Raising funds with Crowdfunding

  • by admin
  • Posted in Internationalization
  • March 23, 2015
Raising funds with Crowdfunding

According to an article on the knowyourmeme.com website signed by Brad (2013), the term “crowdfunding” was coined by Michael Sullivan in August 2006 with the launch of fundavlog, an incubator project for emerging video blogs and project proposals.

Lambert and Schwienbacher (2010, p. 7) and Kleemann, Voß and Rieder (2008, p. 6) describe crowdfunding as “an open call, essentially through the Internet, for the provision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights in order to support initiatives for specific purposes.”

Crowdfunding consist in financing projects and people by large communities, also known as crowds. Instead of searching for finance from conventional sources, such as institutional, venture capitalists or business angels, dedicated user communities are asked to spend money for inventions or any kind of products (Freund, 2010; Nowotarski, 2011; Belleflammey et al., 2010; Schwienbacher and Larralde, 2010; Lambert and Schwienbacher, 2010). According to Schwienbacher and Larralde (2010), crowdfunding may have the potential to raise funds not only for small projects, but also for companies that are typically financed by business angels and venture capitalists.

The main purpose of crowdfunding is to provide entrepreneurs with an alternative solution to raise money because it is well recognized that new ventures face difficulties in attracting external finance from the beginning, through bank loans or equity capital (Belleflammey et al., 2010).

The concept of crowdfunding has its origins in the broader concept of crowdsourcing, which uses the “crowd” to obtain ideas, information, feedback and solutions in order to develop business activities. In the case of crowdfunding, the main objective is to gather money for investment (Howe, 2006; Belleflammey et al., 2010).

Because crowdfunding uses consumers and Web 2.0 tools, it may also help companies in testing, promoting and marketing their products, in gaining a better knowledge of their consumers’ tastes, or in creating new products or services altogether (Belleflammey et al., 2010).

According to Belleflammey et al. (2010), 35.5% of the initiatives of funding using crowdfunding platforms are from US and 49% from Europe.

There are especially three forms of investment using this Web 2.0 application: donation, active investment and passive investment; pure donation constitutes 22% of crowdfunding; the rest represents investments (i.e., the crowd-funder expects to receive a return or a reward), divided between active investment (32%) and passive investment (60%) (Belleflammey et al., 2010).

According to Belleflammey et al. (2010), return/reward to investors: 76.5% of the respondents offer a reward to their crowd-funders, mostly in form of a right to receive the product (2/3 of the cases) or shares that may yield dividends in the future (1/3 of the cases); direct cash payment is expected in 22.2% of the cases where a reward/return is promised; in two thirds of the cases, other forms of reward are also proposed (e.g., getting credit on an album or film, giving money to a charity of the person’s choice, etc.) (Belleflammey et al., 2010).

Using the Crowdfunding application, companies can easily find the answer for two important questions “What is the market for my product?” and “How do I get initial funds to produce it?” Crowdfunding represents a new revolutionary method to raise capital from the initial consumers.

Entrepreneurs get funds and guaranteed customers. The audience gets to be the first to have an exciting new product. If the financial resources are raised or not, this represents a first valuable market feedback for companies.

Raising funds using the crowdfunding application can overcome the barrier of lack of financial resources faced by the SMEs in the internationalization process.

A new way to monetize web activities based on crowdfunding is represented by the platform kickstarter.com. Kickstarter.com is an example of a website that has been offering crowdfunding services since 2009. They have risen over $500 million dollars for more than 35.000 projects pledged by more than 3 million people in almost five years. Project success rate is almost 45%. (Kickstarter, 2013)

There is much reluctance and other problems when it comes to searching funds for existing SMEs and not for start-ups. Founders of such companies are considered to be less transparent when they have to share the company equity, if necessary, with other investors. Basically, on crowdfunding platforms the process of financing ideas, start-ups or existing companies is based on trust and on an open minded attitude on both sides, entrepreneurs and backers. Companies develop a profile on a crowdfunding platform and explain their monetary goals, planned use of the funds and timeline for reaching their goals.

Crowdfunding implicates showing a project description on the internet, especially on crowdfunding platforms, asking for pledges to complete the project. If the minimum amount of pledges is received in a certain deadline, the funds are after transferred into the project account. If the minimum is not reached, no one gets charged, practice used by kickstarter.com platform (Nowotarski, 2011).

