crowdfunding as a tool for startups to raise capital · figure 14. reward crowdfunding volume in...
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Crowdfundingasatoolforstartupstoraisecapital
Why and how to use it
Lasse Magnus Klæbo Andersen
Lars Joakim Mauritzen
Supervisor: Michael Kisser
Master Thesis within the profile of Business Analysis and
Performance Management
NORWEGIAN SCHOOL OF ECONOMICS
This thesis was written as a part of the Master of Science in Economics and Business Administration at NHH. Please note that neither the institution nor the examiners are
responsible − through the approval of this thesis − for the theories and methods used, or results and conclusions drawn in this work.
NorwegianSchoolofEconomicsBergen,Autumn2015
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Abstract
Thisthesisaimstoeducatethereaderonthedifferentcharacteristicsofcrowdfunding,such
thatentrepreneurswhoareconsideringhowtoraisefundsfortheirnewprojectcanmake
more informeddecisions. The thesis does this by extensively reviewing existing literature,
both on crowdfunding and on related financing methods. The authors also examine the
leading European crowdfunding markets in terms of performance, the crowdfunding
platforms that operate and legal characteristics in the crowdfunding environment.
CrowdfundinginvolvesanentrepreneurcreatinganInternetcampaign,withtheaimtoraise
smallamountsofmoneyfromalargeamountofpeople–thecrowd.Themainfocusofthis
thesis is on reward and equity crowdfunding, as thesemodels are foundmost suited for
startupswith limitedcreditandperformancehistory.Rewardcrowdfunding isessentiallya
pre-purchasingmodel,wherefuturecustomersareinvitedtopre-purchaseaproductbefore
productionhasbegun.Equitycrowdfunding is theofferingofprivatecompanies’equity to
thegeneralpublic.ThethesisalsoexaminesthepossibilitiesthatNorwegianentrepreneurs
have in regard to crowdfunding. For the timebeing, the rewardmodel seems tobemore
feasible for Norwegian entrepreneurs, seeing that cross-border transactions are better
facilitatedforthismodel,whiletheequitymodelfacesmorechallenges.Twocasestudiesof
successfullycrowdfundedbusinessesarepresented,oneby rewardcrowdfundingandone
byequitycrowdfunding,inordertoillustratepracticalaspectsofcrowdfundingcampaigns.
Keywords:crowdfunding,entrepreneurialfinance,startup,venturecapital,signaling
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PrefaceThisthesisisapartofourMastersofSciencedegreeinEconomicsandBusiness
administrationattheNorwegianSchoolofEconomics,writtenduringtheautumnof2015.
Thethesisiswrittenwithinourmajor,businessanalysisandperformancemanagement.
Thisisanexploratorystudyontheconceptthatiscrowdfunding.Crowdfundingisamore
democraticwayforconsumerstoexpressdemandandinfluencetheproductionof
enterprises.Webelieveknowledgeabouttheconceptishighlyrelevantforentrepreneurs
today.TheevolvementofWeb2.0.madetwo-waycommunicationwithalargeacrowd
possible,potentiallybringingvaluableproductfeedbackinadditiontocapital.Inthe
Sundvoldendecleration(2013),theNorwegiangovernmentexpressedintentionto
strengtheninnovationandestablishmentinallpartsofthecountry,byfocusingon
entrepreneursandstartups.Further,thegovernmentexpressedintentiontoestablishan
innovationplatformtohelpconnectentrepreneurswithprivatecapital,whilealso
consideringtoconnectthiswithtaxincentives.Webelievethisincreasestherelevanceof
crowdfundingtoday.
Theworkprocesshasbeenchallenging,astheamountofacademicknowledgeand
informationonthesubjectislimitedduetotheindustry’syoungage.Despitethis,weas
authorshavebenefittedmuch,seeingthatcrowdfundingandentrepreneurshipingeneralis
acommoninterestofours.
WewouldliketothankRotemShneorfromtheNordicCrowdfundingAllianceforahelpful
discussiononthetopicofNordiccrowdfunding.WewouldalsoliketothankSigbjørnGroven
fromFutureHomeandDanHeskethfromSomeone.iofortakingthetimetodiscuss
crowdfundingcampaigncomplicationswithus.Lastly,wewouldliketopayoursincere
gratitudetooursupervisor,MichaelKisser,forhisguidancethroughoutthisprocess.His
assistanceandcontributionhelpeduscompleteathesisthatwebelievecontains
informationalandpracticalvalue.
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TableofContents
1. INTRODUCTION 7
2. RESEARCHMETHODS 8
3. WHATISCROWDFUNDING? 9
3.1. DEFINITION 93.2. FINANCIAL&NON-FINANCIALCROWDFUNDING 93.3. CROWDFUNDINGMODELS 103.3.1. EQUITYCROWDFUNDING 103.3.2. LOANCROWDFUNDING 123.3.3. REWARDCROWDFUNDING 133.3.4. DONATIONCROWDFUNDING 153.3.5. ROYALTYCROWDFUNDING 163.3.6. HYBRIDCROWDFUNDING 17
4. LITERATUREREVIEW 18
4.1. LITERATUREREVIEW:CROWDFUNDING 184.1.1. FINANCIALPERSPECTIVE 184.1.2. MOTIVATIONANDDETERRENTS 194.1.3. SIGNALING 234.1.4. SOCIALNETWORK:FAMILYANDFRIENDS 254.1.5. GEOGRAPHYANDPEEREFFECTS 264.1.6. REWARDCAMPAIGNDYNAMICS 274.2. LITERATUREREVIEW:VENTURECAPITALINVESTMENTS 274.2.1. DEMANDFORCAPITAL 284.2.2. UNCERTAINTYFORTHESUPPLIEROFCAPITAL 294.2.3. WHATDETERMINESSUCCESS? 31
5. CROWDFUNDINGINDUSTRYOVERVIEW 33
5.1. FUNDINGVOLUME 335.2. THEGEOGRAPHYOFCROWDFUNDING 355.3. THECROWDFUNDINGPLATFORMS-CFPS 365.3.1. DISTRIBUTIONOFVOLUME 375.3.2. CROWDFUNDINGPLATFORMSBYMODEL 385.3.3. CHARACTERISTICSOFCROWDFUNDINGPLATFORMS 40
6. CROWDFUNDINGMARKETOVERVIEW 42
6.1. EUROPE 426.2. THEUNITEDKINGDOM 436.3. GERMANY 476.4. FRANCE 506.5. RECENTREGULATORYCHANGESINTHEUNITEDSTATES 526.5.1. JOBSACTTITLEIV,REGULATIONA+(CURRENTLYINEFFECT) 536.5.2. JOBSACTTITLEIII,REGULATIONCROWDFUNDING 54
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7. THENORWEGIANCROWDFUNDINGMARKET 56
7.1. MARKETSITUATIONFORNORWEGIANCROWDFUNDERSANDENTREPRENEURS 567.2. VENTURECAPITALACTIVITYINNORWAY 617.3. SMELENDINGINNORWAY 637.4. LEGALASPECTSCONCERNINGFINANCIALCROWDFUNDINGINNORWAY 647.4.1. LEGALCHALLENGESFOREQUITYCROWDFUNDINGINNORWAY 647.4.2. LEGALCHALLENGESFORLOANCROWDFUNDINGINNORWAY 66
8. GUIDE:WHYANDHOWTOUSECROWDFUNDINGFORRAISINGCAPITAL 68
8.1. TRADITIONALFUNDINGVERSUSCROWDFUNDING:COSTOFRAISINGFUNDS 688.2. CHOICEOFCROWDFUNDINGMODEL:WHATTOCONSIDER 708.2.1. REWARDCROWDFUNDING 718.2.2. EQUITYCROWDFUNDING 808.2.3. LOANCROWDFUNDING 858.3. CHOICEOFCFP:WHATTOCONSIDER 868.3.1. CHOICEOFEQUITYCFP 868.3.2. CHOICEOFREWARDCFP 908.4. CASESTUDIES 928.4.1. FUTUREHOME:REWARDCAMPAIGN 928.4.2. SOMEONE.IO:EQUITYCAMPAIGN 96
9. SUMMARYANDFINALTHOUGHTS 99
10. BIBLIOGRAPHY 101
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Listoftables1
Table1.Globalfundingvolumesfor2014______________________________________________________ 33Table2.Globalcrowdfundingvolume,2012-2014 _______________________________________________ 34Table3.Crowdfundingvolumeandgrowthrate,byregion ________________________________________ 36Table4.UK:Averagethree-yearcrowdfundinggrowthratesandvolumes,2012-2014 __________________ 43Table5.Germany:Averagethree-yearcrowdfundinggrowthratesandvolumes,2012-2014 _____________ 47Table6.France:Averagethree-yearcrowdfundinggrowthratesandvolumes,2012-2014 _______________ 50Table7.Characteristicsofdifferentcrowdfundingmodels_________________________________________ 86Table8.EquityCFPs:keyinformation _________________________________________________________ 89Table9.RewardCFPs:Keyinformation________________________________________________________ 91
Listoffigures
Figure1-Globalcrowdfundingvolume,2012-2014 ______________________________________________ 33Figure2.Geographicaldistributionofvolume,2012-2014_________________________________________ 35Figure3.NumberofCFPs,globally.2007-2014__________________________________________________ 37Figure4.GlobaldistributionofCFPs___________________________________________________________ 38Figure5.DistributionofCFPsbasedoncrowdfundingmodel_______________________________________ 39Figure6.UK:Crowdfundingvolume,2012-2014_________________________________________________ 44Figure7.StartupandlaterstageventureinvestmentsinUKcompanies,relativetoequity,businessloanandrewardcrowdfunding,2012-2014 ____________________________________________________________ 45Figure8.Germany:Crowdfundingvolume,2012-2014____________________________________________ 47Figure9.StartupandlaterstageventureinvestmentsinGermancompanies,relativetoequity,businessloanandrewardcrowdfunding,2012-2014_________________________________________________________ 48Figure10.France:Crowdfundingvolume,2012-2014_____________________________________________ 51Figure11.StartupandlaterstageventureinvestmentsinFrenchcompanies,relativetoequity,businessloanandrewardcrowdfunding,2012-2014_________________________________________________________ 51Figure12.TheNordic:Crowdfundingvolume,2012-2014__________________________________________ 58Figure13.EquitycrowdfundingvolumeinleadingEuropeanmarketsandtheNordics,2012-2014_________ 58Figure14.RewardcrowdfundingvolumeinleadingEuropeanmarketsandtheNordics,2012-2014________ 59Figure15.BusinessloancrowdfundingvolumeinFrance,GermanyandtheNordics,2012-2014___________ 60Figure16.StartupandlaterstageventureinvestmentsvolumesinNorwegianfirms,byNorwegianandforeignVCandPE-firms,2010-2014_________________________________________________________________ 61Figure17.NumberofNorwegianstartupandlaterstagefirmsinvestedinbyNorwegianandforeignVCandprivateequityfirms,2010-2014______________________________________________________________ 61Figure18.ShareofamountinvestedinNorwegianstartups,bydomesticandforeignVCandPEfirms,2012-2014 ___________________________________________________________________________________ 62Figure19.OutstandingbusinessloansissuedinNorway,2007-2012_________________________________ 63Figure20.Illustrationofdifferentmotivationlevelsforequitycrowdfunding __________________________ 82Figure21.Aggregatefundingfromcampaignstartuntilend.NumbersinEuro ________________________ 97
1Alltablesandfiguresareself-constructedandbasedonsecondarydataunlessotherwisementioned
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1. IntroductionOneofthemainobstaclesthatthestartup-environmentfacesisraisingcapital(Cosh,
CummingandHughes,2009).Intheirquesttochangetheworld,manyentrepreneurswho
seektostartabusinessendupwithnoexternalsupport.Bankstypicallyrequirecollateralof
thefirmsitissuesloansto,meaningloanfinancingisunavailabletomanystartupsasthey
rarelyfulfillthisrequirement.Furthermore,theproblemofasymmetricinformationfor
investorsisenhancedduetolackofavailablehistoricaldata.Venturecapitalinvestmentsare
availabletosome,althoughtheseinstitutionsprefertoinvestrelativelylargeamountsand
usuallyonlydosoifthepotentialupsideissignificant.Inaddition,venturecapitalistfirms
seemtobeadjustingtheirinvestingstrategiesinfavoroflaterstagecompanies,dueto
loweruncertaintyandamoreprecisevaluationprocess(EY,2013).
Crowdfundinghasemergedasarapidlygrowingformoffundraising.Thisglobal
phenomenonaccountsforlargeamountsofcapitalandiscurrentlyinanevolvementphase,
whereboththegeneralpopulationandgovernmentofficialsarebecomingmoreawareof
thepotentialthatitbrings.Asaresult,crowdfundingmaydeveloptobeanalternative
sourceofcapitalforentrepreneursinneedoffinancing.
Thefocusofthisthesisisontheentrepreneurandhowshemaytakeadvantageofthe
potentialbenefitsthatcrowdfundingbrings.Characteristicsofcrowdfundersaretherefore
examinedwiththeperspectiveofanentrepreneur,meaningtheattractivenessof
crowdfundingasaninvestmentopportunityforinvestorsisonlybrieflytouchedupon.
Thethesisstartsbybrieflypresentingappliedresearchmethods.Chapter3presentsthe
conceptofcrowdfunding,wheresixdifferentcrowdfundingmodelsarediscussed
individuallyinordertohighlightuniquecharacteristics.Chapter4containsadiscussionon
theexistingliteratureinthefieldofcrowdfunding,signalingandventurecapital
investments.Thecrowdfundingindustryandleadingcrowdfundingmarketsarepresentedin
chapter5and6,respectively.Intheindustryoverview,globalvolumesandtrendsare
studiedonanoverallbasis,whereasthemarketoverviewexaminesspecificdomestic
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marketsinregardtoevolvement,volumes,trends,legislationandregulation.Chapter7
presentsananalysisoftheNorwegiancrowdfundingmarket.
Chapter8providesadetaileddiscussiononwhyandhowanentrepreneurshoulduse
crowdfunding,includingananalysisoffivedifferentcrowdfundingplatformsandtwocase
studies.Lastly,chapter9summarizesthepaperandpresentstheauthors’finalthoughtson
thesubject.
2. Researchmethods
Throughoutthisexploratorystudy,theauthorshavereliedonsecondarydatatoalarge
extent.Marketandindustrystatistics,institutionalandacademicresearchreports,and
governmentpressreleaseshaveprovidedmuchinsightintherelativelyunexploredtopicof
crowdfundingandalternativefinance.Mediacoverageoncrowdfundinghasincreasedin
recentyears.However,theauthorsfoundmostonlinenewsarticlesoutdatedand
uninformative,becauseofthefrequentchangeswithintheindustry.
Furthermore,primarydatahasbeencollectedthroughaqualitativeapproach.Email
correspondence,informalquestionnairesandminorinterviewshavebeenperformedin
ordertogainfurtherinsightandunderstandinginthepracticalaspectsofcrowdfunding.
