1. IntroductionThe term crowdfunding refers to theraise of capital from the public in order to fund a cause or the creation of aproduct.
It is a type of crowdsourcing, with the difference that the publicdoes not offer only ideas to shape the product but also the money required forit to be produced. Crowdfunding firstly appeared in 2003, with the launch ofmusic funding platform ArtistShare (Freedman and Nutting, 2015), but became aviable business model after 2010. In 2015 34.4 billion dollars while 149.093were funded.
While there are different types of crowdfunding rewards basedcrowdfunding received the majority of attention from the media as it embodiesthe general idea of crowdfunding: people helping visionaries to accomplishtheir dreams that were not deemed viable by other companies.A good example of what can beachieved with crowdfunding is the story of Palmer Luckey and his product,Oculus Rift. Palmer Luckey started assembling in his basement his own VR(Virtual Reality) machines from junk parts he was buying. After a few years heattracts the attention of video game industry giant John Carmack. Carmackdecided to present Luckey’s prototype in the E3 gaming convention. Theprototype receives the audience’s attention and applauds. Thus in the followingdays Luckey creates the company Oculus and prepares for launching areward-based campaign in Kickstarter.
With the modest goal of 250,000 dollarsand a desire to sell just 100 prototypes, Luckey was surprised to see thepositive reaction from his potential customers. In the first 24 hours Oculus Kickstarter campaign 670,000 from2750 backers. By the end of the campaign after 40 days he had gathered2,437,429 dollars from 9,522 backers(Russell, Twidie, 2014). A few years laterin 2015 Facebook acquired Oculus for the fee of 2 billion dollars. Oculus success turned the heads of manytowards crowdfunding. New entrepreneurs as well as industry veterans werestarting to working in their dreams projects with the shackles of traditionalfunding removed.
Along with the successes came failures. In 2015 a 66% ofcrowdfunding projects was unable to reach the funding goal (Kickstarter.com,2018). The ever growing popularity of crowdfunding lead to the need offorecasting tools in order to help the companies that resort to these venturesto plan ahead of time or make corrections to the campaign strategy. This paperargues that the average pledge is actually more important than the number ofpledgers in the race to the completion of a crowdfunding campaign. Firstly aliterature review will be provided. Then a theoretical background oncrowdfunding will be provided.
The different types of crowdfunding will beanalyzed while a more in-depth look will be provided on the rewards-basedcrowdfunding. Then the two sided relation between crowdfunding and marketingwill be explored. Finally the statistical methods that will be used to provethe goal of the study, will be examined. 2. Literature Review 3. Theoretical BackgroundHaving already given a general ideaof what crowdfunding is, this chapter will delve deeper on the subject. Thedifferent types of crowdfunding will be pointed out. Lastly a view onrewards-based crowdfunding will be provided, indicating the advantages anddisadvantages of this particular model.
Types of crowdfunding1. Rewards-Based Crowdfunding In rewards-based crowdfundingbackers contribute typically small amounts of money in exchange for a smallreward. The rewards depends on the nature of the project. They can vary from athank you note to a copy of the product, or the name of the backer in thecredits (Giucidi, Nava, Lamastra & Verecondo 2012). Due to the nature ofthis type of crowdfunding it is generally preferred among the technology andart industries. The most prolific reward based crowdfunding platforms are Kickstarterand Indiegogo. High profile projects include, videogame Star Citizen(175,000,000 over the course of 4 years), smartwatch Pebble Time (20,000,000$over the course of 40 days) and beehive box Flow Hive (13,000,000 over thecourse of 40 days).
2. Donation-Based CrowdfundingAs the name suggests in donationcrowdfunding the backers of the project (here referred as donators) donatemoney on a project or cause without expecting something in return (Belleflamme,Lambert & Shwienbacher, 2012). It should be noted though that in some caseswhere the campaign is started from a qualified charity organization, donors areentitled to tax reliefs (Marotta, 2016). Popular donation crowdfundingplatforms are GoFundMe and CrowdRise. Popular projects contain American RedCross (4,700,000$ since its conception) and the Robin Hood foundation(2,600,000$ since its conception).3. Equity CrowdfundingEquity crowdfunding firstly appearedin 2010 by the company “Grow VC Group”. It allows the public to fund projectswhile in return they get shares.
