Crowdfunding: How to Raise Money for Your Business

Abstract 

Crowdfunding is a common practice in the modern world of business as organizations seek to generate capital. It is a basic form of alternative finance and crowd sourcing that incorporates the use of the internet as an integral source of reaching out to multiple individuals across the world. With the rate of failure among crowd funded projects, it is particularly essential to note the nature of the projects or ideas before pledging a significant amount of money. The following research looks into the various ways why crowdfunding is potentially a disruptive measure of financing new business ventures by evaluating factors determining fundraising success, overfunding, product uncertainty, and asymmetry of information. 

Introduction 

Crowdfunding is a common practice in the modern world of business as organizations seek to generate capital. It is a basic form of alternative finance and crowd sourcing that incorporates the use of the internet as an integral source of reaching out to multiple individuals across the world. There are numerous crowdfunding platforms including gofundme. Kickstarter, indiegogo, Fundly, JustGiving, and Facebook. These organizations have been able to raise over $34 billion dollars for projects and ventures around the world. While the same concept can be achieved through mail-order subscriptions, benefit events, among other techniques, crowdfunding refers to the internet-mediated registries. Three main actors are essential for the modern crowdfunding model to occur: the individual or group project initiator who propose an idea to be funded, those who believe in the idea and fund it, and a moderating organization serving as the platform. 

Statement of the Problem 

Crowdfunding has been a primary source of financing a variety of for-profit entrepreneurial ventures, medical expenses, and community-based social entrepreneurship projects. However, the technique has caused an outrage among social supporters where there have been incidences of con-artists seeking to raise funds for their own benefit. The fraudulent schemes have put crowdfunding at serious risk as genuine entrepreneurs or community-based initiatives may not get the necessary financing they require. Therefore, it is important to identify various signals that will help match the right entrepreneurs with the right supporters. 

Definition of Terms 

There are various types of crowdfunding that will be evaluated in the following paper including: 

Reward-based - This method involves a scenario where the entrepreneurs presell a product or service to avoid incurring debt or shares of the company. 

Equity - The approach offers the supporters significant shares of the company in exchange of the money pledged. 

Software-value token - Entrepreneurs gather funds by offering their supporters software or digital-based value token often referred to as Initial Coin Offering (ICO). 

Debt-based - This is also known as peer to peer or marketplace lending identifying how investors provide funds to the borrowers with a significant interest. An automated system is used to review the application and determine credit risk and interest rates with its operators making money from a percentage of the loan and a loan service fee. 

Litigation - In this process, borrowers have the opportunity to reach out to their peers for a semi-private and confidential meeting to raise funds either by donations or offering reward. 

Donation-based - The second most common form of crowdfunding after reward-based usually in an effort to help in charitable causes. 

Claim Statement 

With the rate of failure among crowd funded projects, it is particularly essential to note the nature of the projects or ideas before pledging a significant amount of money. 

Literature Review 

Recent studies on business ventures and how organizations begin have paid critical focus on crowdfunding as a major source of raising capital. Belleflamme, Lambert, and Schweinbacher (2013) focus on two primary forms of crowd-funding reward-based and equity as a means of how borrowers are able to reach out to just the right kind of crowd. The research also identifies the impact that uncertainty and information asymmetry have on the success or failure of the crowdfunding process. Mollick (2014) Cordova, Dolci, and Gianfrate (2015) also present evidence of the factors that lead to the success of crowdfunding. 

Significance of the Study 

As previously mentioned, over $34 billion has been raised by crowdfunding initiatives with the intent of funding business initiatives as well as community-based projects. Millions of people look into these factors as a measure of securing their future by getting in on projects during their early stages with the hope that they will rake in millions after the idea comes to fruition. Others seek to alleviate the pain and suffering of members of the community by offering funds that could help pay for treatment procedures. However, many of them fall into traps of fraud and are unable to recover their hard-earned money. It is important to provide the general public with a clear understanding of crowdfunding and ways they can improve in assessing the borrowers. 

Thesis 

The following research looks into the various ways why crowdfunding is potentially a disruptive measure of financing new business ventures by evaluating factors determining fundraising success, overfunding, product uncertainty, and asymmetry of information. 

Background 

The concept of crowdfunding has become a prominent practice in the 21 st century where borrowers take a project or business that is in need of investment and seek funds from a large group of investors (Mollick, 2014). It is evident that the form of venture financing has a variety of goals. The borrowers usually attempt to generate financing by seeking small amounts of less than $1000 investment from each supporter (Mollick, 2014). In this case, the funding may begin with friends and family, but may grow to become a viable source of generating capital. The two-sided network involves what is known as the subsidy-side and the money-side. The former refers to the investors, supporters, and backers who provide their money to the latter who is the founder. In most cases, the platforms like JustGiving charge the money-side a percentage fee to conduct the fundraiser. 