Theauthorshaveadministeredtheresourcesanddatawithcaution,assessingcredibilityand
relevance.Thecitedstatisticshavebeencrosscheckedinordertoassessitsvalidity,whereas
theacademicliteraturehasbeeninternallydiscussedininordertoensureitssoundnessand
relevance.
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3. Whatiscrowdfunding?
3.1. Definition
Scholarsdefinecrowdfundinginmanydifferentways,buttheessentialsareusuallythe
same:AnentrepreneurorprivatepersoncreatesanInternetcampaign,aimingtoraisesmall
amountsofmoneyfromalargeamountofpeople-thecrowd.Thegoalofthecampaign
variesbetweenwhichcrowdfundingmodelisused.TheEuropeanCommissiondefines
crowdfundingas:
“…Anemergingsourceoffinancinginvolvingopencallstothepublic,generallyviathe
internet,tofinanceprojectsthroughdonations,monetarycontributionsinexchangefora
reward,productpre-ordering,lending,orinvestment”(EuropeanCommission,2015a).
Furthermore,crowdfundingcanbedividedintotwomainsubcategories:financialandnon-
financialcrowdfunding.Thedifferencesareexplainedinthefollowingsection.
3.2. Financial&non-financialcrowdfunding
Financialcrowdfundinginvolvesanexpectationforthecrowdfundertomakeafinancial
returnonhisinvestment,i.e.themotivationandincentivestoinvestareusuallyfinancially
based.Threecrowdfundingmodelsfallunderthisdefinition:equity,loanandroyalty
crowdfunding.However,eventhoughthereisapossibilityforthecrowdfundertomakea
financialreturn,hemightalsocareaboutnon-financialreturns,e.g.thepositivefeelingof
helpingalocalcorner-stonebusinessbyinvestinginitsequity,orofhelpingastudentpay
foreducationbylendinghimmoneythroughacrowdfundingplatform(CFP).
Further,financialcrowdfundingenablescrowdfunderstoinvestinprivatedebtandprivate
equity.Thisopportunityexpandsthemarketportfolio.Includingcrowdfundingasan
investmentalternativethereforegivestheinvestorabiggerpotentialtodiversifyandtofind
heroptimalportfolio.Totheextentthatthemarketvalueofthecrowdfundinguniverseis
notmarginal,onecanarguethattheefficientfrontiershiftstotheupperleftwhenadding
crowdfundingasaninvestmentalternative.Onecanthereforearguethatitisdesirablefor
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investorstoincludecrowdfundeddebt/equityasaninvestmentopportunity,becausethey
wouldpotentiallygainthesamereturnforlessriskorhigherreturnsforthesamerisk.
Non-financialcrowdfundingistheopposite,asthereisnodirectpossibilityforthe
crowdfundertomakeafinancialreturnonherinvestment.Rewardanddonation
crowdfundingareexamplesofnon-financialcrowdfunding,althoughthecrowdfunder’s
motivationineachmodelmightdiffer.
Therearecurrentlysixdifferentcrowdfundingmodels.Thesewillbeexplainedinthenext
section.However,throughoutthethesis,themainfocuswillbeonrewardandequity
crowdfunding.
3.3. Crowdfundingmodels
3.3.1. Equitycrowdfunding
Equitycrowdfundingistheactofofferingsecuritiestothegeneralpublicbyprivatelyowned
businesses,usuallythroughtheInternet.Themodelallowsbusinessestoofferaproportion
oftheirequityforapredeterminedprice,sothatanyonecanacquireashareintheprivately
heldcompany(Pierrakis&Collins,2013).
Riskandreturn
Underequitycrowdfunding,acrowdfunder’sreturnislinkedtothefuturesuccessofthe
businesstheyinvestin.Thisgivesthepotentialforgreaterreward,asthevalueoftheequity
mightincreaseifthebusinessbecomesprofitable.However,italsopresentshigherriskfor
thecrowdfunder.Equityownersaretypicallythelasttobecompensated,shouldthe
businessgobankrupt.Anotherriskregardingequitycrowdfundingistheriskofdilutionof
ownership(Massolution,2015).Financingconductedbyventurecapital(VC)firms
sometimesincludeanti-dilutionprotection,sothatiffutureequityisboughtatalowerprice
thanwhattheVCfirmpaidinthepreviousfundinground(commonlyreferredtoas“down
round”),theVCfirm’sownershipshareisadjustedaccordingly(KaplanandStrömberg,
2004).Thisisnotthecaseformanyequitycrowdfundingcampaigns,andthereforeposesan
additionalriskforcrowdfunders(Massolution,2015).
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Apotentialchallengeforissuersofcrowdfundedequityishavingtocommunicatedirectlyto
hundredsoreventhousandsofinvestors.ManyCFPs(e.g.Seedrs)recognizethischallenge,
andtheirsolutionistoraisefundsinaSpecialPurposeVehicle(SPV).TheSPVbecomesthe
shareholderoftheentireissueandplacesasinglepartytorepresenttheinterestofallofthe
crowdfunders(Massolution,2015).
Anexampleofequitycrowdfundingispresentedbelow.Legalaspectsregardingequity
crowdfundingareexaminedinchapter6-7.
Example:BrewDog
TheScottishcraftbeerbreweryBrewDoghastakenadvantageofthepossibilitiesthatequity
crowdfundingpresents.Thebusinesshaspreviouslyinitiatedthreeequitycrowdfunding
campaigns,thefirstonein2010,andiscurrentlyrunningafourthone.Theircurrent
campaignlastsfromApril2015untilApril2016.Theycalltheircampaigns“EquityforPunks”
andhavemorethan14500shareholdersinvestedintheir(private)company(BrewDog,
2015a).
ImagefromBrewDog’s“EquityforPunksIV”prospectus
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Theircurrentcampaignaimstoraiseapproximately$41million(£25million)byselling526
316Bshares(BrewDog,2015a).AsofOctober2015,theyhaveraisedmorethan$16,4
million(£10million),settingtheworldrecordofmoneyraisedthroughequitycrowdfunding
(BrewDog,2015b).However,AllStreet,ananalystfirmdedicatedtoanalyzingcrowdfunding
investments,seemstothinkthattheequityisoverpriced:
“…itisdifficulttoseehowinvestorswillmakeafinancialreturnonthisdealgiventhehigh
valuationof£305million.Nofinancialforecasthasbeendisclosedsothereisvery
littleclarityastohowthecompanywillhittherevenuetargetsrequiredtogeneratea
riskadjustedreturnforinvestors”(Williams-Grut,2015).
TheAllStreetanalystalsopointsoutthattheircalculationsshowsaprice-earningsratioof
115,substantiallyhigherthanotherbrewerycompanies(Williams-Grut,2015).Furthermore,
BrewDogstatesintheirprospectusthattheydonotintendtopayanydividendsinthenear
future,andwillinsteadreinvestpotentialprofitsinthebusiness(BrewDog,2015a).
3.3.2. Loancrowdfunding
Loancrowdfunding2isafinancingmodelwherecrowdfunderslendmoneyviaCFPs(e.g.
LendingClub,Zopa),eitherdirectlyorindirectlytopotentialborrowers.LoanCFPstypically
permitbothprivatepersonsandbusinessestoapplyforloans.
Riskandreturn
Theborrowersinneedoffundsconsulttherelevantplatformforaloanquote.Byinvesting,
thecrowdfundersreceiveadebtinstrumentthatspecifiesthetermsoffuturerepayment.
BorrowerspostloanlistingsonCFPs,butthedetailsoftheloans(e.g.totalamount,interest
andduration)willbedeterminedbytheCFPandtheperceivedriskoftheborrower(e.g.
creditrisk,requestedamountandfinancialhistory).Crowdfunderslendtheirfundsby
reviewingtheloanlistingsthatpotentialborrowershaveposted.Theycanthenselectthe
listingsthatmeettheircriteriaregardingrisk,durationandreturn.Theplatformitselfearns
itsincomebytakinganadministrativefeeand/orapercentageoftheloanedamount
(Massolution,2015).
2Alsocalledpeer-2-peerlending(P2P),peer-2-businesslending(P2B),marketplacelendingandcrowdlending
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Financialreturnisfoundtobethegreatestmotivationforcrowdfunderschoosingthis
model.Furthermore,security(i.e.thattheirmoneyissecure)andriskrating(givenbythe
CFP)areimportantfactors(PierrakisandCollins,2013).However,intrinsicmotivationmay
alsobeimportanttosome(oftenreferredtoas“sociallending”or“impactinvestors”).
3.3.3. Rewardcrowdfunding
Rewardcrowdfundingofferscrowdfundersnon-financialbenefitsinexchangefortheir
pledge(Ahlers,Cumming,GüntherandSchweizer,2015).Themostcommonreward
crowdfundingmodelisessentiallyapre-purchasingplatform.Beforeproductionhasbegun,
futurecustomersareinvitedtopre-purchaseaproductsothattheprojectgetsenough
fundingtoberealized.Thisalsoprovidesintangiblebenefitstothefunders.Theincentiveto
participateinsuchcrowdfundingcampaignsisthereforethecrowdfunders’desirefor
rewardbutalsoinnermotivation(Pierrakis&Collins,2013).
Examples
Duringfall2012thecompanyCloudImperiumGameslaunchedacampaignonthereward
CFPKickstarter.TheyannouncedtheirplansforStarCitizen,aspacegalaxyvideogamethat
takesplaceinthe30thcentury.Withinthefirstmonththeyraisedarecordamountofmore
than$6million(Roberts,2015).Theylatertookthecrowdfundingcampaigntotheirown
platforms,andin2015,GuinessWorldRecords(2015)gaveitthetitle“mostcrowdfunded
project(overall)”withalmost$40millionraisedinmarch2014.AsofDecember2015,the
companyhadmorethandoubledthatamountto$100million,frommorethan1million
differentcrowdfunders(CloudImperialGames,2015).Thisputthevideogamemakerinline
withgiantssuchasBungie(creatorofHalo)andRockstarNorth(creatorofGTA)whenit
comestodevelopmentbudget.TheStarCitizenrelease-datehasyettobeannounced.
Anotherrewardcrowdfundingprojectwasthe“Greekbailoutfund”3.Thecampaignstarter,
ThomFeeny(UK),hadnorelationtoGreeceotherthanthedesiretoassisttheGreekpeople
inthefinancialdistresstheyexperiencedatthetime.HestartedthecampaignontheCFP
3Thiscampaigncouldbecharacterizedasadonationcampaignratherthanarewardcampaign,butduetofundersreceivingperksfromcontributing(e.g.fetacheese,wine,Greekholidayfortwo),thecampaignfallsunderrewardcrowdfunding
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Indiegogo,tocrowdfundGreece’snationaldebtwithagoalof€1,6billion.OnJuly6,2015
thecampaignendedwitharaisedamountof€1930577in8days(Indiegogo,2015b).The
projectdidnotreachitsgoal,sothemoneywasreturnedtothecrowdfunders.However,
thisdemonstrateshowquicklyfundscanbegathered.
Pricedifferentiating
Thisfinancingmodelalsogivestheentrepreneurtheabilitytopricedifferentiateher
customers.Bysettingdifferentrewardlevelsbasedonthesizeofthepledge,the
entrepreneurcanidentifyandexploithercustomers’willingnesstopay.InthecaseofStar
Citizen,onerewardlevelcouldbeprioritizedshipmentofthegamethemomentitis
finished.Anotherlevelcouldincludevirtualgoodsinsidethegame.Anexampleofthisisthe
“JavelinDestroyer”,avirtualspaceshipinlimitedsupplyof200andapriceof$2500each.
CloudImperiumGamessoldall200inlessthanaminute,earningthecompany$500000in
fundingforfurtherdevelopmentofthegame(Roberts,2015).
All-or-nothingversusKeep-it-all
Whenanentrepreneurstartsarewardcrowdfundingcampaign,shemustdecidewhatkind
ofgoalmodelshewants.Whathappensiftheentrepreneurdoesnotmeether
predeterminedfundinggoal?Doesshekeepthemoneyanywayandinitiateanunderfunded
project,oristhemoneyreturnedtothefunders?Twomodelsregardingthisareoften
referredtoastheall-or-nothing(AON)modelandthekeep-it-all(KIA)model.
ManycrowdfundingplatformsonlyacceptAONmodels,wheretheentrepreneurtakesall
theriskregardingwhethershegetsfundedornot(e.g.Kickstarter,FundedByMe).Ifthe
projectdoesnotreachitsfundinggoal,everyfunderisreimbursedandtheentrepreneur
getsnothing.IntheKIAmodel,theentrepreneurkeepsthemoneythatispledgedevenif
thefundinggoalisnotreached(Cumming,LeboeufandSchwienbacher,2015).Chapter8.2.1
examinesimplicationsthatentrepreneursshouldbeawareofwhendecidingbetweenAON
orKIA.
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3.3.4. Donationcrowdfunding
Donationcrowdfundingisoneofthenon-financialmodels.Crowdfunderstypicallyhave
intrinsicmotivationtodonate,andreturnswillbeintangiblebenefitsfrombackingthe
project(Pierrakis&Collins,2013).Aswithallcrowdfundingprojects,donationprojectshave
apredeterminedgoalofhowmuchmoneytheyaimtocollect.Theamountdifferent
projectssettoreachvaryalotinsize.Onecanfindprojectswherethegoalis$1000and
projectswherethegoalis>$500000.Forsomecrowdfundingmodels,CFPstypicallypractice
thataprojectcannotreceivemorefundingthanitsinitialgoal,i.e.overfundingisnot
possible.Fordonationcrowdfunding,however,onlythedurationofthecampaignlimitsthe
amountofmoneyonecanreceive.Furthermore,projectsofthismodelusuallyhavean
overallgoal,e.g.tobuildashelterforthehomeless,tofundrehabilitationcostsofanewly
handicappedfamilymemberortofundmedicalcareforacertainamountofpeopleina
conflictedzone.
Indiegogostarteditsowncharitycrowdfundingcampaigntosupportthevictimsoftheearthquakein
Nepal,spring2015.AsofSeptember7,2015thereare287ongoingcampaignsrelatedtothiscause
andtotalfundingamountedto$2.62million.
Differencesandsimilaritiestonon-profitorganizations
Mentionedpredeterminedgoalsisadistinctdifferencebetweendonationcrowdfundingand
traditionalnon-profitcharityorganizations.Charityorganizations(e.g.UNICEF,RedCross)
workasumbrellaorganizationsforseveraldifferentprojectsandcauses,wherethegoalis
moreabstract.Donatedmoneyisallocatedbetweenmanyprojectsnotnecessarilyknown
bythedonator.Fordonationcrowdfunding,thecrowdfunderdonatesdirectlytoaspecific
project.
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Regardingdonationstobothcrowdfundingcampaignsandtonon-profits,anumberof
factorsmotivatesthegiver,wheresympathy,empathy,guilt,happinessandidentityarethe
strongestdeterminants(Gerber,HuiandKuo,2013).
