Equity crowdfunding and the online investors’ risk perception: A co-created

list of Web Design guidelines for optimizing the user experience

S. Prom Tep, S. Sénécal, F. Courtemanche et V. Gohier

21 Octobre 2015, UQAM (Montréal, QC)

MCPC 2015

Research context and acknowledgements

• Equity crowdfunding

• New venue for business in search of investment money to secure their foundation at lowcost

• Consists of funding through dedicated online marketplaces, connecting small investorsand startups with business projects or recently launched existing products

• Implies investment for partial ownership which can translate in a certain percentage of shares in a commercial enterprise which value depends on the business success

• Related to the rise of social media and Web 2.0 platforms

• Hundreds of these online marketplaces exist in the US and Quebec is following the trend

• Type of investment subject to securities and financial regulations*

*The authors wish to thank the CEFRIO, Center for the use and adoption of digital technology, which initiated the projectwith the support of the AMF Securities Regulators, The Montreal industrial cluster Grappe Finance, and the Quebecretirement savings fund Fondaction.

Research context and objectives

• As online equity crowdfunding practices emerge: Strong need to betterunderstand investors’ perception of risk

• General research question: How do interface design elements influence these riskperceptions and how to optimize investors’ experience (UX) for equitycrowdfunding online investment platforms?

• Research questions and objectives:

• How risk is presented to investors on such transactional platforms?

• To what extent the risk is perceived by the investors though the investment process?

• How can we optimize that investors’ user experience on these platforms?

Customization and Value Co-Creation

• With eCommerce, consumers participate in creating their own online experiences with the brand when they customize online services to suit their needs (Wan, 2004)

• «Co-creation is about joint creation of value by the company and the customer. It is not the firm trying to please the customer but joint problem definition and problem solving.» (Prahalad & Ramaswamy, 2004)

User Experience and Participatory Design

• Participatory design: Direct involvement of (targeted) users in the design and shaping of artefacts (Brandt, 2006)

• UCD and Co-Created UX: Involving users in the design process is in accordance with user-centered design (Nielsen, 1993). By incorporatingtheir evaluative feedback into design recommendations leads to co-createdsystem design interfaces (Bertini and Plumeley, 2014)

Methodology

• Procedure

• User testing of an equity crowdfunfing prototype platform mirroring seedrs.com

• Conducted in HEC Montreal Tech3lab during the Fall of 2014

• One hour interview with each participant, each compensated 85$

• Online task: Participants asked to make an investment in one of the 20 projects awaitingcrowd investment and presented along with 12 already financed projects

• Assessment method

• Direct observation of task completion with:

• Think-aloud protocol with audio and video recording (Techsmith Morae)

• Eyetracking (Tobii X60) with predetermined Areas Of Interests AOIs) on risk labels + risk warnings

• Face reading measures (Noldus Facereader) for emotional valence while fixating the AOIs

• Reported measures of risk perception via questionnaires

Recruiting and Sample Description

• Recruiting done through a marketing research firm

• Criteria: bilingual participants using Internet at least 15+ hours per week

• Eye tracking related restrictions were applied to the recruiting process as well.

• Total sample: 30 participants recruited from the Montreal area

• Indicating that they would be «interested» (70%) and «very interested» (30%) to invest - no more than 2500$ - online to help starting businesses.

• A balanced sample across sociodemographic categories was constituted for the study:

• Gender: 16 women/14 men

• Age group: 31% 18-34, 36% 35-49, 33% 50+

• Education: 37% University degree)

• Revenue: 40% <$50K, 30% $50-100K, 30 % $100K+

Online Testing Environment

• MirroringSeedrs.com Homepage

• Starting point for the investmentprocess taskleading to the prototype pages

RESULTS

Heatmap for the Investment Risk Acknowledgement page

Gaze opacity for the Investment Risk Warning page

The investment risk presentation page

• Risk perception with the list of 7 risk warnings on the risk presentation page

• Reported measures on risk perception

• Almost half participants (13/30) judged that the risk warnings were important and helpful

• Warning descriptions scored 5.93/7 for adequate risk warning and 6.437 for pertinence

• A few participants (6/30) got scared by the warnings judging the risks presented were too high and that key technical terms should be explained to help the investor’s decision-making process (e.g. dilution and diversifications)

• Eye tracking measures showed that participants paid decreasing attention to risk warnings

• More attention to the top ones: Average reading time starts at 3.62 seconds with warning #1 and goes up to 6.22 sec. for warning #4. While on average risk warning #5 and #7 are respectively read 3.18 sec. and 1.68 sec.

