zhao and Zhu (2014)

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The model describes the type of actions that take place when actors interact in the development of the crowdsourcing call. The trigger of the process is when the “issuer” or “assigner” submits the call in the intermediary platform. Following the model layout proposed by Zhao and Zhu (2014), this trigger moment is then followed by a sequence of actions by each of the actors involved.

This first step requires the assigner to have already identified and defined the task it needs the “crowd” to work on. The submission of the call in the intermediary platform also implies that the assigner is aware of the rules used by the platform when it comes to participatory dynamics governance. At this point, the intermediary platform needs to issue a validation to the assigner that the call can be opened; at the same time the type of reward mechanism should also have been defined.

The second step starts when the call is open and providers can start to participate in it, similar to a bidding process where participants act as providers and pitch their proposal. A dual mechanism of push-and-pull guides the interactions between the platform and the providers: platforms push calls to their audience, but providers can also request to participate in certain types of calls. The objective is that providers’ feedback (as contribution proposals) gets into the platform and successfully fits with the assigner’s task call.

Lastly, there are direct interactions between the assigner and provider that might be completed through the platform or out of it. For example, as the providers submit their proposals, they might need additional information so they might inquire on specific issues. Similarly, the assigner might need to introduce additional requests or have to negotiate how to implement or use the provider’s feedback.

3.2.3 Managing Crowdsourcing Calls

Understanding the actors, relationships, and expected participatory dynamics described in the crowdsourcing model raises a question on how to successfully orchestrate crowdsourcing calls. The involvement of different actors with different incentives and motivations points toward the necessity of governance mechanisms that offer structure and facilitates the generation of innovative ideas or solutions at the same time.

While in an outsourcing call the issuer or assigner selects the participant, in crowdsourcing the participation decisions comes from the individual. Thus, it becomes essential to ensure that participants will proactively engage with the call. There are evidences that suggest that a weak definition of the problem, with limited context details, and no feedback on the participants’ inquiries will result in a low engagement (Seltzer and Mahmoudi 2013). On the other hand, a well-defined crowdsourcing challenge offers a clear framework for all types of participants to “compete” with their bids, even if they have limited tacit or expert knowledge in the problem or situation that the issuer describes (Poetz and Schreier 2012).

Besides the clarity of the challenge description and the responsiveness to the inquiries from interested participants, a further understanding of the motivations and incentives for participation provides additional clues on how to build successful crowdsourcing calls. Dividing the motivational factors into intrinsic and extrinsic (Zheng et al. 2011) types helps to identify the potential levers. Extrinsic factors include the use of a clear compensation scheme (can be pecuniary or other equivalent rewards) and/or public recognition for the participant. Intrinsic factors would include the call being designed in a way that would fit with the internal needs and desires of the participant, leading the participant to take the preparation of the bid proposal more like a hobby than a work project. Public acknowledgment has been observed to work as both an extrinsic motivation and also an internal driver for action for some profiles of participants (Zheng et al. 2011).

The definition of the incentives for participating in the crowdsourcing call is implicitly interrelated to its objectives. Following the suggestion of Prpić et al. (2015), there are at least two different types of calls: those that aim for specific and objective contributions from the crowd and those that expect submissions of subjective content. The calls for specific contributions aim to achieve an impartial result by activating the participation of a large crowd; it could be a more simplistic participation like voting or choosing among options, the final objective being to achieve an unbiased result. The audience of this type of calls should be as similar as possible to the final target of the product or service under development; otherwise there is a risk of biased results. The alternative is to build a call that aims for subjective contributions: in this type of calls, the perceptions, hindsight, and beliefs of the individuals are the expected source of “crowd” creativity.

As expected, these different types of crowdsourcing calls require different management mechanisms. It is not the same to lead the participation to a specific range of options with narrow space to contribute as to open up a creative contest where subjective contributions are subject to further constructive development without a predefined end goal. Thus, depending on the type of contributions that are expected, two mechanisms can be used: aggregation and filtering (Prpić et al. 2015). Typical projects that rely on aggregation are “crowd voting”, where the large audience votes are expected to supersede experts’ predictions, and “micro-task crowdsourcing”, where a complex and large task is broken into pieces and each individual completes a small chunk (Prpić et al. 2015).

