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ECONOMIC PROSPECTS AND CONDITIONS OF CROWDFUNDING
Maria Curie Skłodowska University, Poland
Maria Curie Skłodowska University, Poland
This paper aims to present the conception of crowdfunding – the relatively new idea of raising funds
from individuals which is made online by means of a web platform. Intent of this method is the ability to collect, manage and distribute finance using information and communications technology in order to develop particular project in exchange for provision of benefits. Article analyses and expands knowledge about essence of crowdfunding concept, its main types and characteristics. The subject of discussion of this paper are economic conditions for the application of social financing as a source of capital. The authors objective is to juxtapose the incentives and disincentives for both creators and funders. Crowdfunding as all other methods of raising capital is an action that carries risk. Novelty of the approach is researched through the prism of values that characterises all sources of capital. This article lead to the conclusion that main value of the method is to increase the probability of obtaining more beneficial solutions from the community than from the enterprises offering outsourcing services.
Well-organized process of crowdfunding can finance start-ups and increase investment opportunities especially for small and medium enterprises.
Keywords: crowdfunding, wisdom of crowds, start-ups 1079
1. INTRODUCTION Fast and global spread technological developments influence our daily lives. Dynamic development of the Internet has change the way people communicate, obtain information and conduct business.
Development of Web 2.0 concept, online payment systems, social networks enable materialization of numerous concepts used in various types of electronic platforms. This ability for people to communicate and interact with each other has been crucial for the recent emergence of crowdsourcing. The amount of knowledge and talent dispersed among the numerous individuals has the capacity to create the mechanism by which these assets can be matched to those in need of it (Howe, 2008, p.1). Difficulties in attracting external finance is a constant problem that new firms face in their initial stage entrepreneurial initiative. Many ventures remain unfunded, partly due to lack collateral and sufficient cash flows and partly because of unsuccessful attempts to convince investors (Belleflamme & Lambert & Schwienbacher, 2013, p. 4). Nowadays entrepreneurs have started to rely on the Internet to seek financial support for their projects enabling global reach to attract funding.
Crowdfunding is seen as a viable and alternative way to raise funds which occurs online by means of web platform. Alternative approach of funding is based on financial help of general public (the crowd) instead of specialized investors such as banks or venture capital funds (Schwienbacher & Larralde, 2010, p. 3). Determination of economic outlooks and conditions seems to be crucial in terms of evaluating crowdfunding as a fundamental transformation in the way that start-ups, micro-enterprises and small and medium enterprises (SME’s) access funding.
2. THE IDEA AND DEFINITIONS OF CROWDFUNDINGThe concept of crowdfunding derives from crowdsourcing, which describes the process of outsourcing tasks to a large, often anonymous number of individuals the “crowd” in the form of open call application to obtain ideas, feedback, assets, resources, knowledge and expertise to develop corporate activities (Hemer, 2011, p. 8). The term “crowdsourcing” was first used in 2008 by Jeff Howe
and Mark Robinson. In the same year F. Kleemann presented more complex definition:
“crowdsourcing takes place when a profit-oriented firm outsources specific tasks essential for the making or sale of its product to the general public (the crowd) in the form of an open call over the internet, with the intention of animating individuals to make a [voluntary] contribution to the firm's production process for free or for significantly less than that contribution is worth to the firm” (Kleemann, 2008, p. 6). Referring to this definition explanation of the subject matter can be offered in that way: “crowdfunding involves an open call, mostly through Internet, for the provision of financial resources either in form of donation or in exchange for the future product or some form of reward to support initiatives for specific purposes” (Bellaflamme, Lambert & Schwienbacher, 2013, p. 8).
Crowdfunding is a form of financing of various projects or a venture by the community which is group of individuals instead of professional parties like banks, venture capitalists or business angels. The project is funded in this case by the large number of small, one-time payments made by persons interested in the project. Dissemination of the Internet allows for easy communication of projects and create community around them, which contributed to the development of the crowdfunding phenomenon. The term is usually used to refer to collections carried out for this purpose created online platforms, less frequently, with the help of social networking sites or blogs. Explanation of the term varies depending on the authors’ approach to the issue. Crowdfunding can be perceived as a process of raising money to help turn promising ideals into business realities by connecting investees with potential supporters. Nowadays crowdfunding is a Internet-based method of fundraising in which individuals solicit contributions for projects on specialised websites. Other notions of crowdfunding emphasizes financial mechanism and capital formation strategy as a source of funding for start-ups, micro-enterprises and small and medium sized enterprises (SMEs).
Historically crowdfunding functioned before the emergence of the term. First well-known act of Internet-based money raising was the one realised in 1997 by British rock band Marillion which used fan campaign to collect 60 thousand USD, which was allocated to organize US tournée. The whole enterprise was conceived and managed by fans without any involvement by the band, although band used the idea for financing future albums recordings and marketing. Proper development of crowdfunding conception took place in years of 2005-2009 when platforms like: Sellaband.com, Kickstarter.com, Zopa.com, IndieGoGo.com, Kiva.org were implemented (Dziuba, 2012, p. 84).
1080 2.1. Crowdsourcing and crowdfunding – similarities and differences
Crowdsourcing can be used in both commercial and non-commercial actions. Wikipedia is one of the best examples of non-commercial form of crowdsourcing. There are four different ways crowdsourcing
• Enables to access large online labour force, indentify selected workers, post work and letting workers find it
• Asking the crowd to find the solution to a problem
• Helping find existing knowledge and organize it
• Ideals and opinions from the crowd and feedback.