It should be noted that it is consideredillegal in countries like Canada as the law regulates public acquisition ofshares (Mittra, 2012). Angelist and Crowdfunder are among the most popularequity crowdfunding platforms. An indicative example of equity crowdfunding isElio Motors.
Elio Motors taking advantage of the newly signed JOBS Act startedits own equity crowdfunding campaign in order to fund its product, a threewheeled car. The campaign was deemed successful gathering 12,000,000 dollars in2012 and was succeeded by a second campaign at 2015 that secured 25,000,000dollars.4. Debt CrowdfundingDebt crowdfunding is a relativelynew way of crowdfunding. Also known as crowdlending, it is a process similar toa bank loan albeit with lower interests. The firm that requests the loanreceives it from a number of different lenders.
The backers receive their moneyafter a certain period of time, in accordance with the interest rate. Loan isreceived with the requirement that it gathers the asked amount. The keydifferences from a traditional loan are the multitude of persons involvedinstead of one and the lower rates.
Popular platforms are Lending Club andFunding Circle. Rewards-based Crowdfunding:Advantages and Disadvantages ProsRewards-based crowdfunding hassurfaced as a viable way to fund projects from small sized businesses. One ofits upsides is the fact that it is a fairly cost-less way to gather funds. Theposting of a crowdfunding campaign is usually free of charge as the crowdfundingplatforms get a cut after the completion of the campaign. Added to that noprevious work experience is required for the posting of the campaign, while nocredit checks take place. Due to the lack of traditional investors all equityis retained by the members of the company. That way there is no fear ofobstructing the vision of the creators by outside factors. Furthermore the crowdfunding campaign canwork also as a marketing campaign.
Creating an original product that couldponder to a wide audience can increase the word of mouth factor especially inthe early stages. This does not only increases the potential customer base butalso increases the potential pledge amount raised (Hu, Li & Shi, 2015).Finally a rewards-based campaign can be used as a showcase of the audience thatis interested in the product thus giving the company directions on requiredproduction.On the other side a reward basedcampaign can also have its downsides not only for the company but also for thecustomers. Even though it is not usual there have been examples in the past ofcompanies not delivering the product either due to them underestimating thecosts of the production or due to absence of a product (Shaqfat, Lee, Malik& Kim,2016).
Such is the case of Skarp Laser. Skarp Laser is razor productthat claims to use instead of razor blades, a laser beam. The campaign launchedon Kickstarter had managed to gather 4,000,000 dollars before being shut down afew days before its completion. The project found a second life on thegenerally less strict Indiegogo securing over 500,000 dollars in 2015 (McAlone,2015). As of January 2017 the company has yet to deliver the product or presenta working prototype. As mentioned before, rewards basedcrowdfunding can be really useful for small sized businesses. This is due tothe ability to gather easily relatively small amount of money.
On the otherhand with a few exceptions, such as previously mentioned Star Citizen,companies seem to be unable to gather large amounts of money (over 1million). In order to address thisshortcoming it has been observed that companies retreat to a hybrid model usingthe crowdfunding campaign as a vehicle for attracting interest from potentialinvestors (Agrawal, Catalini & Goldfarb).The accessibility of rewards-basedcrowdfunding can sometimes work against it. Crowdfunding does not only drawveterans but also teams of unproven creators who have found a way in to realizetheir ambitions.
Due to the lack of past experience they tend to overestimatetheir abilities and overextend or are simply unable to deliver a prototype.Both cases usually result to bankrupt companies and company members. It shouldbe noted though that this is not exclusive to inexperienced creators. Therehave been cases like Unsung Story, a videogame where a team of industryveterans secured sufficient funding but where forced to halt development due torunning out of funds.Finally during the course of thecampaign companies do not only share their ideas with their potential investorsbut also blueprints or early concepts of the products. Consequently these ideasare made known to potential business rivals. A good example of this is thestory of Yekutiel Sherman. Sherman’s product was a phone case that worked alsoas a selfie stick.
The crowdfunding campaign was a success, surpassing itsfunding goal but after a week from its start an identical product appeared onAliexpress, Alibaba’s global branch. Being 75% cheaper than Sherman’s productthe knockoff product resulted in leaks from the original crowdfunding campaign(Liu, 2016). 4.