The alternatives are the projects that rely on the filtering capacity of crowdsourcing. This type of projects benefits from the diversity of individuals that contribute in the call, capturing unique ideas and being able to filter them through a selection process before implementing them. The main exponent of this type of crowdsourcing calls is “solution crowdsourcing” (Prpić et al. 2015), where a specific problem receives contributions that are pitched as solutions for a business problem. In this type of contest, the crowd acts both as the source of creative ideas, but also as the filtering mechanism that helps to elaborate and promote the most promising solutions (Majchrzak and Malhotra 2013). An example that combines many of the described concepts is the successful platform run by Dell Inc., named IdeaStorm (see www.ideastorm.com). This platform evolved from being simply an online suggestion box into being a source of crowd-validated insights and ideas on how to improve the products and services of the company.

Examples of successful crowdsourcing campaigns provide an illustration of the practical impact of the phenomenon and the success measures. As described by Gatautis and Vitkauskaite (2014), in 2013 Audi (car maker) launched a campaign where over 150,000 visitors where engaged in a competition to produce a TV commercial that resulted in 2275 competing versions (https://www.thinkwithgoogle.com/campaigns/audi-australia-land-of-quattro.html); similarly, also in 2013, Kleenex (tissue brand owned by Kimberly-Clark) started a campaign that attracted close to 200 submissions for new tissue box designs (Gatautis and Vitkauskaite 2014). In both examples, the organizers of the crowdsourcing call obtained benefits beyond solving the creative challenge that they were facing, and leveraged creative talent beyond what would have been their regular restrictions. Other more general examples of initiatives that have thrived thanks to crowdsourcing could be 99 Designs (www.99designs.com) or Threadless (https://www.threadless.com/) where participants help in the design and development of new products, or Squadhelp (https://www.squadhelp.com/) where they become idea generators and consultants for organizations (Zhao and Zhu 2014).

In these crowdsourcing calls the measures for the performance of the campaign go beyond the quality of the final selected solution; for example, in some calls the participants engaged can also take the role of being the first customers, thus a relevant metric for marketing-oriented crowdsourcing campaigns can also be the number of participants, the number of submitted ideas, or even the number of visits that the event page captured, which potentially increased the product and/or brand exposure (Gatautis and Vitkauskaite 2014).

3.2.4 Challenges and Opportunities in Crowdsourcing

Despite the promising advantages of introducing crowdsourcing as a valuable tool for innovation management in organizations, there are also limitations and risks that need to be taken into account. The “wisdom of the crowds” (Surowiecki 2004) might not always deliver unbiased results that can be directly used. For example, they can be affected by key influential users with an ambition to manipulate the results; the outcomes can also be biased if there is a lack of representativeness between the overall population (or target consumer group) and the crowdsourcing’s participants profile (Seltzer and Mahmoudi 2013).

The outcomes of a crowdsourcing campaign are positively related to having a clear design of the call’s objectives and requirements; a clear leadership and resource commitment from the issuer are the other needed components. Overall, the issuer of the call needs to acknowledge that its commitment goes beyond the initial conceptualization of the problem or challenge, to include the execution, feedback mechanisms, and execution of the reward system (if any).

In his early conceptualization, Howe (2008) already identified some of the rules that could make a difference for innovation managers interested in using crowdsourcing in their organization (see Table 3.1). These are still valuable insights into what is expected from the crowd and how a crowdsourcing call should be managed, from the initial considerations of choosing the type of crowdsourcing and engaging the right crowd, to the design of the rules, incentives, and governance mechanisms.