3.3.5. Royaltycrowdfunding
Inroyaltycrowdfunding4,theentrepreneurreceivesfundsfromcrowdfundersinexchange
foraroyaltyfeeoracertainpercentageoffuturesalesorprofitsfromtheproject
(Massolution,2015).
Specialcharacteristics
Thismethoddiffersfromtheothercrowdfundingmethodsinthewaythatit,forboth
parties,hasmorecontractualfreedom.Royaltycrowdfundingcouldbeaviablesolutionfor
someentrepreneurs,astheyhavefewerobligationstothecrowdfundersuntiltheproject
startstoearnincome,contrarytoequityandloancrowdfunding:Royaltycrowdfunding
circumventtraditionalequityconcerns,likemarketfluctuations.Inaddition,ifthe
entrepreneurusescrowdfundeddebttofinanceherproject,shewillhaveanobligationto
payperiodicinstallmentswithinterest,regardlessoftheincomeoftheproject.The
entrepreneurwhousesroyaltybasedcrowdfundingisonlyobligatedtopayouta
predeterminedpercentageofherprofit,orafixedroyaltyfee.
Byusingroyaltycrowdfunding,theprojectispronetocomplicationsbetweencrowdfunder
andtheentrepreneur.Firstly,thepayoutfortheinvestorisadirectresultofthe
achievementsoftheproject.Aswithequityinvestments,itisthenimportanttoensurethat
theentrepreneurputshigheffortintheprojectbyhavingalignedinterestswiththeinvestor.
Secondly,ifabusinessusesthiscrowdfundingmodelforanisolatedproject,thatproject’s
profitwillalsodependonhowthebusinessallocatesitsfixedcosts.Ifnotmentionedinthe
agreement,itwouldthenbeoptimalfortheentrepreneurtoallocateahighamountoffixed
coststotheproject,sothatshehastosharelessoftheprofitswiththeinvestor.Itis
thereforeessentialforbothpartiestohaveagoodunderstandingofthecontractthatis
signed.
4alsoreferredtoasrevenuesharing
17
3.3.6. Hybridcrowdfunding
Hybridcrowdfundingisacombinationofdifferentcrowdfundingmodels.Theremaybe
benefitsforbothentrepreneursandcrowdfundersbyusingthisfundingmodel(DeBuysere,
Gajda,KleverlaanandMarom,2012).E.g.ifanentrepreneurusesacombinationofreward
andloancrowdfunding,thecrowdfunder'spayoffisbothfinancialandnon-financial.This
mightbeagoodalternativeformanycrowdfundersregardingtheirinitialmotivationfor
investing(e.g.iftheywanttoconsumetheproduct,butalsodesirefinancialreturn).Forthe
entrepreneur,itprovidesthepossibilitytocustomizeheroptimalwayofraisingfunds.
Hybridcrowdfundinggivesbothcrowdfunderandentrepreneurflexibility,butthemodel
currentlyaccountsforonlyasmallpartofthetotalcrowdfundingvolume(Massolution,
2015).
18
4. LiteraturereviewItisuncertainifcrowdfundingsupportsorchallengesexistingtheoriesabouthowstartups
raisecapital.ThisuncertaintyisemphasizedinareportbyEY&UniversityofCambridge
(Wardrop,Zhang,RauandGray,2015),whichclaimsthatthephenomenonisunder-studied
andoftenmisunderstood.Thischapterprovidesaliteraturereviewoncrowdfundingand
venturecapitalinvestments.Bothtopicssharecertainsimilarities,anditistherefore
meaningfultodiscussventurecapitalwhenassessingthecharacteristicsofcrowdfunding.
4.1. Literaturereview:Crowdfunding
4.1.1. Financialperspective
Belleflamme,LambertandSchwienbacher(2013)arguethatcrowdfundingshouldbe
consideredadistinctformoffinancingthatcentersonfundingfromthecrowdratherthan
professionalinvestors(i.e.individualswhospecializeinmakingriskyinvestments)or
individualswhohaveapersonallink(familyandfriends)totheentrepreneur.Furthermore,
intheirtheoreticalresearchtheyexaminethecharacteristicsofrewardandequity
crowdfunding.Forrewardcrowdfunding,theysummarizethreecharacteristics:
First,arewardcrowdfundingcampaignofteninvolvespre-purchasingagoodthatisyettobe
availableonthemarket.Theentrepreneurpresentsthetraitsofthefinalgoodandoffer
severaldifferentrewardlevelsthatthecrowdfundercanchoosefrom.Second,mentioned
rewardlevelsrevealconsumers’willingnesstopayandlettheentrepreneurprice
discriminatebetweentwogroups:Consumerswhoenjoyhigherutilityfromconsumingthe
goodwillbereadytopaymoretosecureadditionalcommunitybenefitsarisingfrom
crowdfunding,thanotherconsumers,whowillwaituntiltheproductisavailableonthe
marketatalowerprice(Belleflammeetal,2013).Thiscontradictstheeconomicperception
thatifonepurchasessomethinginadvance,beforeknowingthequalityofthepurchased
good,oneoughttobecompensatedwithdiscounts(DanaJr.,1988).Third,crowdfunders
identifythemselvesasmembersoftheproductionprocessandmayparticipatein
community-basedexperiences.Thisrangesfromtheactofpledgingmoneytodirect
involvementintheproduction.Belleflammeetal.(2013)callthis“communitybenefits”,and
isanadvantageofcrowdfundingovertraditionalfunding,asthisinvolvementcanenhance
19
thecrowdfunders’experiencewiththegood.Theyarguethatcommunitybenefitsexistfor
bothrewardandequitycrowdfunding.Forequitycrowdfunding,communitybenefitsare
linkedtotheinvestmentexperience,whileforrewardcrowdfunding,theyarelinkedtothe
consumptionexperience(Belleflammeetal.,2013).Examplesofinvestorcommunity
benefitsmaybethefeelingofbelongingtoagroupofindividualswhocontributedtothe
veryexistenceoftheproduct,whileconsumptioncommunitybenefitsmaybevotingrights
regardingthedesignoftheproduct.Ifsuchadditionalbenefitsforthecrowdfunder
(consumptionorinvestmentbenefits)exist,theyshouldbefocusedonandamplifiedbythe
entrepreneurinordertomaximizethepotentialofcrowdfunding.
Further,Belleflammeetal.(2013)arguethatthesizeoftheentrepreneur’scapital
requirementaffectstheoptimalchoiceofcrowdfundingmodel(theyonlyconsiderreward
versusequitycrowdfunding).Ifthecapitalrequirementislarge,thesurplusfromprice
discrimination,andthereforealsorewardcrowdfunding,isreduced.Theentrepreneuris
thenforcedtodistorttheoptimalpricingstructuretoattractmorepeopletopre-order;if
not,shemaynotbeabletoraiseenoughmoneytobeginproduction.Thelargerthis
distortion,thesmalleristheadditionalpayofffrompricediscrimination.Belleflammeetal.
(2013)arguethatifthecapitalrequirementislarge,profit-sharing(e.g.equity
crowdfunding)isthebetteralternative.Thisisbecausetheyassumeindividualsare
heterogeneouswithrespecttocommunitybenefitsunderpre-ordering,i.e.individuals
experiencedifferentincreaseinutility,buthomogeneousunderprofitsharing,i.e.
individualsexperienceidenticalincreaseinutility.Theentrepreneurcanthenmoreeasily
exploitcommunitybenefitswithprofitsharingthanwithpre-ordering(Belleflammeetal.,
2013).Theirworkisbasedontheoreticalanalysis.Hence,inorderfortheirresultstooccur,
manyassumptionshavetobemadethatmightnotalwaysfittherealcrowdfundingworld.
Evenso,whenanentrepreneurconsiderswhichcrowdfundingmodeltogofor,thefindings
ofBelleflammeetal.(2013)couldproveuseful.
4.1.2. Motivationanddeterrents
Asmentioned,crowdfundersmightdifferfromtraditionalinvestorsinmanyways.Thisis
likelytoapplytothefunder’smotivation,whetheritisregardingthedecisiontodonate,
pledge,investorlendtoacrowdfundingcampaign.Unfortunately,thereislimitedresearch
20
byscholarsinthisarea.OneexploratorystudybyGerberandHui(2013)5,examineswhat
motivatesanddetersentrepreneursandcrowdfundersfromparticipatinginreward
crowdfunding.Forentrepreneurs,theyfindthatoneofthemainreasonsforinitiatinga
crowdfundingcampaignisraisingfunds.Otherimportantfactorsaretoexpandawarenessof
theentrepreneur’swork,toformconnectionswithsupporters,desireforapproval,to
maintaincontroloftheproject,andtolearnnewfundraisingskills(GerberandHui,2013).
Forcrowdfunders,astrongmotivationtopledgeseemtobecollectionofrewards.However,
whilemanysupportersaremotivatedtocollect,othersaremotivatedto“give”,the
researcherspointout.Helpingothers(i.e.theentrepreneur)seemstobeanotherstrong
motivationforrewardcrowdfunders,bothforfamilyandfriends(F&F)andsupportersnot
knownwellbytheentrepreneur.Third,beingpartofacommunityoflike-mindedindividuals
andinteractingwiththemandtheentrepreneur,motivatedsomeinterviewees(Gerberand
Hui,2013),consistentwithsuggestionsbyBelleflammeetal.(2013)thatcommunitybenefits
exist.Finally,supportingacausemotivatedsome,i.e.thedesiretohelpaprojectberealized
andseeitsucceed(GerberandHui,2013).
Furthermore,GerberandHui(2013)alsofindpotentialdeterrentstostartorfundareward
crowdfundingcampaign.Forentrepreneurs,thebeliefofbeingunabletoattractsupporters,
e.g.thattheproduct’stargetcrowdwastoosmallorthatthethecrowdwasunlikelytovisit
aCFP,orbeingunabletodevelopsatisfactoryrewards,wereconcernsinthefunding
decisionprogress.Otherentrepreneursfearedpublicfailureandexposure,e.g.ruining
chancesoffutureinvestment,personalembarrassmentorotherpeoplestealingtheirideas.
Somefeltangelinvestorsandventurecapitalistscouldbelesslikelytofundfutureventures
iftheentrepreneurhadalreadyfailedincrowdfunding.Lastly,thetimeandresource
commitmentnecessarytoachievecrowdfundingsuccesswasconsideredabarriertosome,
e.g.havingtoreplytoalargegroupofsupporters(GerberandHui,2013).Interviewed
crowdfundersweremainlyconcernedaboutwaitingforandnotreceivingrewardsand
ineffectiveuseoffunds.OnecrowdfunderalsomentionedshedislikedtheKIA(keep-it-all)
model,andthattheAON(all-or-nothing)modelprovidedasenseofsecurity,astheriskof
5Theirresearchconsistsofqualitativedatacollectionthroughinterviewsof83US-basedparticipantsfromthreedifferentCFPs;Kickstarter,IndiegogoandRocketHub(GerberandHui,2013)
21
theentrepreneurinitiatinganunderfundedprojectwouldberemoved(GerberandHui,
2013).
GerberandHui’squalitativeinvestigationofcrowdfundingshedslightonsomequestions
regardingcrowdfunding.However,theirresearchissolelybasedonentrepreneursand
fundersfromtherewardcrowdfundingsegment,andonlyfromthreedifferentrewardCFPs.
EntrepreneursandcrowdfundersonotherCFPs,andespeciallyinothercrowdfunding
models,mighthavedifferentmotivationstostartorsupportaventure.
AnotherstudyonmotivationofcrowdfundersisthatofCholakovaandClarysse(2015)6.In
additiontoanalyzingthemotivationofinvestorsonrewardandequitycrowdfunding
campaigns,theyexploretheimpactofhavingaprojectonbothtypesofcampaigns
simultaneouslyoninvestors’decisiontosupporttheproject.Theiranalysisofinvestor
motivationisbuiltonthementionedfindingsofGerberandHui(2013),i.e.collectrewards
(extrinsic),helpothers,beapartofacommunityandsupportacause(intrinsic),inaddition
totheneedtotrusttheentrepreneur(CholakovaandClarysse,2015).Theirsurveyhasthree
steps:(1)therespondentsareaskedtodecidewhethertheywanttopledgetoapresented
rewardcrowdfundingcampaignandwhy.(2)therespondentsareinformedthatthesame
projectisalsoavailableonanequityCFP,andareaskedwhethertheywouldinvestandwhy.
(3)Therespondentsaregiventheopportunitytoreconsidertheirinvestmentdecisionsso
faranddecideagaintheamounttheywanttokeepintheprojectasapledge(ifany)andthe
amounttheywanttoinvestasequity(ifany)(CholakovaandClarysse,2015).
Theresearchersfindasignificantrelationshipbetweendesiretocollectrewardanddecision
topledge(i.e.extrinsicmotivation).Theneedtotrusttheentrepreneurisalsofoundtobea
significantmotivator.However,contrarytowhatsomeoftheinterviewobjectsofGerber
andHui(2013)saidmotivatedthemtopledge,CholakovaandClarysse(2015)findno
significantrelationshipbetweentheintrinsicmotivators(helpothers,beapartofa
communityandsupportacause)andthedecisiontopledge.I.e.communitybenefitsamong
6TheysurveyedallregisteredinvestorsfromSymbid,aCFPfromtheNetherlandsthatacceptsbothrewardandequitycrowdfundingcampaigns,aswellasamixofthetwo.155outof454respondedtotheirsurvey(CholakovaandClarysse,2015).
22
crowdfunders(Belleflammeetal.,2013)arenotfound.ThefindingsofCholakovaand
Clarysse(2015)appliedtobothrewardandequitycrowdfunding,i.e.pledgingandinvesting.
Therefore,foranentrepreneurwhoisconsideringtolauncharewardcrowdfunding
campaign,abalancebetweenattractiverewardandtrustseemsimportantinorderto
achievecrowdfundingsuccess.
Furthermore,theyfindthataftertherespondentshavebeengiventheoptiontoreplace
theirinvestmentintoeitherreward,equityoracombination(step3inthesurvey),having
investedforequityatstep2hadasignificantpositiverelationtoalsokeepingapledgeinto
theprojectatstep3.AsCholakovaandClarysse(2015)pointout,thiscontradictspredictions
ofcognitiveevaluationtheory(Deci&Ryan,1985)andresearchbyHeymanandAriely
(2004),whohaveshownthatwhenindividualsarepresentedmonetaryandnonmonetary
incentivessimultaneously,theytendtofavoramonetaryperspectivedespitethepresence
ofnonmonetaryinformation.Thissuggeststhattherespondentsshouldhave,when
presentedtheoptiontoreinvest,redirectedalltheirmoneyintoequityratherthanasa
pledgeoracombination(CholakovaandClarysse,2015).Reasonsforthisneedfurther
research,butonemightarguethatonceanindividualhasownershipinacompany,buying
productsfromthatcompanyindirectlyincreasesthevalueofhisequity.Anentrepreneur
consideringcrowdfundingmightbenefitfromsuchaneffect.