Crowdfundingand marketingAs mentioned in the previous chapter asuccessful crowdfunding campaign can also be a successful marketing campaign.In this chapter the relation of marketing and crowdfunding will be analysed aswell as the common mistakes companies make in correlation with marketing. Inhis work … (…)Crowdfunding and marketing are usuallyconsidered two abstract concepts that are no by any means connected. Thatbelief though is wrong. ?he two terms are interconnected and cannot exist without oneanother.
In this chapter the relation between crowdfunding and marketing willbe analyzed and there will be provided examples that prove the importance ofmarketing in crowdfunding.In their work … point out the relationbetween the two concepts. During a crowdfunding campaign the product and thecompany receive free press attention due to the reasons subsequently analyzed.The crowdfunding campaign can in many waysviewed as a marketing campaign. If viewed such as this then it offers someadvantages that a regular product with a regular launching would had to workmauch more in order to achieve it.
1. Network expansionHui et al (2013) indicate the opportunity given by acrowdfunding campaign to raise awareness of the product with the audience. Acrowdfunding campaign entails not only raising funds but present the product tothe potential customers.
Among their findings was that sometimes the benefitsof the raise in the popularity surpassed the benefits of the funds secured. 2. Product ValidationWith the launch of a crowdfunding campaignthe creators establish a form of two sided communication with the audience.Through it the creators receive feedback and in return elaboration thespecifics of the product, trying to make it more appealing to the customers. Itcan be argued that through the process of rewards-based crowdfunding the valueof the product can be determined. Using the final number of backers themanufacture of the product can be vindicated or rejected, thus giving avaluable tool to the crowdfunders.
3. BrandingConnected with the previous two points asuccessful crowdfunding campaign can make a product’s name a successfulproduct. Such is the case of Pebble a product of a crowdfunding campaign thatwas considered for a while a leading brand in the industry (Brown et al, 2016).Furthermore in their work Jobber and Ellis Chadwick (2016) point out that beingfirst on the market with a unique product can also create brand value. 2.
Crowdfunding can work as a marketingcampaign but as … suggests it is a two way relationship. It is vital to theirthat the creators take some steps in order to raise the awareness of thecrowdfunding campaign prior its launch. According to … promoting the product isthe most time-consuming activity the crowdfunders take over the its timeperiod. The steps required will be analysed in the subsequent paragraphs.2.1 Pricing and qualityThe usual incentive in a rewards-basedcampaign is a preorder of the product. It is important for the creators notonly to find an audience but also to price it accordingly. In what is commonly referredas the “lemons problem” cannot distinguish good and bad quality of a product ina market with asymmetrical information (Tomboc 2013).
The creators role shouldbe not only to inform properly their audience of the product’s quality but alsoprice taking account of the profile of it’s prospective customers, cost of theproduct as well theirs competitors pricing. (Hu, Li &Shi, 2015).2.2 Existing ConnectionsAccording to Agrawal et Al (2011) reachingout to families and friends can make a difference especially on the earlystages of the campaign.
Due to the first 24 hours being the most important inthe campaign (Lu, Xie, Kong & Yu, 2014) an early accumulated amount offunds will validate the products to the eyes of the audience and thus motivatethem to participate in funding the project (Agrawal et al, 2011).2.2 Business and Media ConnectionsCommunicating with 5. StatisticsA common question of entrepreneurspreparing to venture in the world of crowdfunding is whether they should keep asmall entry fee in order to attract more backers or use a high fee hoping thatby using a high price they will make up for the leak of the potentialcustomers. This essay centers on rewards-basedcrowdfunding. The highest profile rewards-based platform is Kickstarter.Kickstarter is a peculiar case due to the limit it imposes to crowdfundingcampaigns.
If a campaign fails to meet its goal then it is considered a failureand is unable to secure any funds. This approach is dffferet than the one takenin other platforms like Indiegogo where the crowdfunder does not need to set agoal.The study uses a pool of 10.000 randomlychosen projects, with failures and successes equally distributed. In order toachieve a more precise result, any crowdfunding campaigns that were not able tosecure more than 50 dollars were removed due not only the small number ofbackers but also due to the danger of them not being serious attempts ofcrowdfunding. On the same note high profile Kickstarter campaigns fromindividuals that can be considered industry giants such as singer Neil Young orvideogame company Square Enix were dismissed as were deemed as anomalies.
)In order to calculate the average pledgethe following formula was used: 6. Conclusion