Venkat Kuppuswamy

Crowdfunding Creative Ideas: The Dynamics of Project Backers in Kickstarter

Entrepreneurs are turning to crowdfunding as a way to finance their creative ideas. Crowdfunding involves relatively small contributions of many consumer-investors over a fixed time period (generally a few weeks). The purpose of this paper is to add to our empirical understanding of backer dynamics over the project funding cycle. Two years of publicly available data on projects listed on Kickstarter is used to establish that the typical pattern of project support is U-shaped — in general, backers are more likely to contribute to a project in the first and last week as compared to the middle period of the funding cycle. We further establish that this U-shape pattern of support is pervasive across projects, including both successfully and unsuccessfully funded projects, those with large and small goals, and projects in different categories. We then empirically explore the dynamics associated with several factors, including collective attention effects from platform sorting options, the role of family and friends in supporting projects, the effects of social influence, and the role of project updates over the project funding cycle.

Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007–2009 Financial Crisis

We examine whether and why the value of diversification changed during the 2008–2009 financial crisis. We find that diversified firms increased in value relative to single-segment firms during the crisis, a result that is not driven by the endogeneity of either financing constraints or firms’ diversification choices. We also find that the increase did not simply reflect changes in investor perceptions but real differences in corporate finance and investment, through two different channels: a “more money” effect arising from the debt coinsurance feature of conglomerates, and a “smarter money” effect arising from more efficient internal capital allocation.

Crowdfunding Creative Ideas: The Dynamics of Project Backers

Entrepreneurs are turning to crowdfunding as a way to finance their creative ideas. Crowdfunding involves relatively small contributions of many consumer-investors over a fixed time period (generally a few weeks). The purpose of this chapter is to add to our empirical understanding of backer dynamics over the project-funding cycle. Publicly available data of two years on projects listed on Kickstarter are used to establish that the typical pattern of project support is U-shaped—in general, backers are more likely to contribute to a project in the first and last weeks as compared to the middle period of the funding cycle. We further establish that this U-shaped pattern of support is pervasive across projects, including both successfully and unsuccessfully funded projects, those with large and small goals, and projects in different categories. We then empirically explore the dynamics associated with several factors, including collective attention effects from platform-sorting options, the role of family and friends in supporting projects, the effects of social influence, and the role of project updates over the project-funding cycle.

The Effect of Institutional Factors on the Value of Corporate Diversification

Using a large sample of diversified firms from 38 countries we investigate the influence of several national-level institutional factors or ‘institutional voids’ on the value of corporate diversification. Specifically, we explore whether the presence of frictions in a country’s capital markets, labor markets, and product markets, affect the excess value of diversified firms. We find that the value of diversified firms relative to their single-segment peers is higher in countries with less efficient capital and labor markets, but find no evidence that product market efficiency affects the relative value of diversification. These results provide support for the theory of internal capital markets that argues that internal capital allocation would be relatively more beneficial in the presence of frictions in the external capital markets. In addition, the results show that diversification can be beneficial in the presence of frictions in the labor market.

The Colorblind Crowd? Founder Race and Performance in Crowdfunding

The dearth of minority entrepreneurs has received increasing media attention but few academic analyses. In particular, the funding process creates challenges for either audit or correspondence methods, making it difficult to assess the role, or type, of discrimination influencing resource providers. We use a novel approach that combines analyses of 7,617 crowdfunding projects with an experimental design to identify whether African American men are discriminated against and whether this reflects statistical, taste-based, or unconscious bias on the part of prospective supporters. We find that African American men are significantly less likely than similar white founders to receive funding and that prospective supporters rate identical projects as lower in quality when they believe the founder is an African American male. We conclude that the reduction in perceived quality does not reflect conscious assumptions of differences in founder ability or disamenity but rather an unconscious assumption that black founders are lower quality. In two additional experiments, we identify three means of reducing this bias: through additional evidence of quality via third-party endorsements i.e., awards, evidence of prior support, through evidence that African American founders have succeeded previously, and by removing indicators of the founders race. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2774 . This paper was accepted by Toby Stuart, entrepreneurship and innovation.

Risky Business: The Impact of Property Rights on Investment and Revenue in the Film Industry

Our paper tests a key prediction of property rights theory, specifically, that agents will respond to marginal incentives embedded in property rights when making non-contractible, revenue-enhancing investments. (Grossman and Hart, 1986; Hart and Moore, 1990). Using rich project-level data from the U.S. film industry, we investigate variation in property right allocations, investment choices, and film revenues to test the distinctive aspects of property-rights theory. Empirical tests of these key theoretical predictions have been relatively sparse due to the lack of appropriate data. The U.S. film industry deploys two distinct allocations of property rights, which differentially affect marginal returns on a particular class of investments. In many cases, films are both produced and distributed by studios that then take in the lions share of revenue. In other cases, films are produced independently and distributed by studios under revenue sharing agreements, which give studios 30-40% of the revenue stream. Under either regime, the studio determines and pays for the allocation of scarce marketing resources. After accounting for the endogenous nature of property-right allocations, we find that studio-financed films receive superior marketing investments compared to independent films and that these investments fully mediate the positive effect of vertical integration on film revenues. As a result, this study contributes to the empirical literature on property rights by showing that both of the predicted linkages (from marginal returns to investment and from investment to revenue) exist in a single empirical setting.