Table 3.1. Rules for successful innovation-focused crowdsourcing
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3.3 Crowdfunding as a Disruptive Force for Innovation Potential in Organizations

Crowdfunding has been increasingly popular in recent years and has emerged as a new way to raise financial capital to support innovative ideas not only from nascent entrepreneurs but also from established organizations. It allows the general public to make a collective investment in individual entrepreneurs or businesses which need financing to start or grow. Through crowdfunding platforms such as Kiva, Kickstarter, and Indiegogo, entrepreneurs who have limited access to traditional funding sources such as banks, venture capitalists, and angel investors, raise billions of dollars to get their business off the ground since small amounts of money from a large number of ordinary people can add up quickly to reach the goal. According to a recent report by a UK-based crowdfunding center, 442 crowdfunding campaigns are launched globally on a daily basis and entrepreneurs raise more than $60,000 on an hourly basis (Clifford 2014). It has a disruptive impact on entrepreneurial financing processes in diverse contexts such as consumer products, real estates, and journalism. The first modern-day crowdfunding can be credited to a British rock band named Marillion, who in 1997 raised $60,000 from their fans’ donations online. In 2000, the first crowdfunding platform named ArtistShare emerged and allowed artists to raise money for their new creative works from their fans. In the late 2000s, crowdfunding became popular among entrepreneurs and investors with the birth of Kickstarter and Indiegogo. In 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act that allows entrepreneurs to sell their equity stakes in new ventures to the general public through the Internet. As of 2015, the global crowdfunding industry was a $34.4 billion market that more than doubled in comparison to 2014. With the emergence of this phenomenon and approval from government, crowdfunding has become a viable source for entrepreneurial resource acquisitions for those who have limited access to traditional financing sources due to lack of proven history.

3.3.1 Types of Crowdfunding

Although there has been a lack of a clear definition or taxonomy of the different types of crowdfunding options (Tomczak and Brem 2013), there are some common elements in most of the crowdfunding campaigns. The phenomenon of crowdfunding is mainly designed to raise financial capitals through the Internet. Individuals and organizations can either choose an all-or-nothing (AON) or keep-it-all (KIA) strategy. In an AON strategy, crowdfunders’ pledges are only collected if the goal is met by the end of the campaign. In a KIA strategy, pledges are collected even if the fundraising goal is not met. For example, the issuer or assigner has a goal of $20,000 and has only raised $18,000 at the end of the campaign. In an AON strategy, the issuer will not receive any funds since the goal is not met. But, in a KIA strategy, the whole $18,000, which has been accumulated during the campaign, will still be received. Usually, platform fees are higher in a KIA model than in an AON model. Research has found that an AON strategy is much more likely to be successful at achieving the fundraising goal.

There are multiple options available for entrepreneurs looking for the right fit between their situation and type of crowdfunding they can use. Some options are (1) donation-based crowdfunding, (2) reward-based crowdfunding, (3) lending-based crowdfunding (i.e., peer-to-peer lending), (4) royalty-based crowdfunding, and (5) equity-based crowdfunding. Depending on the type of campaign, the impact on economic values and social values is different (see Fig. 3.2), offering a visual classification of crowdfunding types (Meyskens and Bird 2015).

Fig. 3.2
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Crowdfunding and value creationSource: adapted from Meyskens and Bird (2015)

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Donation-based crowdfunding allows individuals and organizations to raise money from the crowd and crowdfunders contribute in the form of donation without any form of return. They are socially or intrinsically motivated to donate money for a worthy cause. Examples of campaigns range from funding for education to paying medical bills. GoFundMe is one of the personal fundraising platforms for donation-based crowdfunding. Every day, users of GoFundMe raise over $4 million. As of November 2015, the most funded campaign in GoFundMe is “Saving Eliza”, a campaign to raise $2.5 million to fund a clinical trial for the treatment needed by children who were born with Sanfilippo syndrome, a rare degenerative disease. Within 26 months, the campaign raised over $2 million through more than 36,000 donations.

Reward-based crowdfunding is arguably the most popular type. It allows start-ups and small businesses to raise money through various crowdfunding websites such as Kickstarter and Indiegogo. Here, providers contribute to the campaigns and get rewards for their contribution. Rewards are different depending on the number of pledges and the issuer of the campaign, ranging from thank you notes to meeting the creators, and distributing some accessories such as T-shirts and hats. Alternately, creators also treat crowdfunders as early customers and presell products/services that sometimes do not exist yet. After successful campaigns, issuers collect the money and give rewards as promised but there is no legal obligation to deliver rewards.