Crowdsourcing is distributed problem solving which offers some significant benefits like: access to flexible workforce, broad access to creative talent, increased cost-effectiveness and business capabilities, reduces time-to-market and faster project delivery. Crowdfunding focuses on providence of money for a particular purpose by a large group of people. It offers a hosts of benefits as: access to capital with hedged risk, works as a marketing tool, provides easier source of funding than traditional channels, introduces potential loyal customers, develops free PR and an opportunity for advance sales. The convergence of the two concepts results from the methods of communication and access to mass groups of participants. Dissimilarities flows from the purpose of participants activities and focusing on specific methods of rewarding and motivating.
To sum up the description of crowdfunding emphasize should be put on its economical dimension and abilities to exploit the capabilities of social networks and other new features of Web 2.0, especially the function of viral networking and marketing which enables the mobilization of a large number of users in specific Web communities within a relatively short period of time (Hemer, 2011, p. 8). This concept is realized through the electronic platform, which function include advertising jobs projects, monitoring their implementation, creating interaction between market participants, providing systems payment and reward participants (Dziuba, 2012, p. 84). Crowdfunding involves close cooperation of investors, intermediaries and entrepreneurs. Crowdfunders or backers (donors, sponsors, clients, lenders/creditors) and capital seeking ventures are basic actors in the crowdfunding process.
3. CATEGORIZATION OF CROWDFUNDING PLATFORMSIn business practice crowdfunding facilitates the raising of capital for a variety of purposes, using numerous variations of the models. There are four main categories (with several modifications) of
crowdfunding platforms (CFP’s) which appear in the present studies and literature:
Investment crowdfunding • Lending-based crowdfunding • Reward-based crowdfunding • Donation-based crowdfunding • Equity/investment type is the collective effort of individuals who network and pool their money, usually via Internet to investing for equity, or profit/revenue sharing in businesses or projects. Contributors are rewarded an equity stake in a company in return for their investment. The value preposition being offered is company ownership or voting rights (Gulati, 2014, p. 4). This embodiment provides range of solutions to assist start-ups and companies in early stage of development. Project initiators and their partner platforms define o time period and a target amount of money which serves as a threshold (Hemer, 2011, p.16). Money target is divided into equal slices which are offered via the platform as equity shares (or stocks) to the crowd at fixed prices. Collecting money lasts until the threshold is reached and then investment phase begins.
In this type of crowdfunding three models can be recognized. First is collective investment which combine the assets of various individuals (e.g. business angels), and organizations to create a larger, well-diversified portfolio. In return investors expect dividends or share in future profits. Business angels investments require a high return rate as they are at high risk (Dziuba, 2012, p.87). Second is investment fund which can be defined as a supply of capital belonging to numerous investors that is used to collectively purchase securities while each investor retains ownership and control of own shares. Benefits in the form of shares allow to separate distinct securities-based (equity) model.
Securities-based funding gives ownership, or a promise of future revenue to investors in equity or
All investment models are selected by mutually overlapping criteria of allocation which consist:
• range of benefits achievable by investors
• value of invested funds
• organizational form of the project
• use of technology.
Out of all crowdfunding models equity-based produce the largest amount of funds raised on a perproject basis (Crowdfunding Industry Report, 2012, p. 20), although this form of model has been the slowest to grow due to regulatory restrictions that relate to this type of activity.
Lending-based crowdfunding enables the direct borrowing of funds, bypassing the traditional financial institutions, such as banks. This type of crowdfunding is largely an evolution of the peer-to-peer model
of lending pioneered by firms such as Landingclub and Zopa. Two approaches can be distinguished:
microfinance (P2P microfinance) and social lending (P2P lending). Peer-to-business resembles micro-financing so projects and businesses seeking debt apply through the platform uploading their pitch, with members of the crowd taking small chunks of the overall loan. Micro-lending solution is a financial aid usually used by the poorest, offered in small amounts, collected and distributed by non-profit and social focused platforms. Others like social lending operate as an investment – free funds are allocated and lent to certain rules. Payment plus interest might be returned in a lump sum or along some sort of payment schedule (Gulati, 2014, p. 5). Social lending relate to higher amounts making it the second largest category of world crowdfunding market, as measured by the monies raised. Crowd lending is considered a threat to the big lending businesses as global banks.
Donation-based crowdfunding is in practice the most widespread model. Its essence is a platform (website) to communicate with the crowd of participants and reporting of project offers, such as the collection of funds for a specific, philanthropic goal or social sponsorship In this model participants are not rewarded.
Reward-based (sponsorship model) crowdfunding allows people receive non-financial rewards in return for their contribution to projects. Donors are offered usually low-value items like: t-shirts, CD’s, books, tickets for cultural events (which are often subjects of rebounds). Often this type of funding is tiered which means the more participant will donate the better reward he will receive. Sponsorship systems tend to focus on supporting the creative projects or units. Participants from the network "crowd" invest their funds in the project (for example, musical activities, film production, the organization of the concert, the idea of the book), in order to support them. Fundraising for the project is clearly defined time, usually takes a few weeks to several months. Entrepreneurs or artists crowdfund the production cost of their record, movie, game or product and allow the donors to be first recipients one the production is complete (Introduction to crowdfunding, 2012, p. 3).
In sponsorship crowdfunding can be distinguished three models of rewarding of market participants.
First All-or-Nothing – when the fund-raising period is over and the project was not realized - invested funds are going back to the donator reduced by the collected fees.