OnelimitationtotheresearchofCholakovaandClarysse(2015)isthattheyonlysurveyed
registeredinvestorsfromasingleCFP(Symbid).Equitycrowdfundingcampaignsdominate
thisplatform,whichmightindicatethatmostofsurveyedinvestorsalreadyhadamoney-
drivendecision-makingapproach.Thefindingthatintrinsicmotivationwasinsignificantwas
thereforemorelikely,aspredictedbymentionedresearchofHeymanandAriely(2004).If
oneweretosurveycrowdfundersfromanotherplatformwhererewardcrowdfundingis
dominant,e.g.Kickstarter,theresultsmightdiffer.
23
4.1.3. Signaling
Equitycrowdfunding
Theprimarytargetinvestorsofstartupsonequitycrowdfundingplatformsareoften
unsophisticatedinvestors.Unsophisticatedinvestorsdonothavetheexpertiseto
comprehensivelyresearchandevaluatepotentialinvestments,andastheirinvestedamount
typicallyissmall,theircostofdoingsocouldquicklysurpassthebenefit.Theinterpretation
ofsignalssentfromtheentrepreneur,then,mightdifferfromwhatispredictedby
traditionalsignalingtheory(e.g.Spence(1973)).Atworst,ifthesmallinvestorcannot
interpretanycrediblesignals,hehasnowayofdifferentiatinglowqualityventuresfrom
highqualityventures.Thiscouldcreatetheproblemofadverseselection(Akerlof,1970).A
potentialconsequencemightbethattheequitycrowdfundingmarketentersa“marketfor
lemons”state,asdescribedbyAkerlof(1970).
OneempiricalstudyontheareaofsignalinginacrowdfundingcontextisthatofAhlersetal.
(2015).ThedataoftheirresearchisgatheredfromASSOB(AustralianSmallScaleOfferings
Board),oneofthelargestequityCFPs.Theyexaminewhichcrowdfundingsignalsand
attributesofventurequalitythataremostlikelytoinduceinvestorstocommitfinancial
resourcesduringequitycrowdfundingcampaigns.
Furthermore,asclaimedbySpence(1973),asignalmustbeobservable,costlytoproduce
andabletodifferentiateamongcompetingstartupsinorderforittobeeffective.
Forentrepreneurs,thefindingsofAhlersetal.(2015)highlightthatretainingequity,
providingmoredetailedinformationaboutrisksandhumancapital(i.e.educationofboard
members)andcanbeinterpretedaseffectivesignalsamongcrowdfunders,andhence
increaselikelihoodoffundingsuccess.Thissuggestssomesimilaritybetweenequity
crowdfundersandmoretraditionalinvestors(DownesandHenkel,1982;Wickham,2006).
Apotentiallimitationoftheirresearch,however,isthattheyignorethenon-financialaspect
ofequitycrowdfunding.Crowdfunders’non-financialmotivation,e.g.iftheinvestorisalsoa
consumeroftheproductandhasastrongbondwiththebrand,mightalsoapplyinequity
crowdfunding,andcouldhaveaffectedthechanceofcampaignsuccessintheirresearch.
24
Evenso,thefindingsmayproveusefultoanentrepreneurwhoisconsideringtolaunchan
equitycrowdfundingcampaign.
Rewardcrowdfunding
Asmentioned,rewardcrowdfundingofteninvolvespre-purchasingofgoodsthathaveyetto
beproduced.Fundersinthistypeofcampaignmightdifferfromthoseofe.g.equity
crowdfundingcampaigns,astheyareconsumersofaproductratherthaninvestorsina
venture.
Mollick(2014)examines,basedonempiricalresearchofdatafromtherewardCFP
Kickstarter,whetherentrepreneurscanincreasetheirlikelihoodforcrowdfundingsuccessif
theyfocusonpreparednessasasignalofquality.Formeasurementofpreparedness,he
investigatesthreepotentialdeterminants7:ifthecampaignpitchhasavideo(1),whether
projectsprovidedupdatesthreedaysafterlaunch(2)andifthecampaignpitchhadspelling
errors(3).Hisresultsindicatethatbothprovidingavideoandfrequentupdatesincreasethe
chanceofsuccess(by26%and13%,respectively),andthatspellingerrorsreducethechance
ofsuccess(by13%).Thesefindingshighlighttheimportanceofpreparednessduring
crowdfundingcampaigns,asitmaysignalproductqualitytocrowdfunders.
OnepotentiallimitationofMollick’s(2014)studyisthatKickstarteronlypermitsAON
rewardcampaigns(Kickstarter,2015a).Otherrewardcrowdfundingsites,likeIndiegogo,
alsopermitsKIA8rewardcampaigns(Indiegogo,2015a).IfMollick’s(2014)findingsalso
applytoKIArewardcrowdfundingcampaignsisthereforeuncertain.
Cummingetal.(2015)foundthatonIndiegogo,AONcampaignshaveahigherchanceof
meetingitsfundinggoalthanKIAcampaigns:34%ofallAONcampaignsreachedtheirgoal,
whileonly17%ofKIAcampaignsdidthesame.Theyarguethatthismightbebecauseofthe
signalanentrepreneurgiveswhendecidingtogofortheAONmodel.Spendingtimeand
effortincreatingacrowdfundingcampaignwhileinthesametimeriskingnottoreceiveany
7AllthreefactorsarementionedintheofficialKickstarterblogaswaystostandout:https://www.kickstarter.com/blog/so-how-can-i-make-my-project-stand-out8Indiegogooreferstothesemodelsasflexibleorfixedfunding
25
fundingisriskyandcostlyfortheentrepreneur.TheAONmodelmightthensignalthatthe
entrepreneurisseriousaboutproductionandthatshewillnotgoforthwithanunderfunded
project.Thisreducesriskandcostsforthecrowd,andenablestheentrepreneurtoseta
higherfundinggoal.TheresearchalsoshowsthatAONcampaignsonaveragesoughttoraise
$31397,versus$20478forKIAcampaigns.
4.1.4. Socialnetwork:familyandfriends
Conti,ThursbyandRothaermel(2011)studiedtheimportanceofinvestmentbyF&Finearly
stageventureswhenapplyingforexternalinvestment,suchasventurecapitalandbusiness
angelfinancing.TheirfindingssuggestthatF&Fmoneyhasapositiveimpactonexternal
investment.However,alimitationoftheirresearchisthattheyonlylookatthetechnology
sector(Contietal.,2011).IsF&Fmoneyalsoimportantforcrowdfunding?Mollick(2014)
examinestheeffectofthesizeofthefounder’ssocialnetwork.Hearguesthatthisisoften
theinitialsourceofsignificantfundingformanyprojects,andisthereforeequivalenttoF&F
money.Toresearchthis,heexaminesfoundersontheCFPKickstarter.Bylookingatthe
founders’Facebookfriends,Mollick(2014)findsthatfounderswithalargesocialnetworkon
Facebookaresignificantlymorelikelytobesuccessfullyfundedthanthosewithasmall
socialnetwork.E.g.foranaverageprojectintheFilmcategory,hefindsthatafounderwith
10Facebookfriendswouldhavea9%chanceofsucceeding,onewith100friendswould
havea20%chanceofsuccess,andonewith1000friendswouldhavea40%chanceof
success(Mollick,2014).However,onemightsuspectthattheoriginationofthisfinding
couldalsocomefromthecredibilitythatalargeFacebooknetworkpresents(asasignal),not
onlyfromthepartthatitislikelytobringmoreF&Fmoney.Funders,atleastoflarger
Kickstarterprojects,mightdoabackgroundcheckoftheentrepreneurbeforepledging.
HavingasmallFacebooknetworkmaythenweakentheentrepreneur’scredibility,maybe
reducingwillingnesstopledgebythefunder.Also,onepotentiallimitationofthestudy
mightbethattheresearcheronlylooksatfounders’Facebooknetwork,notothersocial
mediasiteslikeLinkedInorInstagram.
Otherresearcherswhoexaminetheimportanceofsocialcapitalincrowdfundingcampaigns
areZheng,Li,WuandXu(2014).TheystudyKickstarterfromtheUSandDemoHourfrom
China,tworewardCFPs.Theirempiricalresearchmeasuresthedegreeofsocialnetworkties
26
asthenumberoffanstheentrepreneurhasoneitherFacebook(theU.S.)orWeibo(China),
andtheyfindthatsocialnetworktieshaveasignificantpositiveeffectonthelikelihoodof
crowdfundingsuccess(Zhengetal.,2014),consistentwiththefindingsofMollick(2014).
4.1.5. Geographyandpeereffects
Existingtheorypredictsthatgeographicaldistanceisimportantforinvestorsevaluatingearly
stageentrepreneurialventures(FloridaandKenney,1988).Investoractivitiessuchas
monitoringofprogressandprovidinginputarecost-sensitivetodistance.Isgeographical
distanceanimportantfactorforearlystagecrowdfundersaswell?Agrawal,Cataliniand
Goldfarb(2015)examinethecharacteristicsofinvestorsfromtheCFPSellaband9.Their
empiricalresearchsuggeststhattheroleofgeographicaldistanceseemstobegreatly
diminishedforcrowdfundingrelativetootherfinancingforms,astheaveragedistance
betweenentrepreneur(artist)andinvestorisapproximately5000km.However,theyalso
findthatlocalanddistantinvestorsaredifferent:Distantinvestors’desiretoinvestincreases
astheentrepreneuraccumulatescapital,whereaslocalinvestors’desiredoesnot.Further,
theyfindthatinvestorsfromtheentrepreneur’ssocialnetwork(i.e.F&F)are
disproportionatelylocal,andthatF&Finvestearlywhileothersinvestlate(Agrawaletal.,
2015).
Inotherwords:geographicaldistanceseemslessimportantforcrowdfunding,butF&F(who
aremostlikelylocal)investearlierthanotherinvestors.Distantinvestorsarealsoresponsive
totheinvestmentdecisionofothers.Agrawaletal.(2015)thereforespeculateintheir
conclusionthatearlyinvestmentmayserveasasignalofentrepreneurialcommitment,and
thatlaterinvestorsmayusethissignaltherebyincreasingthelikelihoodoffurtherfunding
andaccesstodistantsourcesofcapital.
Thisunderlinestheimportanceofsocialnetworkforcrowdfundingcampaigns.Inorderto
reachdistantsourcesofcapital,theentrepreneurhastoutilizehersocialnetworkandgain
momentumforhercrowdfundingcampaign.
9SellabandisamusicCFPthatallowsartiststoraisethemoneyfromtheirfansandtheSellaBandcommunityinordertorecordaprofessionalalbum,givingapercentageoffutureprofitsinreturn.
27
ApotentiallimitationfortheresearchofAgrawaletal.(2015),aswithotheracademic
crowdfundingreports,isthattheyonlyexamineoneCFP.Iftheirfindingsapplytoother
CFPsisuncertain.
4.1.6. Rewardcampaigndynamics
EmpiricalresearchofKuppuswamyandBayus(2015)examinesfundingcycledynamicsof
rewardcrowdfundingcampaigns.BystudyingdatafromKickstarter,theyfindthatthe
fundingcycletypicallyisU-shaped:Morefundingoccursduringthefirstandlastweek
comparedtothemiddleofthecampaign.Thisisfoundtooccurforalltypeofreward
campaigns,nomatterthelengthorproductcategory.Theyarguethattheearlyfunding
mostlikelycomesfromF&Fsupport,whilethelatterincreaseinfundingactivitymightoccur
becauseofarelationshipbetweentwoeffects:agoal-gradienteffectandadeadlineeffect.
Thegoal-gradienteffect,asproposedbyHull(1932),suggeststhatthemotivationtoreacha
goalincreaseswithproximitytothedesiredendstate.KuppuswamyandBayus(2015)argue
thatthiseffectcouldexplainsomeofthesuddenincreaseinfundingactivity.Furtherso
whenthedeadlineeffectoccurs,i.e.thatalotofactivityhappensattheendofan
experience(WebbandWeick,1979).Thetwoeffectscouldthenenhanceeachotherand
createaspikeinfundingactivityattheendofthefundingcycle.
Moreover,KuppuswamyandBayus(2015)findthat70%ofbackersonKickstarteronly
supportasingleproject,andthat95%ofthesebackersjoinedKickstarterandpledgedinthe
sameday.Henceserialbackersseemrare.Thiscouldindicateahigherdependencyonsocial
networkforrewardcampaigns.
4.2. Literaturereview:Venturecapitalinvestments
Manystartupsareinitiallyfinancedbybootstrapping,creditcardsandpersonalloansinthe
entrepreneur’sname.Inaddition,manyturntofamilyandfriendsforfinancialsupport,
whetheritissaleofequityorloans.Ifthesefinancingoptionsareexhaustedorunavailable,
thestartupmaytrytoobtainabusinessloanatabankortrytosellalargeequitystake.
28
Venturecapital(VC)firmshaveplayedakeypartasafinancialintermediaryinthecapital
marketsbysupplyingcapitaltostartupsinneedoffinancing.
JengandWells(2000)statethatventurecapitalhasbeenthedrivingforcebehindsomeof
themostvibrantsectorsintheUSfrom1980to2000.Further,JengandWells(2000)
specificallyattributelargepartsofthesuccessfulgrowthofcompanieslikeMicrosoft,
CompaqandOracle,toventurecapitalfinancing.Theyalsoclaimthatthereexistsa
widespreadbeliefthatventurecapitalfirmsareinstrumentalinbringinginnovationsto
marketandtherebyenhancingeconomicgrowth,jobsandopportunitiesforfurther
technologicalinnovation.Venturecapitalisayoungindustrythathasexperiencedrapid
changes.Itispossibletolookatfindingsanddataforthepastandthepresent,butGompers
andLerner(2001)emphasizethatthevalueoftheseinsightsregardingtheventurecapital
industryofthefuturemayremainunclear.Thisconstraintalsoappliestothecaseofthe
crowdfundingindustry.Theindustryhasexperiencedhighgrowthforthepastfiveyears,but
duetoitsyoungageitmightbechallengingtoascertainhowtheindustrywilllookinthe
future,solelybasedonafewyearsofdata.
4.2.1. Demandforcapital
Entrepreneursmightfollowseveraldifferentstrategiesandactionsinordertoattract
attentionfromVCs.Thisalsoappliestoentrepreneurswhoareusingcrowdfundingasa
sourceoffunding.HusteddeandPulver(1992)analyzeddatafrom318activestartups
seekingcapitalinMinnesotaandWisconsin(US).Theresultsshowedthatentrepreneurs
whodidnotseekadviceinthefundingprocesswerepronetobelesssuccessfulinacquiring
equityfinanceandthatthosewhodidseekadvicebutusedbankersweremorelikelytofail
inacquiringequityfinance.Attorneysappearedtocontributepositivelyinthe
entrepreneur’sprocessofsecuringequityfinance,specificallybyhelpingwithmarketingand
referralstoothersourcesofcapitalthanVCs.Inaddition,thestudyfoundthatless
experiencedentrepreneurswhoareaggressiveinseekingfundingandwhoarewillingto
surrenderasubstantialownershipshare,arethemostsuccessfulinsecuringequityfinance.