As of November 2015, Kickstarter has helped entrepreneurs and start-ups raise over $2 billion from almost 10 million crowdfunders since its inception. It has more restrictions than Indiegogo in terms of country and type of projects: although anyone in the world can contribute, Kickstarter is only open to creators from 19 countries. Also, it does not allow campaigns for personal causes. Indiegogo is more open and affords more freedom. In November 2015, creators from 224 countries had used the platform to raise financial capital for anything considered legal; about 15 million people from all over the world visited the Indiegogo website each month. The most funded campaign in reward-based crowdfunding is “Pebble Time”, a smartwatch designed and built by a California-based maker. It raised over $20 million during its 31 days of campaign. It is not only the most funded but also the fastest funded campaign, raising twice its goal within an hour. Research has found some factors that could increase the chance of success in crowdfunding: Mollick and Kuppuswamy (2014a) found that campaigns with videos and early updates are more likely to succeed; social networks of entrepreneurs also affect their success. In addition, Colombo et al. (2015) also found the reciprocity effect: individuals who supported other campaigns in the past have better chances to succeed.

Lending-based crowdfunding, also known as peer-to-peer lending or debt-based crowdfunding, allows individuals or organizations to borrow money from the crowd as a loan without collateral using an Internet platform and to pay it back with interest. Lenders sometimes have not only the financial goal of getting interest but also a socially intrinsic goal of helping others. Some popular platforms in this type of crowdfunding are Kiva.org, LendingClub.com, and Prosper.com. As of November 2015, LendingClub alone had funded over 13 billion loans to borrowers, and Kiva, which connects people through lending to alleviate poverty, helps individuals from 83 counties borrow over $785 million with a 98.45 % repayment rate. Research shows that lenders respond positively to a loan request when it is framed as helping others than investing for an opportunity.

Equity-based crowdfunding allows entrepreneurs who have limited access to traditional venture capitalists and angel investors to raise financial capital from the crowd in return for an equity stake in their ventures. Since there is a need for a higher level of regulations, equity-based crowdfunding is not legally allowed in many countries. Recently, the US Security Exchange Commission (SEC) has allowed regular citizens to invest in equity crowdfunding with some restrictions. Equity crowdfunding is especially important to provide financial capitals for start-ups and small businesses that need between $20,000 and $2,000,000: friends and families might afford to contribute to ventures if the required financial capital is less than $20,000 while venture capitalists may think it is not worthwhile to invest in ventures that need less than $2,000,000. Thus, equity crowdfunding fills that gap and helps start-ups that need financial capital in that range. Because of its lesser popularity than other types of crowdfunding, research has not been developed in this type until recently (Tomczak and Brem 2013). A research study by Ahlers et al. (2015) reports that internal factors such as financial roadmaps, risk factors, number of board members and their education level have significant impact on fundraising success.

Royalty-based crowdfunding might be the newest type. Like in other types, issuers of call can raise money from the crowd and pay back a percentage of revenue from their venture. Thus, entrepreneurs do not lose their equity stake in the venture while investors earn a regular income from gross sales. However, it is mostly appropriate for products/services that have high profit margins because loyalties are added to the expense. Products or services with no or low variable costs such as developing mobile applications are better suited, as profit margins are higher for additional sales of the application.

