What Happens When You Provide a Refund Mechanism in a Crowdfunding App?
By Vanessa Pineda on December 19, 2016
Our internal crowdfunding application, Cultivate Ideas, is like Kickstarter for inside your business. It allows employees to submit and collaborate on ideas, then give everyone a voice on investment decisions by letting them “fund” the best ideas. Unlike when people use their own money in Kickstarter, employees are using company dollars that are given to each individual, usually from an R&D or project budget. The ideas that receive enough money - their “tipping” point - then get turned into projects that the company will make a commitment to support.
In the application itself, we created a feature you won’t find on Kickstarter - a “refund” button - to encourage employees to move their investments around. Because employees are not buying anything with their own money, reallocating funds is costless and our hypothesis was that it would encourage people to optimize their investment strategies, especially towards the end of a funding round when it was apparent which investments had critical support and which didn’t.
In this post, we wanted to share what we’ve found so far introducing this new capability into a crowdfunding process. We took a deeper dive looking at one client in particular, a pharmaceutical company who has run 2 crowdfunding campaigns so far.
For context, a group of about 200 employees was asked to submit project ideas around specific topic areas, related to the science the group conducts. Employees submitted ideas and worked together to refine and improve the proposals. Thirty-eight ideas were considered ready to enter the crowdfunding stage. At this point, the company had set aside $100K to distribute evenly to employees, so each participant received $500 to invest over two weeks. Budget size for ideas was limited so that employees would focus on proposing small-scale “experiments” vs. expensive moon shots. Each employee was tasked with deciding how much of their allotted money, if any, should go towards the 38 project ideas. Employees also had the option to get a refund on any of their investments at any time during the funding period so they could re-invest elsewhere.
During the first week of funding, employees made over 500 investments, yet only a handful took refunds and re-allocated their money. By the end of the funding period, 35% of the participating employees had used the refund feature.
It appears that most of these refunds were made not because of regret over their original choice, but rather as a strategic move. Only projects that receive 100% of their funding goal are given their budgets, so it made sense for the investors to move money from a project unlikely to “tip” to one that is closer to its “tipping” point. On average, refunds were requested on projects that were only 24% of the way towards their goal. That is, people retracted the investments that were unlikely to lead to a funded project. We also noticed that the majority of refunds were made in the last two days, signaling that people waited to get refunds until it was clear that their first investment choice was unlikely to “tip”.
In the last two days, as employees reallocated their funds towards projects closer to their “tipping” point, the number of fully funded projects doubled from 7 to 14. Each of these final seven projects relied, at least partially, on “refund money” to reach their goals.
What about the 65% of employees that chose not to use the refund feature? Some may have simply been happy with their original decisions; however, there may be some organizational and human behavioral challenges to using the refund feature. We heard from individuals they felt “bad” using it if they’ve already allocated money to peers’ ideas. This particular client chose to not make investments in the system anonymous, so fears of social repercussions may have kept some people from using the refund option.
This is not unlike the refund anxiety or just general social awkwardness some consumers feel when making returns to retail stores. Some feel as if they are admitting a failure for not making the right decision the first time, or are worried the sales associate will judge them. Others feel bad for taking away from a company’s profits.
Ultimately given the fact the number of ideas that were funded doubled in the last 2 days, in large part because of the re-investment of funds, the refund feature has proven to be a valuable mechanism. It also makes it that much more imperative on the entrepreneur, however, to cultivate a positive signal early so people feel there is momentum. This isn’t dissimilar to a new restaurant opening where early reviews can make or break its success.
It’s still early days for internal crowdfunding, and we’ll be doing more analysis on this and other clients to better understand if this process creates an appropriate balance of “risky” vs. “safe” ideas, favors those who are simply better marketers, and other “traps” that may lay ahead. Stay tuned!