Incontrast,olderandmoreexperiencedentrepreneursarepronetohavedifficultiesin
acquiringequityfinancing(HusteddeandPulver,1992).
29
Further,VC-backedfirmstendtohavehigherqualitymanagementteamsthannon-VC-
backedfirms,assuggestedbyChemmanur,SimonyanandTehranian(2011).Intheir
research,managementqualityismeasuredbysizeoftheteam,percentageofteam
memberswithanMBAdegree,priormanagerialexperienceandrelevantcorefunctional
expertise.Thismayimplythatmanagementquality(e.g.MBAdegree)servesasacredible
signalthatreducesinformationasymmetry,therebyincreasingthefirm’sattractiveness
towardsVCfirms.However,theresearchofChemmanuretal.(2011)doesnotprovidean
explanationastowhyVC-backedfirmstendtohavehigherqualitymanagementteams(i.e.
iftheVCpreferhighmanagementqualitypre-investmentoriftheythemselvescreatehigh
managementqualitypost-investment).
AdifferentapproachtoattractattentionfrominvestorshasbeenresearchedbyDavila,
FosterandGupta(2003).Theyfoundthatembarkingonanearlyhigh-growthstrategyin
ordertogainattentionfrompotentialcapitalinvestorsmightnotbethemosteffective
strategy.Theirresultssuggestedthatcompanieswithhighgrowth,priortoanyVC
investment,didnotappeartosendausefulsignaltodecreasetheinformationasymmetry
betweentheentrepreneurandtheVC.Thus,VCsatthetimeofthestudydidnottendtouse
highgrowthsignalsasasignificantcriterionintheselectionprocess(Davilaetal.,2003).For
crowdfunding,signalingcouldbeanimportantcomponentinthetimebefore,duringand
afterthecampaign.Therefore,studyingthepracticeofsignalinginarewardorequity
crowdfundingsetting,bylookingatparallelsbetweenresearchonthetopicandactualcases
whereithasbeenimplemented,mightprovidevaluableinsights.
4.2.2. Uncertaintyforthesupplierofcapital
Venturecapitalfirmsaregenerallyinterestedinyoungcompaniesthatshowgrowth
potential.Thesecompaniesalsocomewithacorrespondinghighrisk.Intheirpaper,
GompersandLerner(2001)suggestthatoneofthemainreasonsforentrepreneursfinding
itdifficulttoobtainfinanceisinformationasymmetry.
Furthermore,thisinducesaprincipal-agentproblemandcorrespondingagencycosts
betweentheentrepreneurandtheventurecapitalfirm.Thisproblemisespeciallydifficult
forcompanieswithintangibleassetsandwhoseperformanceisdifficulttoassess,suchas
30
earlystage,high-techcompanieswithaheavyrelianceonR&D(GompersandLerner,2001).
Intermsofcrowdfunding,thisproblemtranslatesintotheinformationasymmetrythatis
presentwhencrowdfundersinvestsinanequityorrewardcampaign.Itisdifficultfor
crowdfunderstomonitortheirinvestmentsandinmanycasestheironlyguaranteeisthe
wordoftheentrepreneur.Thisposesaninterestingissueonhowtheconceptof
crowdfundingdealswithmonitoringandinformationasymmetry,andwhatfactors
motivatescrowdfunderstoinvestinprojectsinspiteofthis.
KaplanandStrömberg(2001)foundthattherearelimitstotheextenttowhichVCsare
willingtomonitorandsupporttheirportfoliocompanies,regardingmonitoringcostsand
involvementcosts.ByemployingtheVCsownpeopleinthestartup,theVCwillbeableto
monitorandmanagethestartupinthedesireddirection.TheresearchofKaplanand
Strömberg(2001)suggestedtheVCplaysaroleinformingthemanagementteamofthe
portfoliocompany,pre-investment,in14%oftheinvestments.Inaddition,theirresearch
suggestedthatin50%oftheinvestments,theVCexpectedtoplayaroleinthemanagement
afterinvesting.TheVCsinKaplanandStrömberg’s(2001)studywereworriedabout20%of
theirinvestments,theirmainconcernbeingthattheinvestmentsmightrequiretoomuch
time.Eventhoughthisresearchwasdoneoveradecadeagoandthefactthatinformationis
nowgenerallymoreaccessible,onecanarguethatthefindingsofKaplanandStrömberg
(2001)stillholdsvaluetoday,asthemotivationofthedifferentactorsinthistypeof
transaction,whetherVCorcrowdfunding,isneitherfullyaccessiblenortransparent.
Ingeneral,financialintermediariestakeonaroleofmonitoringandgatheringinformation
aboutindividualfirms.Asimpliedinthesectionabove,astrategyusedbyVCsinorderto
monitorandcontrolitsinvestmentsistomakeadditionsorsubstitutionstothe
managementoftheportfoliocompany.
AstudybyHellmannandPuri(2002)examinedtheVCsroleintheprofessionalizationof
startups,wherethedataoriginatedfrom170younghigh-techcompaniesinSiliconValley,
California.TheirfindingssuggestedthatVCsplayeda“top-down”roleattheportfolio
company.Firstly,byreplacingkeymanagementpositions,butalsobyinfluencing
developmentsfurtherdowntheorganization,e.g.introductionofstockoptionplansfor
31
employeesandformulationofhumanresourcepolicies.Furthermore,HellmannandPuri
(2002)concludedthatfirmswithventurecapitalfundingaremorelikelyandfasterto
replacetheentrepreneurwithanexternalCEO,butthattheentrepreneurstillfunctionsas
anemployeeofthecompany.Thestudyemphasizesthatinthecontextofventurecapital,
theinvestorcanplayamuchlargerrolethanjustamonitoringentity(HellmannandPuri,
2002).Monitoring,advisoryandprofessionalmanagementaretraitsthatcrowdfundersdo
notprovideentrepreneurswith,seeingthatthecommoncrowdfunderwouldmostlikely
lacktheexperienceandcredibilitytohaveanimpact.Therefore,itmightbeinterestingto
investigateifCFPsprovideentrepreneurswithsomeofthesamequalitiesthatventure
capitalfirmsprovidetotheirportfoliocompanies,andhowthisaffectstheoutcomeof
crowdfundingcampaigns.
4.2.3. Whatdeterminessuccess?
Gompers,Kovner,LernerandScharfstein(2006)didastudyonserialentrepreneurs(i.e.
entrepreneursofoneormoresuccessfulorunsuccessfulventures).Theyinvestigatedhow
theskilloftheentrepreneurandtheVCmightincreasethechanceofsuccess.Theresearch
showedthatentrepreneurswhopreviouslysucceededhaveahigherchanceofsuccessin
theirnextventure,thanfirst-timeentrepreneursandentrepreneurswhofailedintheir
previousventure(Gompersetal.,2006).Chatterji(2005)foundthatanentrepreneurwho
usesherindustryexperiencefromherpreviousemployerhaveahigherchanceofsuccess
thanhercompetitorswholacktheexperience.Thefindingsabovemightseemintuitive,but
theycontradicttheclaimfromKihlstromandLaffont(1979),whoclaimedthatluckisthe
onlyfactorthatdeterminesiftheentrepreneurissuccessfulornot.
Onecanarguethatthesuccessofaventuredoesnotsolelyrelyontheentrepreneur,but
alsoonthecharacteristicsofthesourceoffunding.Companiesthatarefundedbymore
experiencedVCfirmshaveahigherchanceofsuccess(Sørensen,2004;KaplanandSchoar,
2005;Gompersetal.,2006).Inaddition,Chemmanuretal.(2011)findthatboth
managementqualityandVC-backingcancontributepositivelytothelevelofinterestfrom
analystsandinstitutionalinvestorsintheeventofanIPO.
32
TheresearchfromGompersetal.(2006)suggeststhatVCfirmsarenotjustrisk-bearersand
suppliersoffunds,butalsoconsultantswhoputthefundsintherighthandsandensures
thatitisusedeffectively.Furthermore,thestudyshowsthattheexperienceoftheVCisof
lessimportanceiftheentrepreneurhasahistoryofsuccessfulventures.Thismayindicate
thatpriorsuccessisasignalofqualityorthatVCsaddlittlevaluetotalentedentrepreneurs
(Gompersetal.,2006).
33
5. CrowdfundingIndustryoverview
5.1. Fundingvolume
Onaglobalbasis,thetotalcrowdfundingvolumeamountedto$2.7billionin2012,$6.1
billionin2013and$16.2billionin2014.For2015,thetotalvolumeispredictedtoreach
$34,4billion(Massolution,2015).Incomparison,theglobalIPO,venturecapital,private
equity,anddebtvolumein2014weredistributedasfollows:
Activity IPO VentureCapital PrivateEquity DebtissuanceVolume $258billion $87billion $252billion $5700billionTable1.Globalfundingvolumefor2014.DatafromHarjani(2014),NVCA.org,Bain&company(2015)andThomsonReuterscorporation(2015),respectively.VCincludesseed,ventureandbuy-outs.
Figure1-Globalcrowdfundingvolume,2012-2014.DatafromMassolution(2015).
Thecrowdfundingvolumehasgrownexponentially,butonecanseethatcrowdfundingis
stillrelativelysmallcomparedtomoretraditionalfundingsources.Furthermore,thetotal
crowdfundingvolumeisunevenlyattributedbetweenthedifferentmodels.
Loancrowdfundinghashadthelargestvolumesinthepastthreeyears,mainlyduetohigh
activityintheUKandAsia.Equitycrowdfundinghashistoricallybeensubjectto
cumbersomeregulationandlegislationinsomecountries,whichmadethemodeladifficult
fundingoptiontoworkwith.Today,onecanseechangesinregulationandlegislationinthe
0123456789101112
2012 2013 2014
Globalcrowdfundingvolume2012-2014Inbillion$
Donation
Reward
Loan
Equity
Royalty
Hybrid
34
USandEuropeancountries,whicharelikelytoincreasethegrowthofequitycrowdfunding
forbothmarkets.Rewardcrowdfundingisthemostusedcampaigntype,andhas
experiencedstablegrowthduring2012-2014,butithasnotattractedthebiggestvolumes.
Thismaypartlybeexplainedbythebeliefthatmostrewardcampaignshavelowercapital
needsandthereforeseeklessfunding.In2012,royaltyandhybridcrowdfundingwerenot
perfectlyidentifiedanditisthusdifficulttofindexactnumbersfromthisyear.In2014both
modelsexperiencedgrowth,buttheirfundingactivityandvolumesarestilllowerrelativeto
theothermodels.
Model/Year 2012 2013 2014 Growth,2013-2014Donation $999m $1340m $1940m 45%Reward $391m $726m $1330m 84%Loan $1190m $3440m $11080m 223%Equity $118m $395m $1100m 182%Royalty N/A $59m $273m 336%Hybrid N/A $117m $487m 290%Totalvolume $2700m $6100m $16200m Table2.Globalcrowdfundingvolume,2012-2014.DatafromMassolution(2015),Statista(2015a)and
Statista(2015b)
35
5.2. Thegeographyofcrowdfunding
Figure2.Geographicaldistributionofvolume,2012-2014.DatafromMassolution(2015)
CrowdfundingismainlyInternet-basedandthereforegeographicalbordersaffectsmostly
equityandloancrowdfunding,duetodifferencesinlegislationamongcountries.Donation
andrewardcrowdfundingaremodelsthat,toalargeextent,havenocountryborders.As
mentionedearlier,Agrawaletal.(2015)foundthattheroleofgeographicaldistanceseems
tobereducedforcrowdfundingrelativetootherfinancingforms.Theworldmarketcanbe
dividedintothefollowingregions:NorthAmerica,Europe,Asia,andacollectivegroupisalso
establishedforOceania,SouthAmericaandAfrica,duetotheirrelativelysmallmarketsize.
ThemainemphasisofthisthesisisonEurope,duetothehigherrelevanceforNorwegian
entrepreneurs.Inaddition,theNorthAmericanmarketisdiscussedduetoitssizeand
maturityinregardtotheconceptofcrowdfunding.
NorthAmericahastraditionallybeentheregionwherethelargestcrowdfundingamounthas
beenraised,andtheregionhascontinuedtogrowexponentiallyoverthelastyears.Europe
hasalsoexperiencedhighgrowthforthepastthreeyears,buthaslostabigshareoftotal
marketvolume.Furthermore,themarketforcrowdfundingisgrowingatahighrateinAsia.
Inrecentyears,largepartsoftheAsianpopulationhaveexperiencedanincreasein
purchasingpower,whichmakeAsianconsumersmoreaccessibleandgivetheman
36
increasedfinancialpowertoaffectmostoftheworld’seconomicarenas,e.g.throughstock
exchangeorInternetshopping.Fromonlyhaving1%oftotalvolumein2012,Asia
accountedfor21%ofthetotalvolumein2014,primarilyconsistingofloan-basedfundsfrom
ChineseCFPs(Massolution,2015).Crowdfundingvolumeandgrowthratesformentioned
regionsareshownintable3below:
AnnualgrowthratesandfundingvolumeRegion/Year 2012 2013 2014NorthAmerica 92% $1610m 140% $3860m 145% $9470mEurope 65% $945m 43% $1350m 141% $3300mAsia N/A $33m 245% $810m 320% $3400mOceania N/A $76m -64% $27m 59% $43mSouthAmerica N/A $0,8m 268% $21m 167% $57mAfrica N/A $0,1m 6000% $6m 101% $12mWorldgrowth/Volume 81% $2700m 126% $6100m 167% $16200m
Table3.Crowdfundingvolumeandgrowthrate,byregion.DatafromMassolution(2015),Statista
(2015a)andStatista(2015b)
Theremainingregions,Oceania,SouthAmericaandAfrica,onlyaccountforafractionofthe
totalvolume.Intuitively,anexplanationforthismightbethattheseregionsareless
developedwithregardtotechnologyandlegislation(exceptforAustralia)andcantherefore
notadaptasquicklytothegrowthpotentialthatcrowdfundingprovides.
SpecialforNorthAmericaarethepreviousbarriersonequitycrowdfunding.TheUSis
currentlychanginglegislationinregardtoequitycrowdfunding,whichwillprobablyfacilitate
growthintheUSequitycrowdfundingsector.Thisisfurtherdiscussedinsection6.5.
5.3. Thecrowdfundingplatforms-CFPs
Themarkethasexperiencedgrowthinthenumberofcrowdfundingplatforms.Thereasons
fortheincreaseinCFPscouldbecoherentwiththereasonsfortheincreasedfunding
volume,i.e.thegeneralpublicawarenessoftheconcept,technologicaladvances,andless
cumbersomelegislation.Inaddition,thereareseveral“make-your-own-CFP”providers,
37
reducingthecostandcomplexityofcreatingaCFP.Intheearly2000s,therewereveryfew
onlinecrowdfundingplatformswhiletoday,thereareover1250activeplatforms.