3.3.2 Does Crowdfunding Decrease Barriers for Innovation?

Since it has been substantially difficult to raise external financial capital, many start-ups and small businesses cannot fill the funding gap between internal sources such as family and friends, and external sources such as banks and investors. Crowdfunding fills the gap by providing this financial capital. In addition to that, it also allows entrepreneurs and small business owners to test their product in a presale consumer environment before introducing it to the market. Since most products/services are still in development stage, entrepreneurs and business owners can get feedback from providers on how to make their products/services better. Since commercially attractive innovations are developed by customers who are the primary beneficiaries, they can provide insightful suggestions during product development; this feedback can help local firms or entrepreneurs understand customers’ needs and wishes so as to avoid wasting resources in new product development that customers are not willing to buy. Moreover, testing new innovative products in customer environment helps firms identify potential product problems or weaknesses. By modifying products based on customers’ feedback before market introduction, firms can produce better-quality and more commercially innovative products by collaborating with those customers. For example, crowdfunding backers warn entrepreneurs who are trying to develop an innovative bag that recharges electronic devices while in motion that their charger is not compatible with the electrical voltage used in some countries. This feedback allows entrepreneurs to solve this issue at an early stage. In addition, platforms like Ideaken create a community where an individual can share his/her innovative idea and other people in the community can collaborate to innovate in return of reward and recognition. Thus, crowdfunding and crowdsourcing help to address challenges of innovation faced by individual entrepreneurs trying to start new ventures and enable managers from established organizations to identify commercially innovative opportunities.

3.3.3 Downsides of Crowdfunding

Although crowdfunding provides numerous benefits to entrepreneurs, there are also drawbacks that come with it. First, an open call to the general public is a double-edged sword for entrepreneurs. On the one hand, it allows entrepreneurs to expose their ideas to potential investors around the world. On the other hand, the exposure comes with risks. Without proper protection of intellectual property in advance, it allows people to steal creative and innovative ideas. Second, unlike traditional investors such as venture capitalists who can provide strategic guidance and expertise about the future direction of a new venture, crowdfunders usually lack the ability to provide insightful feedback. Besides these drawbacks for entrepreneurs, crowdfunders also face numerous uncertainties. In a reward-based platform, about 75 % of projects fail to deliver rewards on time (Mollick and Kuppuswamy 2014b), and it is not unusual that they fail to deliver any of the promised rewards at all (Mollick 2014). Thus, crowdfunders should be aware of these downsides.

3.3.4 Dynamics of Crowdfunding Campaigns

The following graphical layout (see Fig. 3.3) of a typical crowdfunding project page from Kickstarter provides a visual understanding of crowdfunding in terms of actors, actions, and key metrics being used.

Fig. 3.3
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Graphical layout of a crowdfunding campaign page

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  • Campaign page—Project page with description and an optional video that clearly explains the project.

  • Project creator—Individual or groups of entrepreneurs from start-ups or established organizations; issuer of call.

  • Backer—Individual supporting the project; provider.

  • Goal—Amount the project creator aims to raise.

  • Pledges—Amount of money that is actually raised by project creator.

  • Updates—Place where the project creator can add information about the project during and after the campaign.

  • Comments—Place where backers can post their comments about the project and ask questions to the project creator.

  • Duration—The number of days the campaign runs on the platform to reach its goal.

In order to understand how innovation managers or entrepreneurs can run a successful campaign, a closer look at the dynamics of the campaign is needed. A recent study by Murray et al. (2015) provides the process model of persuasion in crowdfunding (see Fig. 3.4).

Fig. 3.4
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Process model of persuasion in crowdfundingSource: adapted from Murray et al. (2015)

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This sequential process distinguishes successful from unsuccessful crowdfunding projects. Entrepreneurs can either have a growth or fixed mindset. Issuers of call with a growth mindset view crowdfunding campaigns as an opportunity to test their product in the marketplace via a novel way of raising financial capital while those with a fixed mindset view crowdfunding campaigns as an opportunity to solely raise financial capital for their product. These different mindsets apparently impact on the next step.

Both entrepreneurs with growth and fixed mindsets realize that they need to learn about crowdfunding before launching their campaigns since it is a new phenomenon for them. However, the way they learn is different. Those with a growth mindset learn actively by approaching experienced crowdfunding entrepreneurs and gaining insightful knowledge before starting their campaigns, while those with fixed mindset learn about crowdfunding just through observation of previous campaigns and do not try to approach experienced crowdfunding entrepreneurs.