The academic research in reference to the factors that determine the success of crowdfunding is significantly limited. The experts in the field have been able to develop significant information on the nature of this venture financing practice. Through critical evaluation of the crowdfunding practices it is evident that the researchers have found there is more than one goal. While funding of the project serves as the primary purpose of each entrepreneurial venture, the practice is also essential in getting the demand for the product or service. In the reward-based crowdfunding, developers offer the product as a reward for those seeking to offer finances for the firm. Mollick (2014) notes that Pebble “smart watch” was initially rejected for venture capital funding, but after a successful Kickstarter campaign the startup company was able to receive numerous offers. The reverse is also true where the lack of interest shown by individuals on the crowdfunding platform it is less likely that the product or service offered will succeed and, in most cases, the developers usually exit from the market as fast as possible. 

Presentation of Data 

The existing research shed light into the fact that majority of the founders who launch their projects and ideas onto various crowdfunding platforms have significant goals in mind. The first being getting the required financial capital to kick-start or continue with the idea and the second being gathering of information on the demand of the product or idea they are selling. This study intends to identify the various measures that the developers of the novel ideas can achieve success in crowdfunding. In this case, it is essential that the entrepreneur recognizes significant measures that will help positively influence the supporters to provide financial investment generously and be able to reach their intended target. Belleflamme and cohort (2013) noted that the most successful entrepreneurs on crowdfunding platforms prefer implementing pre-order approach over sharing profits. In this regard, the innovator is able to seek payment from potential consumers for a product even before it is made and may charge at optimal discriminating prices without sharing profit. The difference being that more consumers will be interested in purchasing the product offered before it is in the market rather than wait for the growth of the company and share the profits. 

Information about the project is another factor that could significantly influence the possible success of the crowdfunding campaign. In the business environment, it is evident that the entrepreneurs do not wish to become too open about the plans they have in the future to prevent other members of the industry from stealing their ideas. Nevertheless, it is essential that the organization uses effective measures that will enable the investors to have a rough idea of the company or project direction. Kraus and cohort (2016) among other researchers on the same identify this practice as web presence. Hereby, factors such as pictures of the project presentation, separate website, personal photograph of the founder, and videos that spark emotional response. The founders will not that the most captivating crowdfunding campaign receives the most attention and can attract even more backers with heavy financial investment. 

The use of various forms of media as a means of communication is also particularly important in making the pitch. The backers of the project would want to learn as much as possible about the project along with the people who are developing it. In this case, rather than reveal information that would lead to intellectual theft, it would be better off spreading news and announcements about the leader. The approach is depicted as a more relatable measure of attracting the investors. It is for this reason that social networks are becoming increasingly important. The social networks enable the investors to interact with the project owners as a measure of sharing ideas that may better improve the product or service offered. This approach will be critical to the achievement of a positive goal for the borrowers. 

The equity-based crowdfunding has shown significant promise for the members of the platforms that offer such practices. It is evident that the German equity crowdfunding incorporates models that encourage the investors that their money will be put to good use. For instance, having the reputation of running serious campaigns is an important factor for the crowdfunding platforms (Hornuf & Schwienbacher, 2018). The investors are assured that their investment will be made to organizations with high potential for achieving success in future. Out of the 59 portals available on the German market as of 2016, 37 of them had successful campaigns (Hornuf & Schwienbacher, 2018). The success of three major platforms Seedmatch, Innovestment, and Companisto, organizations seeking funding will approach these to present their campaign. The project owners will feel confident about securing the funding required. 

It is evident that the German platforms also incorporate the use the approach of all or nothing appeal to potential investors. The organizations usually offer equity shares of the firm in exchange of the capital. In this case, the project owners will set a specific goal of financing that they would wish to receive to commence or progress with the idea. However, if the goal is not reached, the investors will all receive their money back. The recent cases have shown that the funding goal is usually at around 50,000 EUR (Hornuf & Schwienbacher, 2018). Furthermore, the portals rarely incorporate the use of overfunding on a particular project. Once receivers acquire their target, they stop selling securities to the crowd (Hornuf & Schwienbacher, 2018). However, Innovestment has deviated from the practice as it opts for the three-stage, multi-unit second price auction. The model approach enabled increasing the funding limit within the first, second, or third level of auction. 