Figure3.NumberofCFPs,globally.2007-2014.DatafromMassolution(2015)
5.3.1. Distributionofvolume
InNorthAmerica,thetop5andtop10CFPshavetraditionallyaccountedformostofthe
domesticmarket.In2011,thetop5CFPsinNorthAmericawereresponsiblefor73%ofthe
totalvolumeandthetop10CFPswereresponsiblefor89%.In2014,theseindicatorshave
changedsothatthetop5CFPsnowmakesup79%(increase)ofthetotalvolume,butthe
top10makesup88%(decrease).ThisimpliesthatthefundingvolumeinNorthAmericais
primarilyfunneledthroughthebiggestCFPsinthisregion.Europehowever,hasexperienced
theopposite.In2011thetop5EuropeanCFPsheld95%oftheEuropeanmarketshareand
thetop10CFPsheld97%ofthemarketshare.In2014bothindicatorshavedecreased
significantly:thetop5andtop10CFPsarenowresponsiblefor64%and75%,respectively
(Massolution,2015).Furthermore,asillustratedinfigure4below,theEuropean
crowdfundingvolumeisdistributedoveralargernumberofCFPsthantheNorthAmerican
crowdfundingvolume.
0
200
400
600
800
1000
1200
1400
2007 2008 2009 2010 2011 2012 2013 2014
38
Figure4.GlobaldistributionofCFPs.DatafromMassolution(2015)
Basedontheauthors’researchondifferentCFPs,itisalsofoundthatEuropeanCFPsoften
specializeinaparticularcrowdfundingmodelorservice,andtargetspecificinvestorsand
entrepreneurs.TheUSCFPsontheotherhand,mightspecializeinacrowdfundingmodel,
butitseemsthattheytypicallytargetthegeneralpopulationratherthanasegmentofthe
population(withtheexceptionofequitycrowdfunding).
Lastly,theCFPsinNorthAmericaareregulatedunderthesameUSlegislation,whereasthe
CFPsinEuropearecommonlyregulatedunderthelegislationofthecountryofresidence.
ThismayimplythattheEuropeanmarketactuallyneedsmoreCFPsindifferentcountriesin
ordertomeetthedemandfromcrowdfundersandentrepreneurs.However,this
explanationissubjecttochange,sincethecontinuousevolvementofcrowdfundingin
EuropepromoteschangeinlegislationonadomesticlevelbutalsoonaEU/EEAlevel.
5.3.2. Crowdfundingplatformsbymodel
Platformsofferdifferentservicestobothcrowdfunderandentrepreneur.Someplatforms
containseveralofthedifferentcrowdfundingmodelsbuthavemainemphasisonone
model,whileotherplatformsspecializeononeofthemodelsonly.EventhoughtwoCFPsin
thesamecountrymightspecializeine.g.equitycrowdfunding,theirrequirements,services
andofferingscouldbedifferent.Forexample,theUKequityCFPsCrowdcube,Seedrsand
SyndicateRoomdiffersubstantially:onSyndicateRoom,abusinessangelactsasthelead
39
investorandnegotiatesthetermsofthedeal.Thesetermswillapplytoboththeangeland
thecrowdfunderswhowishestoinvestaftertheangel.OnCrowdcube,crowdfundershold
sharesdirectly,andonSeedrs,allthesharesarepooledinaspecialpurposevehicle(SPV),
whereSeedrsactsasanomineeonbehalfofallitscrowdfunders.
Reportson1250CFPsindicatethefollowingglobaldistributiononCFPsbasedon
crowdfundingmodel,wherethemodelthattheCFPhasmainemphasisonisregistered:
Figure5.DistributionofCFPsbasedoncrowdfundingmodel.DatafromMassolution(2015)
Duetotheirrelativelynewentrance,hybridandroyaltycrowdfundingCFPsonlyaccountfor
asmallshare.ThereisamajorityofrewardanddonationCFPs,arguablybecauserewardand
donationcrowdfundingtendtobelessstrictlyregulated,thusmakingiteasiertoprovidethe
service.LoanCFPsalsohaveasubstantialshareoftotalCFPs.Thisisprobablyduetoitshigh
volume($11,08billionin2014,68,4%oftotalcrowdfundingvolume)andgrowth,which
couldsignallucrativebusinessopportunities.ThelargenumberofequityCFPsmightseem
counterintuitive,asequitycrowdfundinghasbeenprematureinmanymarkets.Apossible
explanationmaybethatoperatingequityCFPisprofitable,sincehistoricallytheactors
involvedhavebeenhighnetworthindividualsandbusinessangels.
22,6%
29,0%18,3%
18,9%
4,0%
7,2%Donation
Reward
Loan
Equity
Royalty
Hybrid
40
5.3.3. Characteristicsofcrowdfundingplatforms
ItisoftenfreetobecomeamemberonCFPs,butcrowdfunderstypicallypayasmall
percentageoftheinvestedamountwhichtheCFPslabelasatransactionfee.Entrepreneurs
willontheotherhandbesubjecttoalargercost.SomeCFPsoperatewithafixedinitialfee
whentheentrepreneurstartshercampaign,andasuccessfeethatincursifthefundinggoal
isreached.Thesuccessfeeisapercentagethatistypicallybetween5-10%ofthetotal
amountoffundsraised.Incomparison,underwriterspreadforanIPOisapproximately7%
ofissuegrossproceeds(Lee,LochheadandRitter,1996;ChenandRitter,2000;PwC,2015).
ThefeethatmostCFPschargeifacampaignissuccessfulhelpsaligninterestswith
entrepreneurs,whilealsoreducingtheentrepreneurs’riskoflosingmoneyifthecampaign
shouldfail.However,itcouldpotentiallyalsodamageinvestor-entrepreneurrelationships
regardingthetruequalityoftheproject(whichoccursduetoinformationasymmetry).
Previousentrepreneurshiptheory(e.g.Wickham,2006)suggeststhatentrepreneurshave
incentivestobeoverlyoptimistic(i.e.understaterisk)abouttheirbusinessplanwhen
presentingittoinvestors,inordertogetahighercompensationfortheirequity(orproduct).
Rationalinvestorsshouldanticipatethisbehaviorandthereforetaketheirmoneyelsewhere,
forcingtheentrepreneurtochooselesspreferredinvestors10.Ifcrowdfunders,assumedto
belesssophisticatedthantraditionalinvestors,recognizesuchoverlyoptimisticactionisless
likelybutrequiresmoreresearch.Conversely,onemightthinkthat,inthelongrun,CFPsare
dependentoninvestorsreceivingareturnoninvestment.Otherwise,theCFPcouldearna
badreputationandbeavoidedbycrowdfunders.ThiscouldreducethelikelihoodofCFPs
influencingentrepreneurstopresentoverlyoptimisticbusinessplans.However,as
crowdfundersarearguedtobemotivatedbymorethanfinancialfactors,somemightcare
lessaboutalowornegativereturnoninvestment,whichinturncouldreducetheCFPs’
potentialreputationproblem.
Asmentioned,CFPsthatspecializeinthesamemodeloftendifferfromoneanotherby
providingthecrowdfunderandtheentrepreneurwithdifferenttoolsandservices,andby
targetingdifferentsegmentsofthemarket.SomerewardCFPsmayonlyacceptprojects
10Boththeentrepreneurandtheinvestorarethenworseoffthaniftheyhadagreedonarealisticbusinessplan,therebyresultinginthewell-knownprisoner’s’dilemma(Wickham,2006)
41
relatedtoculture(e.g.film,musicandart),whilesomerewardCFPsonlymayaccept
innovativetechnologyprojects.SomeequityCFPsinEuropeonlyallowhighnetworth
individuals,businessprofessionalsandangelinvestorstoinvestthroughtheirplatform.By
limitingtheinvestorstoagroupofresourcefulindividuals,equitycampaignshavethe
potentialtobefullyfundedwithinhoursordays.Further,theservicesCFPsprovidemaybe
professionalmarketingassistance,legaldocumentationandpost-campaignadvisory.
Whenanentrepreneurinitiatesarewardorequitycampaign,theCFPtypicallyrequiresthe
entrepreneurtoprovidesufficientinformationaboutherproject.Thisispartofthedue-
diligenceprocessthatmostCFPsperformwhenassessingwhetherornotaprojectshouldbe
featuredontheirCFP.Thisprocessvariesalotincomplexity.SomeequityCFPsrequire
detailedlegaldocumentation,businessplansandfinancialforecasts,whilesomereward
CFPsonlyrequireabusinessideapitchintheformoftextorshortvideo.Becauseofthe
differencesinwhatisrequiredfromtheCFP,itisimportanttheentrepreneurusesaCFPthat
meetsherneeds.
42
6. Crowdfundingmarketoverview
ThischapterexaminestheleadingmarketsforcrowdfundinginEurope.Thechapterstarts
byexplainingthecurrentregulatorysituationforcross-bordertransactionsinEurope,
followedbyabriefoverviewofthecrowdfundingactivityintheUK,GermanyandFrance.
Lastly,recentchangesintheNorthAmericanregulationandlegislationarepresented.
6.1. Europe
DifferencesinregulationamongEUandEEAcountriescanmakeitdifficultforboth
crowdfundersandentrepreneurstomakecrossbordertransactions.Furthermore,thelegal
frameworksofEuropeancountrieswereinitiallynotengineeredforthenewconceptthatis
equitycrowdfunding.Tosimplifytheequitycrowdfundingprocess,manyEuropean
countriesarenowintroducingnewdomesticlawsforregulatingcrowdfundingactivity.
Thesenewrulesmightbeappropriateforthedomesticactivity,butforthepurposeofcross
bordercrowdfundingtransactionsitmayhaveahamperingeffect(Gabison,2015).
Therefore,aharmonizationoflegislationandregulationforcrowdfundingintheEUandEEA
mightbenefittheEuropeancrowdfundingactivity.
InSeptember2015,theEuropeanCommissionpublished“Theactionplanonbuildinga
capitalmarketsunion”.Inthereport,thecommissionrecognizescrowdfundingasan
alternativefinancingformforstartupsandsmallandmediumenterprises(SMEs),andthey
furtherhighlighttheneedforregulationandlegislationthatcanmakecrowdfunding
accessiblebetweenmembercountries.TheEuropeanCommissionissettopublishanew
statementontheseissuesandpossiblesolutionsinthefirstquarterof2016.Untilthen,they
areonlymonitoringandgatheringinformationinregardtotheEuropeancrowdfunding
activity(TheEuropeanCommission,2015b).
Currently,apossiblesolutiontocrossbordercrowdfundingtransactionsintheEUandEEAis
TheMarketinFinancialInstrumentsDirective(MiFID).MiFIDisanEUlawthatprovides
regulationsrelatedtoinvestmentservicesforallthe31memberstatesoftheEEA(ESMA,
2014).Themainobjectiveofthedirectiveistoprotectinvestorsandincreasecompetitionin
investmentservices.ByobtainingaMiFIDlicense,aCFPcanhaveoperationsinitsresiding
43
countryandinmembercountriesoftheEEA.InvestorsandentrepreneurswhouseMiFID
licensedCFPsarealsosubjecttothedomesticlegislationintheircountryofresidence
(ESMA,2014).
InordertoobtainaMiFIDlicense,CFPshavetoconsultwiththefinancialsupervisory
authorityoftheirresidentcountry.InApril2015,theFinnishCFPInvesdorobtainedaMiFID
licensefromtheFinnishFinancialAuthority,becomingthefirstEuropeanCFPtohavea
licensetoofferservicesacrosstheEEA.
6.2. TheUnitedKingdom
TheUKaccountsforasubstantialamountoftheglobalcrowdfundingvolume.Thisismainly
duetothelargeamountofloancrowdfundingactivity:UKCFPslentout$1,32billionto
individualsand$997milliontobusinessesin2014,asillustratedintable4below.TotalUK
crowdfundingamountedto$2,5billion(Wardropetal.,2015).
Model Growth2012-2014 Volume2014Loan-Business 253% $997millionLoan–Individuals 113% $1320millionEquity 420% $147millionReward 176% $45millionDonation 100% $4million
Table4.UK:Averagethree-yearcrowdfundinggrowthratesandvolumes,2012-2014.Datafrom
Wardropetal.(2015)
LoancrowdfundingintheUKfollowstheexponentialgrowththeglobalmarkethas
experienced.Inregardtothecrowdfundingindustry,rewardcrowdfundinghashadastable
growthforthelastthreeyears,whereasequitycrowdfundingintheUKhasexperiencedhigh
growth.Thisisillustratedinfigure6.Possibleexplanationsforthehighgrowthmaybethe
establishmentofmorespecializedequityCFPs,moresuitableregulationandlegislation,
alongwiththegeneraldevelopmentofcrowdfunding.
44
Figure6.UK:Crowdfundingvolume,2012-2014.DatafromWardropetal.(2015)
ComparedtotheotherEuropeanmarkets,therelationshipbetweenUKequity
crowdfundinginvestmentsandventurecapitalinvestmentsinUKcompaniesishigh,at
13,3%11.Thismaysuggestthatequitycrowdfundingisbecomingmoreofarealsubstituteto
traditionalequityfinancingforstartups(Groom,2015).SpecialfortheUK,thereseemstobe
atrendwheremoreandmoreinstitutionalinvestorsparticipateinthecrowdfunding
market.BruceDavis,arepresentativetheUKcrowdfundingassociation(UKCFA),emphasizes
thatthiscouldbeaproblemforthefutureUKcrowdfundingmarket,seeingthatsmaller
investors(therealcrowd)mightbecrowdedoutbyinstitutions(Wardropetal.,2015).For
entrepreneurs,however,thissituationcouldincreasesupplyoffunds,therebypotentially
makingiteasiertoobtainfunding.
11EquityCF/(VCstartup+VClaterstage)=147/(523+583)≈0,133.Numbersfromfigure7.
0100200300400500600700800900
1000110012001300
2012 2013 2014
UKcrowdfundingvolume2012-2014inmillion$
Loan-individualsLoan-BusinessesEquity
Reward
Donation
45
Figure7.StartupandlaterstageventureinvestmentsinUKcompanies,relativetoequity,businessloan
andrewardcrowdfunding,2012-2014.DatafromEVCA(2015)andWardropetal.(2015)
LegislationandregulationintheUK
TheFinancialConductAuthority(FCA)regulatescrowdfundingintheUK,andcrowdfunding
activityfallsunderthelegalframeworkoftheFinancialServicesandMarketsAct2000
(FSMA)(Solarplaza,2015).AccordingtotheFSMA,acompanycanraiseupto€5millionina
12-monthperiodandunsophisticatedinvestorscaninvestupto€10000ina12-month
period(Gabison,2015).Inaddition,unsophisticatedinvestorsmustpassan
“appropriatenesstest”inordertoshowtheCFPthattheyunderstandtherisksthatare
involvedinequitycrowdfunding.ForeigninvestorsareallowedtoinvestthroughUKCFPs,
buttheywouldstillbesubjecttodomesticlegislationfromtheirresidentcountry(Gabison,
2015;FCA,2015).