After learning about crowdfunding, persuasion mechanisms of entrepreneurs play a role. Entrepreneurs can use different quality and quantity persuasion mechanisms that reveal information about products and themselves. These mechanisms include (1) highlighting their background such as education, prior experience in the industry, and prior experience of starting a business; (2) pitching the crowd with a compelling story; (3) connecting with their primary (family and friends) and secondary providers (followers from social network such as Facebook, Twitter, and Linked); (4) consistently updating during the campaign; and (5) contributing to other crowdfunding campaigns. Depending on the quality and quantity of these persuasion mechanisms, the campaign comes alive or remains dormant.

Campaigns that are alive gain interest from potential crowdfunders through different channels such as word of mouth, social media, and traditional media, eventually increasing the chance of success, while campaigns that are dormant gain no or less interest from potential crowdfunders, which in turn decreases the chance of success. Therefore, a combination of an interesting product/service, a strong personal network, and a persuasive campaign is the potential driver of a successful campaign (Brem and Wassong 2014). Table 3.2 provides some tips from crowdfunding researchers and experts for successful campaigns.

Table 3.2 Tips for successful crowdfunding campaigns
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3.4 Redefining Innovation with Crowdsourcing and Crowdfunding

The impact of crowdsourcing and crowdfunding on innovation management goes beyond the campaign or call goals. From a broader perspective, both phenomena have contributed to modifying the boundaries of innovation management in emergent and established organizations. Nevertheless, there are specific activities in the innovation management process where the transformative impact of these phenomena has been particularly substantial.

Using as reference the innovation process framework from Brem (2011), we can propose a similar linkage between crowdsourcing and crowdfunding as with innovation and entrepreneurship perspectives of the innovation process (see Fig. 3.5). In this context, the crowdsourcing activities have found particular support among organizations in need of help to identify new ideas or filter them (idea management), or to establish a linkage between a problem and an opportunity (opportunity recognition), or to refine a possible solution or idea (research opportunity and idea development). Similarly, organizations that have been using crowdfunding were likely to expect support in the first steps as they brought a new product to the market (commercialization), or were interested in getting further traction for an idea or product they were launching (diffusion).

Fig. 3.5
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Innovation process and linkage with innovation and entrepreneurship Source: adapted from Brem (2011)

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These phenomena have had an impact on different areas of the innovation process, and this difference in their application area provides a hint on how they can evolve in the future. While crowdsourcing and crowdfunding are gaining adoption and being introduced in new organizational contexts or fields, the outcomes of crowdfunding can have further long-term impacts. One of the causes for this longer-term impact is that there is no a priori limitation that we often see in crowdfunding campaigns, where the volume of the funds collected is not capped. Therefore, in comparison with crowdsourcing, there is no a priori call that constrains the number of solutions that are implemented, but instead there is a stronger focus on maximizing the potential value of the campaign.

An alternative reflection on the outputs of crowdsourcing and crowdfunding campaigns is to observe what happens when they fail. Surprisingly, recent findings from a sample of projects in Kickstarter found that most entrepreneurs continued with their project after failing to achieve their funding goal (Mollick and Kuppuswamy 2014b). The concept of a failed crowdsourcing campaign is somewhat more difficult to grasp. It could be a situation where the solutions proposed by the crowd did not meet the minimum requirements of the issuer of the call, or that the participation was weak and no fully developed ideas emerged; in these cases, it is more probable that the potential project idea is abandoned.

On the positive side, the observation that 90 % of the crowdfunding (reward-based) campaigns turn into full organizations (Mollick and Kuppuswamy 2014b) gives further evidence of the impact on the more entrepreneurial part of the innovation management process (see Fig. 3.5). While a well-managed crowdsourcing campaign can be the sparkle of a successful new product or service, a successful crowdfunding campaign is seen as a good predictor of further funding from traditional and alternative sources as well as the beginning of a new firm.