When Firms are Potemkin Villages: Formal Organizations and the Benefits of Crowdfunding

Scholars have long been interested in the reasons why firms exist, arguing that they have efficiency and productivity benefits over other approaches to organizing. We examine why entrepreneurs often form firms, since entrepreneurial ventures are not large enough to accrue many of the expected efficiency benefits from formality. Instead, we argue that there are reasons besides efficiency (and regulation) that cause firms to exist. We suggest that an unrecognized implication of new institutional and ecological theory leads entrepreneurs to establish firms as a legitimating agent, and to allow them to act in industries with existing firm populations. We test this theory by examining a unique sample of crowd-funded startup companies, to empirically identify the advantages of formal versus informal organizations with different types of third party entities. We find that adopting the mantle of a formal organization helps entrepreneurs in contexts where they operate with other formal organizations, but not in interactions with other types of resource holders. We also demonstrate that crowdfunding may have substantial benefits for entrepreneurs beyond fundraising.

Goal Relatedness and Learning: Evidence from Hospitals

Organizations vary significantly in the rates at which they learn from experience (i.e., learning by doing). While prior work has explored how different categories of prior experience affect learning outcomes, limited attention has been paid to the role played by the organizational context. We focus on one important aspect of an organization’s context—goals—and examine how the degree of goal relatedness across an organization’s diverse set of activities affects the rate at which it learns from experience. In doing so, we argue that even where otherwise diverse activities are knowledge related, if they are not goal related, learning by doing is likely to suffer. Using data from the hospital industry our findings suggest that goal relatedness is an important consideration when it comes to learning. Although goal-related teaching aids learning by doing in clinical care, we find that strong academic affiliations (and the research-oriented tasks and goals they bring with them) may detract from it.

Second Thoughts About Second Acts: Gender Differences in Serial Founding Rates

Men are far more likely to start new ventures than women. We argue that one explanation of this gap is that women respond differently to signals of past entrepreneurial success due to the “male hubris, female humility” effect. We argue that as a result women are disproportionately less likely to persist in second founding attempts than men when they have succeeded or failed by large margins. Using a data set of serial founders in crowdfunding, we find evidence supporting this prediction. We then turn to a unique survey of founders in crowdfunding in order to examine alternative explanations. We find support for a variety of systematic differences between male and female founders, but the persistence effect remains. While decreased persistence in the face of low quality opportunities benefits women individually, we argue that it disadvantages women as a group, as it leads to 25.3% fewer female-led foundings in our sample than would have occurred if women reacted similarly to men.

Blaming the Customer: The Effect of Cast Racial Diversity on the Performance of Hollywood Films

Is employment discrimination driven by consumer bias rather than employer bias? One explanation for the persistence of employment discrimination, despite considerable legal and social pressure, is that unbiased employers are penalized by biased customers. An equitable employer is therefore a less profitable one, and apparent employer bias is more accurately described as reflected consumer antipathy. The empirical challenge of relating consumer behavior to employee composition has limited prior tests of this hypothesis and focused attention largely on employer behavior. We provide a rare direct test of the claim that consumers change their spending patterns in relation to employee composition by evaluating the commercial and artistic performance of all films released theatrically within the United States between 2011-2015 as a function of the racial diversity of their cast. We find that employing black actors for less prominent roles has no effect on either outcome. However, we find that films employing multiple black actors in leading roles achieve significantly higher domestic box-office revenues (149% higher) than films with no black actors. Moreover, this higher commercial performance domestically does not occur at the expense of artistic success or international box-office appeal. Specifically, we find no evidence of a penalty with respect to Academy Award nominations or international film revenues for films with more black actors. These results indicate that the persistent underemployment of minorities in Hollywood is not the product of consumer discrimination.Is employment discrimination driven by consumer bias rather than employer bias? One explanation for the persistence of employment discrimination, despite considerable legal and social pressure, is that unbiased employers are penalized by biased customers. An equitable employer is therefore a less profitable one, and apparent employer bias is more accurately described as reflected consumer antipathy. The empirical challenge of relating consumer behavior to employee composition has limited prior tests of this hypothesis and focused attention largely on employer behavior or structural factors. We provide a rare direct test of the claim that consumers respond to employee composition by evaluating the commercial and artistic performance of films released theatrically within the United States between 2011-2015 as a function of the racial diversity of their cast. We find that films are not penalized for the diversity of their casts; instead employing multiple black actors in the principal cast achieves significantly higher domestic box-office revenues than films with no black actors. Moreover, we find that international audiences do not exhibit evidence of bias against diverse casts, and that the net returns to diversity remain positive when worldwide box-office revenues are considered. We confirm the robustness of these results in a survey and experimental setting that controls for film-level differences, and through an analysis of a novel dataset capturing the social media activity (on Twitter) for each film by users of different races. Our findings advance an alternative interpretation of the consumer bias thesis, where consumers prefer employers reflect their world or values, rather than their traits.