In2014theFCAintroducednewrulesrelatedtosolicitation.UKCFPsandcompaniesusing
theUKCFPstoraisefundscanonlymakedirectofferstoinvestorswhoqualifyasahighnet
worthindividual,asophisticatedinvestororindividualswhoconfirmtheyintendtoinvest
lessthan10%oftheirnetassetsincrowdfundingsecurities(FCA,2015).
Crowdfundinginvestments/pledgesareavailabletoforeigncrowdfunders.Inregardto
entrepreneurs,mostUKCFPsrequirethatthecompanythatseekstoraisefundsisaUK
050100150200250300350400450500550600650700750800850900950
1000
2012 2013 2014
CapitalallocatedtoUKbusinesses,2012-2014inmillion$
Startup
Laterstageventures
Reward
Equity
Loan-Businesses
46
limitedliabilitycompany(LLC)orlimitedliabilitypartnership(LLP).Throughemail
correspondencewithSeedrs,aUKequityCFP,theauthorsfoundthatSeedrs’business
modelallowsforeigncompaniestoraisemoneythroughtheirplatform.OtherUKCFPsthat
werestudied(e.g.Crowdcube,SyndicateRoom)didnotencourageforeigncompaniesto
raisefundsthroughtheirplatform.
ToincentivizeinvestmentinearlygrowthcompaniesandstartupsintheUK,HerMajesty’s
RevenueandCustoms(HMRC)offertheSeedEnterpriseInvestmentScheme(SEIS)andthe
EnterpriseInvestmentScheme(EIS)toUKtaxpayerswhoinvestinqualifyingcompanies
(Seedrs,2015a).
SEISisdesignedforinvestmentsinstartupsandgivestheinvestor50%oftheamount
investedineligibleSEIScompanies,backtotheinvestorintheformofincometaxrelief.
Furthermore,ifaninvestorissubjecttocapitalgainstaxfromotherinvestmentsandhas
reinvestedhiscapitalgainsinsharesinaSEISeligiblecompany,hecanreceive50%ofthe
investedamountincapitalgainstaxrelief.AtdisposaloftheSEISeligibleshares,shouldit
resultincapitalgainsoraloss,theinvestorwillbeexemptfromcapitalgainstaxorreceive
lossrelief(Gov.UK,2015a).
EISisdesignedforinvestmentincompanieswhoareinalaterstagethanstartups.By
investinginEISeligiblecompanies,theinvestorwillreceive30%oftheinvestedamountin
incometaxrelief.ThecapitalgainstaxobligationfromaninvestmentinanEISeligible
companycanbedeferredifthecapitalgainsarereinvestedinanotherEISeligiblecompany.
Inaddition,capitalgainsfromdisposingoftheEISsharesorapotentiallossiftheinvestment
fails,canresultincapitaltaxexemptionorlossrelief(Gov.UK,2015b).
47
6.3. Germany
TotalGermancrowdfundingamountedto$184,2millionin2014.(Wardropetal.,2015)A
distributionofcrowdfundinggrowthratesandvolumeforGermanyisshownintable5
below:
Model Growth2012-2014 Volume2014
Loan-Business 101567% $8,1million
Loan–Individuals 101% $106,6million
Equity 174% $39,5million
Reward 119% $22,3million
Donation 57% $7,7million
Table5.Germany:Averagethree-yearcrowdfundinggrowthratesandvolumes,2012-2014.DatafromWardropetal.(2015)
RelativetotherestoftheEuropeanmarket,therehasbeenequitycrowdfundingactivityin
Germanyforsometime.Table5illustratesthattheGermancrowdfundingenvironmenthas
notexperiencedthesamegrowthasothermarketsinthetime-span2012-2014,whichmight
beduetothefactthatGermanyhashadoverallcrowdfundingactivitypriorto2012.There
hasbeencrowdfundingactivityinGermanysince2006.SeveralrewardCFPsemergedin
2010,andin2011,moreequityCFPsenteredthemarket(ECN,2015).
Figure8.Germany:Crowdfundingvolume,2012-2014.DatafromWardropetal.(2015)
0102030405060708090100110
2012 2013 2014
Germancrowdfundingvolume2012-2014inmillion$ Loan-
individualsLoan-businessesEquity
Reward
Donation
48
Germanequitycrowdfundingvolumeamountsto4,8%12ofventureinvestmentinGerman
companies,whichisconsiderablylowerthanintheUK.InvestmentsfromVCandprivate
equityfirmsinGermanstartupshavehistoricallybeenhigh,andarealmostatthesamelevel
asintheUK.ContrarytootherEuropeanequityCFPs,manyGermanequityCFPsspecializein
seedandstartupfunding.Thisisanimportanttrait,asthegeneralrequirementsfor
launchingaseedcapitalcampaignarelessstrict.Intuitively,whenacompanyseeksseed
funding,onewillnotexpectsaidcompanytohavealongtrackrecordofrevenuesorverified
financialstatementsforthelasttwoyears.
Figure9.StartupandlaterstageventureinvestmentsinGermancompanies,relativetoequity,businessloanandrewardcrowdfunding,2012-2014.DatafromEVCA(2015)andWardropetal.(2015)
LegislationandregulationinGermany
GermanCFPsoperatethroughtheGermanInvestmentActandtheGermanSmallInvestor
ProtectionAct.MostoftheinvestmentopportunitiesthatGermanCFPsofferaregoverned
bytheobligationtopublishaprospectus,buttheGermanlegislatorshaveintroduceda
“crowdfundingexception”.Thisexceptionexcludesequitycrowdfundingfromseveral
requirements,includingtherequirementofpublishingaprospectusaslongasthecompany
raiseslessthan€2,5million(Solarplaza,2015;Klöhn,HornufandSchilling,2015).
Germanplatformsthatoffercrowdfundersequityfrompublicandprivatecompaniesare
performingfinancialservicesaccordingtoGermanlaw,andarethussubjecttotheGerman
12EquityCF/(VCstartup+VClaterstage)=40/(512+326)≈0,048.Numbersfromfigure9
050100150200250300350400450500
2012 2013 2014
CapitalallocatedtoGermanbusinesses,2012-2014inmillion$
Startup
LaterstageventureReward
Equity
Loan-businesses
49
BankingActandfurthermorerequiredtohavealicensefromtheGermanFederalFinancial
SupervisoryAuthority13(BaFin)(ECN,2015).Researchbytheauthorsofthisthesis,however,
findthatmostGermanequityCFPsoperateunderanexemptionfromthisrequirement.In
fact,insteadofofferingequity,GermanequityCFPsoperateasaninvestmentbrokeror
contractbrokerthatoffercrowdfunderssubordinatedloansand/orprofit-participation
loans.Byperformingtheseservices,theGermanequityCFPsareonlysubjecttoacquirea
licenseundertheGermanTrade,CommerceandIndustryRegulationAct,whichisafarless
comprehensiveprocesstoobtainthantheBaFinlicense(ECN,2015).
Thetypeofsecurity(i.e.subordinatedloansand/orprofit-participationloans)thatinvestors
receivewheninvestingthroughGermanequityCFPs,canbecharacterizedassomethingin
betweenofequityanddebt.Thecompanyseekingfundingsignsaloancontractwithanon-
fixedinterestrate,wherethefuturepaymentstoinvestorsdependsonthefuture
performanceofthecompany(ECN,2015).Ifthecompanyissoldtoalargerinvestor(exit),
theinvestorsreceivefinancialcompensationrelativetotheirinitialinvestment.Ifthe
companyisnotsoldduring,orattheendoftheloanperiod,avaluationofthecompanyis
performedandinvestorsarepaidoutashareinthecompanyvalueaccordingtotheirinitial
investment.Theinitialsecuritythatinvestorsreceivewheninvesting,doesnothavevoting
rightsandthesecurityranksbelowothertypesofdebtinaninsolvencyproceeding
(Companisto,2015).
Inordertoprotectcrowdfunders,Germanlawstatesthatanindividualmayonlyinvestupto
€1000incrowdfundingprojectsduringa12-monthperiod.However,iftheindividualcan
providetheCFPwithanincomestatementthatprovesthatheorshehasliquidassetsofat
least€100000,heorshecaninvestupto€10000(Kelly,2015).SolicitationbyGermanCFPs
isallowed,buthasstrictrules.Mostimportantly,advertisementsforinvestment
opportunitieshavetoincludewarningnoticesthatexplainstherisksacrowdfunderwillface
(Klöhn,etal.2015).
13During2014,onlyonecompanysoughtfinancingthroughthisplatformmodel(ECN,2015).
50
MostGermanCFPsareopentoforeigncrowdfunders.However,theauthorsfound,through
emailcorrespondencewithGermanCFPs(CompanistoandSeedmatch),thatforeign
entrepreneurswouldhavetoincorporateaGermanlimitedcompany(GmbHorUG)asa
holdingcompanyforthesharesoftheactualcompanythatseeksfunding.Thiswouldincur
transactioncosts,legalworkandadditionaltaxation,whichcouldreducetheattractiveness
forNorwegianentrepreneurstochooseGermanCFPs.
6.4. France
During2014,$106millionwasfundedthroughindividualloancrowdfundingand$10,7
millionthroughbusinessloancrowdfunding.Rewardcrowdfundingaccountedforthe
secondhighestvolume,$46,9millionwhileequityanddonationcrowdfundingaccountedfor
$35,4millionand$5,9million,respectively(Wardropetal.2015).
Model Growth2012-2014 Volume2014
Loan-Business 3443% $10,7million
Loan–Individuals 172% $106million
Equity 94% $35,4million
Reward 170% $46,9million
Donation 97% $5,9million
Table6.France:Averagethree-yearcrowdfundinggrowthratesandvolumes,2012-2014.DatafromWardropetal.(2015)
InOctober2014,theFrenchgovernmentpassedlawstofacilitatebusinessloan
crowdfunding.Thisresultedinahighgrowthrateforthissegment,andtheestablishmentof
over70domesticcompaniesthatoffercrowdfundedbusinessloanstoFrenchbusinesses
(Yoshimura,2015).
TheFrenchGovernmentseemstotrytofosterthecrowdfundingenvironment.TheFrench
PublicInvestmentBank(PBI)hasestablishedawebsitededicatedtoFrenchCFPsandFrench
crowdfundingprojects,creatingagatheringpointfortheFrenchcrowdfundingmarket.The
directorofinnovationatBPIFrance,PaulFrancoisFourier,furtheremphasizesthat
51
crowdfundingisnowaraceinwhichthedifferentEuropeanmarketsarepositioning
themselvestowin(Wenzlaff,2014).
Figure10.France:Crowdfundingvolume,2012-2014.DatafromWardropetal.(2015)
France,aswellasGermany,hasalowequitycrowdfundingvolumerelativetoventure
capitalinvestments,atapproximately3%14.TotalinvestmentsinFrenchstartupshave
historicallybeenlowerthaninvestmentsinGermanandUKstartups,butforlaterstage
ventures,FrenchcompanieshavereceivedsubstantiallymorefundingthanGermanlater
stageventures(EVCA,2015).
Figure11.StartupandlaterstageventureinvestmentsinFrenchcompanies,relativetoequity,businessloanandrewardcrowdfunding,2012-2014.DatafromEVCA(2015)andWardropetal.(2015)14EquityCF/(VCstartup+VClaterstage)=25/(388+439)≈0,03.Numbersfromfigure11.
0102030405060708090100110
2012 2013 2014
Frenchcrowdfundingvolume2012-2014inmillion$
Loan-individualsLoan-businessesEquity
Reward
Donation
050100150200250300350400450500550
2012 2013 2014
CapitalallocatedtoFrenchbusinesses,2012-2014inmillion$
Startup
LaterstageventuresReward
Equity
Loan- businesses
52
LegislationandregulationinFrance
Asmentioned,newregulationsforFrenchcrowdfundingwentintoeffectinOctober2014.
FrenchequityCFPsofferingequitymustnoweitherobtainalicenseasa“crowd-sourced
investmentadvisor”(CIP)oralicenseasafinancialserviceprovider(PSI).CFPsundertheCIP
licenseworksasanintermediarybetweenthecrowdfunderandentrepreneur.TheCIPCFP
canissuesecuritiesfromFrenchpubliccompanies(SA)andFrenchprivatecompanies(SAS).
Thelatterhastoprovideauditedfinancialsfortheprevioustwoyears.Themaximum
amountaSAorSAScanraisethroughaFrenchCIPCFPis€1millionina12-monthperiod.
Investorsfacenolimitationsinregardtohowmuchtheycaninvest,butCFPsareresponsible
tocheckwhetherinvestorshaveenoughfundssothatapotentiallossdoesnotleavethem
inapersonalfinancialcrisis(ACPRBanquedeFrance,2014;Solarplaza,2015).TheCIPCFPis
themostcommonCFP-typeinFrance,butitcanonlyofferitsservicesinFrance,restricting
thecrowdtoFrenchresidents.
IfaplatformhasthePSIstructure,a€125000capitalrequirementfortheCFPisrequiredby
law.CompaniesusingthePSICFPcanraiseupto€5millionina12-monthperiod.In
addition,thecrowdisnotrestrictedtoFrancebuttotheentireEEA.UnderthePSIlicense,
theCFPcansellsecuritiesdirectlytoinvestors,i.e.notjustworkingasanintermediaryasCIP
CFPsdo(Torris,2015).
TheFrenchCFPAlternativawasin2012splitintwobusinessunits,AMFranceand
Alternativa.fr.AMFranceisaPSICFPandAlternativa.frisamultilateraltradingfacility
(MTF),whichenablesinvestorstotradesecuritiesinasecondarymarket.AMFranceand
Alternative.fronlyofferservicestosophisticatedinvestorsandSAcompanies.When
companiesraisefundsthroughAMFrance,theyaresimultaneouslylistedonAlternativa.fr
(Torris,2015).Theopportunitytotradeinasecondarymarketmakesequitycrowdfunding
securitiesmoreliquidforcrowdfunders,whichisanareatheequitycrowdfundingindustry
inmostcountrieshavefoundchallengingtoaddress.
6.5. RecentregulatorychangesintheUnitedStates
TheSECregulatesequitycrowdfundingintheUSthroughtheSecuritiesActfrom1933and
throughvariousstateandfederalregulations(Solarplaza,2015).Historically,ithasbeen
53
problematicforUSstartupstoraisefundsthroughequitycrowdfunding,astheruleshave
beencumbersomeandnotcustomizedtofittheconceptofcrowdfundingforstartups.In
addition,onlyaccreditedinvestors15havebeenallowedtoinvestinprivatecompaniesinthe
US.Currently,thereareapproximately8millionaccreditedinvestorsintheUS,equalto2,5%
ofthetotalUSpopulation(Barnett,2015).Traditionally,ifaUSprivatecompanywantsto
sellitsequity,ithastoregisterwiththeSECormeettheexemptioncriterionsthatareset
forthbyRegulationD.Bothalternativesbearsignificantcostsintheformofcomplex
legislativeandregulatoryburdens(SEC,2014).Consequently,thishasmadetheofferingof
equitydifficultforearlystagecompaniesandstartupsinneedofseedfunding.
