When the virtual reality company, Oculus Rift, sold to Facebook for $2bn in 2014, one man – the 21-year-old entrepreneur behind the company – was very happy. But more than 9,500 investors were not. 

“I backed Oculus Rift and all I got was this lousy T-shirt,” read the posts of some of the disgruntled early backers, who had put their money behind the virtual reality goggles in 2012. At the outset, Oculus Rift surpassed its fundraising target of $250,000 with a crowdfunding campaign on Kickstarter that hauled in nearly 10 times that amount. But the goodwill soon evaporated when furious early-stage backers accused the company of selling out to Facebook. They bemoaned their lack of what would now have been a lucrative stake in the company, as they had received no financial reward for their early faith in the product. 

And this got Dr Magdalena Cholakova thinking. As Associate Professor of Strategy and Entrepreneurship at RSM, she has examined what motivates individuals to back or invest in entrepreneurial ventures. “During the past decade there’s been an explosion of interest in the phenomenon of crowdfunding,” she says. “At its inception, it focused on reward-based crowdfunding, which allowed people to pledge a certain amount of money to a venture and then receive either a product or something symbolic in return (depending on the size of the pledge). 

“Soon, however, the concept of equity-based crowdfunding gained legal ground as well, which meant that backers could also become investors in companies. So, I wondered what happened when the same company tried to use both methods of raising funds, which tap into two very different human incentives and motivations?” 

To understand her work, says Cholakova, it helps to understand how crowdfunding can help shape entrepreneurial ventures. Initially, people who backed early-stage projects with small sums – $10, for instance – on the likes of platforms such as Kickstarter, did so not for the money but for some sort of hedonic or other non-financial rewards. “The reward-based stage allowed a startup to test the waters and demonstrate that they have a proof of concept to the market,” she says. 

Once entrepreneurs establish that there is an appetite for their product or business, they might want to move on and raise more funds through selling small stakes. But does this existence of two different types of financial support cloud the field? Does the prospect of financial gain jeopardise the support of people who simply like the idea? 

“It’s the same with kids – some are motivated to do their homework because they want to do well and get better; we call this intrinsic motivation,” says Cholakova. “But if you start paying kids to do their homework, their intrinsic motivation dwindles away.” 

One of the triggers for Cholakova’s research were the US reforms of 2013, namely the so-called JOBS Act that legalised equity investment platforms, opening the door to millions of amateur and small-scale investors. In the past, if you were looking for funding you would first go for the “three fs” – families, friends and fools – before trying to tap into potential external investors, such as angels or the banks. “Now entrepreneurs have many more options, so people without a sophisticated investor background are able to make risky bets. All of a sudden, you have two different models on the market.” 

How do these two different funding models work alongside each other? “Typically, reward-based platforms attract individuals who invest because they like a project or want to support it,” explains Cholakova. “Whereas equity investors back a project because they want a financial return.” 

To find out more, she invited investors to take part in an experiment. Some 150 Dutch individuals active on the Dutch crowdfunding platform Symbid – the largest equity crowdfunding platform in the Netherlands – were given details of a real startup and asked if they wanted to back it by making a pledge in return for a non-financial reward. They were then given the chance to reallocate that pledge and transform it into an equity investment via an equity crowdfunding platform. 

The results were surprising, and ultimately good news for entrepreneurs, says Cholakova. Contrary to previous research, which showed that financial incentives – or extrinsic motivation – are likely to crowd out non-financial incentives, the investors surprised her. Those who said they would invest in return for equity were significantly more likely to also keep their initial pledge on the reward-based crowdfunding platform that offered no financial returns – rather than siphon all their cash into equity. “They were happy to keep both,” she says. “And that’s great news – that these two funding models can co-exist, and one won’t crowd out the other.” 

And this helps entrepreneurs as they work to refine their businesses during the early stages. They can still use the reward-based platforms as a sounding board, before moving on to offer a stake in their business for cash. “You are able to validate and flesh out your ideas without risking a subsequent source of funding. This is key.” 

Find out more about Dr Magdalena Cholakova’s work