Crowdfunders make financial contributions with or without the expectation of receiving compensation (Belleflammey et al., 2010). This can take various forms, including cash, bonds, stocks, profit sharing and pre-ordering of products. Nobody is 100% sure that his money will be invested according to the description presented online or that he will receive what it was promised. In order that this process to functions and to gat successful, founders of SMEs who seek funding for internationalization have to be transparent, honest, and they have to base their strategy on creating emotion among investors as much as they can, to receive the money needed.

Stable SMEs have an important advantage against start-ups, they exist for several years and they have the product or service as a proof of their intentions. Depending on the product or service, but by using it, they can search for financial resources in the market where they want to internationalize using crowdfunding platforms. They can use their product in order to create emotion and easily raise the money needed. But this is available only for catchy products. For example, a brewery can develop their presentation to find money on their product. The beer is appreciated by almost all men and it is easier for them to create the emotion and to raise money despite the company’s lack of transparency.

In order to have success companies have to follow the example of sponsored projects by creating a similar mood and values among the funders.

A clear and interesting video to promote the project is considered to be a must. Companies should plan on offering something tangible in exchange for a pledge.

Crowdfunding uses Web 2.0 technologies and e-payment application to facilitate transactions between creators (people who request funds) and funders (people who give money).

Kickstarter uses an All-or-Nothing funding model, which means that if a funding goal is not reached, the funds are returned to the funder and the creator receives no funds (Kickstarter, 2013; Gerber, Hui and Kuo, 2011). The success rate is 43% according to Gerber et al. (2011).

RocketHub and IndieGoGo adopt the All & More fundraising system. Creators can keep the money they raise even though their funding goals are not achieved. If creators reach or exceed their funding goals, RocketHub will offer an additional benefit, which is to waive the submission fees (4%) for creators’ first five launched projects. Similar to RocketHub, IndieGoGo uses the keep-what-you-raise funding model. However, a higher fee will be charged from creators if they do not realize the funding goals. All they require from the creators is to pay the payment process fee (if the goal is reached) charged by Amazon Payments or Paypal (between 3-5%) (Gerber et al., 2011).

A limitation which does not depend on the company could be the laws of the country where the SME is established, that could prevent small investors from taking equity in firms. For example, in the UK, such investment is allowed (Firth, 2012). But in many countries, there is also a limit in how many private investors a company can have (Belleflammey et al., 2010). However, used properly, crowdfunding can satisfy the financial needs of the company in order to be able to raise the amount necessary for internationalization.

  1. Belleflammey, P., Lambert, T., Schwienbacher, A. (2010). Crowdfunding: An Industrial Organization Perspective. Paper for the workshop Digital Business Models: Understanding Strategies. Retrieved July 13, 2013, from: http://economix.fr/pdf/workshops/2010_dbm /Belleflamme_al.pdf
  2. Brad. (2013). Crowdfunding. Retrieved July 13, 2013, from: http://knowyourmeme.com/memes/crowdfunding
  3. Firth, N. (2012). Crowdfunding successes show value of small donations. New Scientist, 213(2858), 22
  4. Freund, R. (2010). How to Overcome the Barriers Between Economy and Sociology With Open Innovation, Open Evaluation and Crowdfunding? International Journal of Industrial Engineering and Management, 1(3), 105-109.
  5. Gerber, E.M., Hui, J.S., Kuo, P.Y. (2011). Crowdfunding: Why People Are Motivated to Post and Fund Projects on Crowdfunding Platforms. Retrieved July 13, 2013, from: http://www.crowdsourcing.org/document/crowdfunding-why-people-are-motivated-to-post-and-fund-projects-on-crowdfunding-platforms/9367
  6. Howe, J. (2006, June 14). The rise of crowdsourcing. Wired. Retrieved May 2, 2013, from: http://www.wired.com/wired/archive/14.06/crowds.html.
  7. Kickstarter. FAQ. (2013). Retrieved 12 July, 2013, from: http://www.kickstarter.com/ help/faq/kickstarter%20basics#faq_41846
  8. Kleemann, F., Voß, G.G., Rieder, K. (2008). Un(der)paid innovators: The commercial utilization of consumer work through crowdsourcing. Science, Technology and Innovation Studies, 4(1), 5-26.
  9. Lambert, T., Schwienbacher, A. (2010). An Empirical Analysis of Crowdfunding. Retrieved 12 July, 2013, from: http://ssrn.com/abstract=1578175
  10. Nowotarski, M. (2011). Funding Your Invention: Get Started with Crowdfunding. Markets, Patents & Alliances, LLLC. Retrieved July 12, 2013, from: http://www.marketsandpatents.com/pdfs/Get-Started-with-Crowdfunding-IPWatchdog.pdf