• On average a negative valence was observed when participants were reading risk warnings stressingthe fact that the participants were actually reading the warnings and emotionnaly reacting to the riskswhile perceiving them

• Warning #4: highest average negative emotional state while users were reading

• Related to company shares and dilution = specific legal terminology related to business ownership equityconsumers were not familiar with

The investment risk acknowledgement page

• Risk acknowledgement intensifies risk-related information need for investors

• Before consenting the participants read the 7 risk acknowledgements during 11.18 sec. on average (> 6.22. sec. for the highest average time spent on risk warning #4)

• Almost half of them (13/30) clicked to open pop-ups providing more detailed information on the riskpresented indicating they needed to know more to make an investment decision

• Risk perception was higher after reading the risk-related information on both the riskpresentation and acknowledgement pages: 5.33 vs. 4.33/7

• Risks appeared clearer: 6.07 vs. 5.8/7 evaluating that warning descriptions are complete and 6.3.vs. 5.8/7 for readibility

• Negative emotional valence observed again while reading the risks and the pop ups information which confirmed risk was perceived

• A few participants even checked «NO» to some risk akcnowledgement questions

• «Can you afford to lose your total investment?» or «Do you understand that your investment has not been approved in any way by the securities and the regulators or by anyone else?» and «Do you understand thatyou may not have the same legal protections as you would if your investment was made under a differentregime under securities laws? If you wnat to know more, you need to seek professional legal advice?»

Assessment of risk perception

• Study evaluated how design and interface elements influence risk perceptions

• While the risk warning labels and descriptions were judged adequate and relevant by the participants, the study mainly identified two prohibitive usability issues linked to risk perception:

• A lack of information content detail regarding some specific business equity ownership terminology not sufficiently explained for the participants to understand the risks involved (e.g., dilution)

• A redundant sequence of presenting both the risks warnings and the risks acknowledgement pages successively

• In order to better support the user experience of the consumer’s investment process and the decision-making evaluation based on risk perception:

• Technical term definitions should be clearly provided as information content, as well as made easily accessible and readable.

• The risk presentation and risk acknowledgement are two immediate sequential steps in the investment process that should be revised for usability purposes with:

• 1) a clear indication of the consequences associated with the deal-breaker questions

• 2) the addition of reversibility options for the users, otherwise it is effective for fraud protection but could become overly conservative on the safe side of investors’ protection, and counter-productive to the crowd investment marketplaces main purposes

Optimizing the investor’s onlin experience withco-created design recommendations

• Co-creation process: the list of design recommendations is based on the direct observation of participants completing the investment task and their evaluations and suggestions

• Present major risk warnings first and foremost (from the eyetracking fixations duration on AOIs in the risk warnings presentation page);

• Provide access to a glossary of terms or mouse-over definition for complex technical financial terms such as «equity» (from the eyetracking fixations duration on AOIs in the risk warnings presentation page and the think-aloud protocol);

• Avoid the immediate successive sequence of the risk warnings presentation page and the risk acknowledgement page as it increases investors’ level of risk perception (from the emotional state reading based on measures of emotional valence on both pages and direct observation of investors’ behavior on the risk acknowledgement page);

• Warn users that risk acknowledgement questions are process preventive depending on the answers and provide some explanation as to why the investment process is aborted (from direct observation of task completion while navigating the risk acknowledgement page);

• Reversibility options should be allowed at the Investment Risk Acknowledgement page for investors who wish to change their mind after realizing that the investment is prohibited without acknowledging some risk. (from direct observation of task completion while navigating the risk acknowledgement page).

Conclusion

• Goal of this study was manifold and aimed at:

• Understanding more thoroughly investors’ perception of the risk level associated with equity crowdfunding to make sure they are adequately informed of the investment risks

• Producing a co-created list of web usability guidelines for equity crowdfunding site managers in order to optimize the user experience offered through their online investment platforms.

• Methodological and managerial contributions

• Set of design solutions stemming from a participatory design approach leveraging new (eyetracking and emotional state reading) and traditional (think-aloud protocol and questionnaires) web site usability testing methods for a value co-creation design process

• Integrating users’ objective and subjective usability evaluations to better inform design recommendations based on both research and practical expertise in online system evaluation and conception for consumers to guide equity crowdfunding websites managers for optimizing the user experience

References

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• Securities and Exchange Commission (2014). Proposed rules for Regulation Crowdfunding. http://www.sec.gov/rules/proposed/2013/33-9470.pdf

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