Analysis of Data 

The recent research has shown that a critical examination of the various types of crowdfunding techniques and their specific approaches that will attract the highest number of investors in the shortest time. For instance, organizations may seek to use the reward-based approach as the technique enables the company to assess the demand for its product while seeking funding through pre-orders. However, the project owners also recognize that the communication channels between them and the investors should be fluid. Research has shown that the ease of communication increases likelihood of consumers investing their money on the company by making pre-orders. The preordering mechanism is also believed to be more profitable for the owners of the project as it minimizes profit sharing. 

In some alternative sectors, equity-based crowdfunding is believed to be the ideal measure of influencing customers to invest. In this form, the organizations set a target that should be realized to implement the various activities that would lead to the growth of the company. By setting a limit, these upcoming firms are able to limit the number of shares they give away to the investors. Failure to reach the limit also means that the investors will receive all their money back. The practice is an appropriate measure of minimizing below par performance of the projects seeking investment. For instance, those who would wish to reach 50,000 EUR but only attain 30,000 EUR will mean that they will not be able to fully satisfy the needs that would lead to proper growth of the company. 

Discussion 

The recent research has shown that there is a clear guideline on the measures to undertake in order to achieve success as project owner in crowdfunding. Through quantitative analysis of the market and the decisions made, researchers are able to identify the approaches the measures that will lead to definite attraction of the investor. The operations of the firm are key in dictating the approach that the organizations could use. For instance, technology companies that would want to manufacture a competitive device may use the pre-order approach and make sure they can communicate with consumers why they should choose their product. The use of social media platforms will be critical in reaching out to a wider customer and investor base. 

Conclusion 

Analytical Summary 

Crowdfunding is a modernized approach towards appropriate and determined measures of institutions and entrepreneurs to mobilize a group of people to invest in their products. The organization will require effective techniques and guidelines that when implement will lead to a seamless campaign that brings in the capital necessary to realize effective growth of the firm. As the practice of crowdfunding has been embraced in the modern business society, more website operators have come up to act as platforms where borrowers and investors can meet. In this regard, the former should evaluate the platforms to identify that which suits their needs and could potentially improve possibility of realizing the full amount. 

Thesis Reworded 

Crowdfunding is a disruptive approach of financing upcoming organizations as it eliminates the need to depend on financial lending institutions or peer to peer lending where in both cases may lead to heavy interests that may cripple the firm even before it picks up. The crowdfunding technique notes that the mediating platforms have been actively involved in realizing success while minimizing overfunding (only in some cases). The project owners seeking investment reduce level of product uncertainty through interaction with investors on social networks. 

Recommendations 

The above research shoes that there is lacking information on the full scope of crowdfunding. Majority of the researchers focus on two main forms, reward-based and equity, ignoring all other approaches to receive financing. There is need to expand on scholarly knowledge on the other approaches and their successes in the business environment. These types of crowdfunding are largely unexplored and entrepreneurs have little information on how best to make changes to their strategic approach. It is critical to collect more information on this issue to make positive development on the body of research. 

References 

Belleflamme, P., Lambert, T., & Schwienbacher, A. (2014). Crowdfunding: Tapping the right crowd. Journal of business venturing, 29 (5), 585-609. 

Cordova, A., Dolci, J., & Gianfrate, G. (2015). The determinants of crowdfunding success: evidence from technology projects. Procedia-Social and Behavioral Sciences, 181 , 115-124. 

Forbes, H., & Schaefer, D. (2017). Guidelines for successful crowdfunding. Procedia CIRP, 60 , 398-403. 

Hornuf, L., & Schwienbacher, A. (2018). Market mechanisms and funding dynamics in equity crowdfunding. Journal of Corporate Finance, 50 , 556-574. 

Jegelevičiūtė, S., & Valančienė, L. (2015). Comparative analysis of the ways crowdfunding is promoted. Procedia-Social and Behavioral Sciences, 213 , 268-274. 

Kraus, S., Richter, C., Brem, A., Cheng, C. F., & Chang, M. L. (2016). Strategies for reward-based crowdfunding campaigns. Journal of Innovation & Knowledge, 1 (1), 13-23. 

Mollick, E. (2014). The dynamics of crowdfunding: An exploratory study. Journal of business venturing, 29 (1), 1-16. 

Valančienė, L., & Jegelevičiūtė, S. (2014). Crowdfunding for creating value: stakeholder approach. Procedia-Social and Behavioral Sciences, 156 , 599-604.