3.4.1 Evolution and Challenges for Crowdsourcing and Crowdfunding Platforms

The last decade of evolution in crowdsourcing platforms provides an indication of what we can expect from the emerging crowdfunding platforms. The surge of platforms for all types of crowdfunding (reward, donation, and equity) has led to a consolidation process, in particular as new regulations have been introduced for equity crowdfunding (Stemler 2013). The regulations have set new boundaries but are also expected to foster the reputation and responsibilities of the existing platforms. The increasing maturity of the platforms for crowdfunding can also be seen in the specialization and niche positioning of some of them. For example, even in the leading platform Kickstarter, it has been observed that from 2010, there is an increasing presence of technological product projects, while the number of personal or social projects has been declining (Samanci and Kiss 2014). Whether intended or not, as the crowd becomes larger, specialization helps to improve the connection between the involved parties.

Further evidence on the evolution of the platforms and their connection with innovation managers or entrepreneurs can be seen in how they have been adopted and used. In particular, the competition between Indiegogo and Kickstarter has shown how two different crowdfunding models can coexist. The KIA rules set by Indiegogo has helped this platform attract lower-risk projects that could have high ambitions but also low starting costs (Cumming et al. 2015). The challenging AON mechanism that Kickstarter has traditionally defended keeps attracting innovators and entrepreneurs with radical product concepts where the perception of uncertainty is in both the crowd and the founder (Cumming et al. 2015). Using again the innovation process as a reference, it could be argued that KIA mechanisms could further support diffusion activities in an innovation process; while AON mechanisms in reward crowdfunding are particularly suitable in the commercialization activity, providing support to the hypothetical question of whether not to start the production of the product.

3.4.2 Future Opportunities for Crowdsourcing and Crowdfunding: Social Innovation

As crowdsourcing and crowdfunding are applied to new contexts, new opportunities appear to ignite or transform how innovation is managed. A singular opportunity emerges in the field of social innovations.

Contrary to the economic theory expectations that projects with positive externalities might never get started, the use of technological platforms to leverage the power of the crowd has been a positive surprise (Seltzer and Mahmoudi 2013; Davies 2014). The concept of civic crowdfunding has gained traction as a tangibilization of the societal participation as investors to create social value: for example, finding solutions to social problems, engaging individuals in responsible and healthy behavior, helping unattended or marginalized social groups, or promoting environment-friendly actions by individuals and organizations.

The development of civic and socially driven crowdfunding opens the door to another dimension of impact for these initiatives. It can potentially modify the traditionally passive roles of individual citizens and activate potential contributions by knowledgeable actors (Davies 2014).

3.4.3 Unexpected Consequences and New Expectations for Innovation Management

Although crowdsourcing and crowdfunding are recent phenomena, they are changing consumer behavior. As the lines between product or service creation and consumption become increasingly blurry, concepts like co-creation gain strength to explain the new role that consumers expect to play (Zheng et al. 2011; Perks et al. 2012). In this sense, crowdsourcing and crowdfunding impact on this trend, giving a taste of co-creation to a much larger collective.

It is plausible that those that participate in crowd contests or fundraisers are eager to try again. The experience of being partially responsible for others’ success (and proudly be part of it), or having been part of a successful social initiative, or having achieved a positive return from a risky, but limited, investment in a project or product would be the new type of relationship that some customers or consumers expect to have.

As a result of these changes the separation between production and consumption becomes even more blurry (Ordanini et al. 2011); for example, it could also be expected that the co-creation expectations of consumers (Perks et al. 2012) will not stop with their participation in isolated crowd platforms, and they will demand further involvement. For innovation managers, this implies an additional effort to flexibilize and open their innovation processes to benefit but also provide to a participatory crowd. On the positive side, these new co-creation mechanisms open the door to identify and work with emerging lead users (Brem and Bilgram 2015) that otherwise might not have ever been identified. From a broader point of view, innovation managers should expect to not only engage lead users, but also tap on the whole diversity of talented individuals that define the emerging creative class (Howkins 2013); more often than ever, this talent pool is mostly self-employed and ready to act as independent creative sources for all types of organizations and projects.

Despite being recent phenomena crowdsourcing and crowdfunding are quickly evolving into valuable innovation management mechanisms, but it will be as important to use them as to know how and when to use them, being aware of their potential value as well as of their long-term transformative impact on the relationships between organizations, consumers, and their stakeholders.