OnApril5,2012,presidentBarrackObamasignedthe“Jumpstartourbusinessstartupsact”
(JOBSact)intolaw.TheJOBSactcomprisesofseventitles,withtheaimtoencourage
fundingofUSsmallbusinessesbyrelaxingvarioussecuritiesregulations(SEC,2015b).For
entrepreneursandcrowdfunding,twoimportantchangesaretheSEC’sadoptionof
RegulationA+(titleIV)andRegulationCrowdfunding(titleIII).
6.5.1. JOBSacttitleIV,RegulationA+(currentlyineffect)
RegulationA+,whichwasadoptedonMarch25,2015,givesprivatecompaniesthe
opportunitytoraisecapitalfrombothaccreditedandnon-accreditedinvestors.Under
RegulationA+,USandCanadiancompaniescanchoosetooffersecuritiesupto$20million
(tier1)or$50million(tier2),ina12-monthperiod.Ifthecompanydecidestooffer
securitiesforamaximumof$20million,itcandecidewhethertoadheretotier1ortier2.If
thecompanyofferssecuritiesundertier1,itwillhavenolimitationsregardingthenumber
ofnon-accreditedinvestorsortheamountthatnon-accreditedinvestorscaninvest.
Furthermore,undertier1,companiesaresubjecttoindividualstatelawsiftheychooseto
selltheirsecuritiesinotherstatesthanthestatewherethecompanyresides.Undertier2,
non-accreditedinvestorsmayonlypurchasesharesinprivatecompaniesforupto10%of
theirannualincomeornetworth,whicheverisgreater.Thetradeoffbychoosingtier2,
15BasedontheSEC’sdefinition,anaccreditedinvestorisanindividualwhohasanincomeexceeding$200000ineachofthetwopreviousyears,orhasjointincomewithaspouseexceeding$300000ineachofthetwopreviousyears.Alternatively,anaccreditedinvestorcanbeanindividualwhosenetworth,orjointnetworthwithaspouseexceeds$1million,excludingthevalueofhis/her/theirprimaryresidence(SEC,2015a).
54
relativetotier1,isthattier2offeringsareexemptfromthedifferentstatelawsinwhichthe
securityissold.Thiscansavethecompanybothtimeandmoney(SEC,2015c).
WhileRegulationA+offeringsaresubjecttolessextensivereportingandlessdisclosure
requirementsthanofferingsthataremadeunderRegulationD,itisstillalengthyandtime-
consumingprocessthatisnotverysuitableforstartups.RegulationA+isoftenreferredtoas
the“MiniIPO”.Offeringsundertier1andtier2wouldthereforesuitcompaniesthatarenot
lookingforseedfunds,butrathercompaniesthatarepassedthatstage.Themainfactor
thatisimportantforequitycrowdfundinginregardtoRegulationA+,isthatnon-accredited
investorsareallowedtoinvest.
6.5.2. JOBSacttitleIII,RegulationCrowdfunding16
TheSECadoptedtheRegulationCrowdfundingrulesonOctober30,2015.Underregulation
Crowdfunding,therequiredlegalpaperworkanddisclosureprocessisreducedrelativeto
previousregulations.Inaddition,thesecurityofferingcanbedonethrougharegistered
crowdfundingportal(i.e.CFP)ratherthantraditionalbrokers,whichmightbecheaperfor
entrepreneurs.Underthistypeofoffering,aUSlimitedcompanycanraiseamaximumof$1
millionthroughcrowdfundingofferingsina12-monthperiod.Further,fora12-month
period,anyindividualwithanannualincomeornetworthlessthan$100000caninvestan
aggregateof$2000,or5%ofthelesserofhisannualincomeornetworthincrowdfunding
offerings.Forthesameperiod,ifanindividual’sincomeornetworthisequalto$100000or
more,hecaninvest10%ofthelesserofhisannualincomeornetworth(SEC,2015d).
RegulationpriortotheJOBSactdidnotallowanypublicsolicitationforprivatecompanies.
UnderregulationCrowdfunding,companiescanuseemailandsocialmedia(e.g.LinkedIn,
Facebook,Instagram)toofferinvestmentopportunities.IncontrasttoRegulationA+,
RegulationCrowdfundinggivesstartupsinneedofseedfundsanopportunitytoaddressa
largecrowdwithouthavingtogothroughalongandcostlyprocess.Regulation
Crowdfundingmaythereforebecharacterizedasthebeginningofrealequitycrowdfunding
intheUS(Guzik,2015).
16Ineffectfromearly2016
55
However,asaforeignentrepreneuritmightprovedifficulttoraisefundsthroughequity
crowdfundingintheUS.ThroughemailcorrespondencewithUSequityCFPs,albeitpriorto
theadoptionofregulationcrowdfunding,theauthorsfoundthatUSequityCFPsarewilling
toworkwithforeignentrepreneursonlyiftheentrepreneurincorporatesaUSlimited
company.
56
7. TheNorwegiancrowdfundingmarket
ThissectionexaminesthecurrentsituationforcrowdfundinginNorway,inadditionto
crowdfundingvolumesintheNordicregion(Norway,Denmark,Sweden,Finlandand
Iceland).Thesectionalsobrieflyreviewstheactivityoftraditionalsourcesofcapitalfor
Norwegianentrepreneursandstartups.Lastly,theregulatorychallengesthatcrowdfunding
platformsfaceinNorwayisdiscussed.
7.1. MarketsituationforNorwegiancrowdfundersandentrepreneurs
TherearealimitednumberofCFPsinNorwaywhichtogethercoverreward,donationand
equitycrowdfunding,e.g.momsmeanbusiness.com(reward),NewJelly.com(reward&
equity)andbidra.no(rewardanddonation).TheCFPsmentionedhaveseveralsuccessful
projectsthathavebeenfinanced100%ormore.Still,theNorwegianCFPsseemtodevelop
andoperateataslowerpacethanitscompetitorsinEuropeandintheUS.Onemightalso
arguethatthemajorityoftheNorwegiancrowdislessinformedoftheconceptof
crowdfunding.ThesearetwoimportantobstaclesthattheNorwegiancrowdfundingmarket
needstoovercome.
ThroughemailcorrespondencewiththeFinnishCFP“Invesdor”,theauthorsfoundthata
newInvesdoraffiliatewillbecomeoperationalinNorwaywithinthefirstthreemonthsof
2016.Furthermore,thenewaffiliatewilloperatethroughitsnewlyobtainedMiFIDlicense.
Theywillfirstofferequitycrowdfunding,andatalaterstageintroduceloancrowdfundingto
theNorwegianmarket.Invesdoralreadyhasexperienceinequityandloancrowdfunding
fromtheiroperationsinFinland,whereastheNorwegianfinancialcrowdfundingmarketis
practicallynon-existent.IfoneassumesthecrowdfundingmarketinNorwayfollowsthe
sametrendsasforotherEuropeancountries,thepotentialforafinancialCFPinNorwayis
high.Currently,therearenoCFPsinNorwaywhereaninvestorcanmakeafinancialprofit17.
AfteradiscussionwithDr.RotemShneor(2015),headoftheNordicCrowdfundingAlliance
(NCA),theauthorslearnedthatasameasuretopromotegrowthintheNordiccrowdfunding
17NewJellyhashadtwocrowdfundingcampaignsmarkedasequitycrowdfunding,buttheentrepreneurs
explicitlyemphasizethatafinancialreturnfortheirinvestorsisnotapriority.
57
market,acampaignlistedonaNCApartneredCFPwouldalsobefeaturedoneveryother
CFPthatisapartneroftheNCA.ThiscouldhelpsolvingtheproblemofalimitedNorwegian
crowd,asNorwegiancampaignswillthenalsobelistedonCFPsinDenmark
(Booomerang.dk),Finland(Invesdor.comandMesenaati.me)andonIceland
(Karolinafund.com).NCAandthepartnerCFPsrepresentover30000individual
crowdfunders,distributedamongtheNordiccountries(NordicCrowdfundingAlliance,
2015).
Asmentioned,Norwegiancrowdfunderscurrentlyhavelimitedoptionsinregardtofinancial
crowdfunding.ANorwegiancrowdfunderlookingfornon-financialreturnshouldseekout
thespecificprojectthathewantstofund,regardlessofthelocationofthecampaign.Ifhe
ontheotherhandislookingforfinancialreturn,additionalfactorsareimportant,e.g.the
legislationandregulationofthecountryinwhichtheCFPresides,domesticlegislationand
regulationforthecrowdfunder,currency,accessibilityandreliability.Fromtheauthors’
researchandcorrespondencewithforeignCFPs,itseemsloancrowdfundingforNorwegian
nationalscannotbecharacterizedasaviableinvestmentoption.However,theresearch
suggeststhatequitycrowdfundinginEuropemaybearealisticinvestmentopportunity.
ExcludingNordicCFPs,severalEuropeanequityCFPs(e.g.Seedrs,Crowdcube)areopento
foreigninvestors.Still,investingthroughaforeignCFPwouldmaketheinvestorsubjectto
bothdomesticandforeignlegislation,whichinsomecasesmightbeproblematic.Amore
harmonizedregulatoryframeworkfortheEU/EEAcouldhelpmitigatethisissue,thereby
benefittingthewholeEuropeancrowdfundingindustry.
58
Figure12.TheNordic:Crowdfundingvolume,2012-2014.DatafromWardropetal.(2015)
DespitetheslowdevelopmentofcrowdfundinginNorway,crowdfundedloanstoindividuals
andbusinessesduring2014intheNordicsequaled$115millionand$38millionrespectively.
$12millionwasraisedthroughrewardcampaigns,whiledonationbasedcampaignsraised
approximately$133000.During2014,equitycrowdfundingactivitytotaled$5million.
Figure13.EquitycrowdfundingvolumeinleadingEuropeanmarketsandtheNordics,2012-2014.DatafromWardropetal.(2015)Asfigure13illustrates,theNordicequitycrowdfundingvolumehasnotyetexperiencedthe
samegrowththattheleadingmarketshave.AcollectivereasonforlowNordiccrowdfunding
volumesingeneralmaybethelimitedcrowdoftheNordiccountriesrelativetothecrowdin
theUK,GermanyandFrance.However,forequitycrowdfundingintheNordics,thelow
0102030405060708090100110120
2012 2013 2014
Nordiccrowdfundingvolume2012-2014inmillion$ Loan-
individualsLoan-businessesEquity
Reward
Donation
0102030405060708090
100110120130140150
2012 2013 2014
Equitycrowdfundingvolume,2012-2014inmillion$
UK
Germany
France
Nordics
59
volumemayalsobearesultofcumbersomedomesticregulationandlegislation.Wardropet
al.(2015)foundthatasignificantamountoftheprovidersofalternativefinance(i.e.CFPs)in
theNordicsbelievedthatcurrentlegislationandregulationintheircountrywasexcessive
andtoostrict.ContrarytoFrance,wherethegovernmenthasacknowledgedcrowdfunding
asafocusarea,indicationsarethatNordiccountrieslagbehindintheprocessoffacilitating
equitycrowdfundingonadomesticlevel.
Figure14.RewardcrowdfundingvolumeinleadingEuropeanmarketsandtheNordics,2012-2014.DatafromWardropetal.(2015)
Rewardcrowdfundinghasfewerlegalconstraintsinregardtocross-bordertransactions.This
mightexplainwhytheNordicregionhasexperiencedthehighthree-yearaveragegrowthof
143%inthissegment.Albeit,theNordicvolumeisstilllowcomparedtotherestofthe
Europeanmarket.
0
10
20
30
40
50
2012 2013 2014
Rewardcrowdfundingvolume,2012-2014inmillion$
UK
Germany
France
Nordics
60
Figure15.BusinessloancrowdfundingvolumeinFrance,GermanyandtheNordics,2012-2014.DatafromWardropetal.(2015)
Intheabovetable,volumesfortheUKisexcludedinordertoincreasetheillustrativeeffect
oftheothermarkets.Contrarytovolumesoftheothersegmentsofcrowdfunding,business
loancrowdfundingintheNordicsishigherthaninFranceandGermany.Aspreviously
explained,FrenchbusinessloancrowdfundingactivitywasfirstinitiatedinOctober2014,
whenproperlegislationwasintroduced.Furthermore,GermanCFPsprovidingcrowdfunded
businessloansarerequiredtohaveapartnerbank,towhomtheypayacommissionon
issuedloans,makingmarginslowerandoperationslessprofitable(Vasagar,2015).
OnemajorobstaclethatNorwegianentrepreneursfaceisthelackofNorwegianfunding
sourcesandavailablecapital.Dr.RotemShneor(2015)withtheNCAemphasizesthis
problemandclaimsthesolutioncouldbecrowdfunding.Inordertoassessthisclaim,itis
relevanttolookattheavailabilityofcapitalbyexaminingstartup/SMElendingandventure
investmentsintheNorwegianmarket.Bothloanandequitycrowdfundingcouldbe
characterizedassubstitutestothefundingsourcesmentionedabove.Theoretically,the
accessibilityofcrowdfundedcapitalishigherthantraditionalbusinessloansandventure
capital,ifoneassumesthatbankshaverequirementsthatoftenareunrealistic(e.g.credit
historyandyearsofrevenues)formoststartups.Furthermore,thenumberofstartups
fundedviaVCfirmsisonlyafractionofthenumberofstartupsinneedoffunding(as
illustratedinfigure17below).
0
5
10
15
20
25
30
35
40
2012 2013 2014
Businessloancrowdfundingvolume,2012-2014excludingtheUK,inmillion$
Germany
France
Nordics
61
7.2. VenturecapitalactivityinNorway
In2014,venturecapitalandprivateequityfirms(domesticandforeign)invested$74,4
millioninstartupventuresand$82,7millioninlaterstageventuresinNorway,totaling
$157,1million.Inaddition,theNorwegianprivateequitymarketexperiencedanalltime
highinvestmentlevelfromforeigninvestorsin2014(NVCA.no,2015).
Figure16.StartupandlaterstageventureinvestmentvolumesinNorwegianfirms,byNorwegianandforeignVCandPE-firms,2010-2014.DatafromEVCA(2015)
Theinvestedamounthasdeclinedforthepastfouryears,butexperiencedanupturnin
2014.Figure16illustratesthatthetotallevelofavailablecapitalhasdecreasedinthepast
fiveyears.Inadditiontoadecreaseinvalueofinvestments,therehasalsobeenadecrease
innumberofinvestmentdeals,asshowninfigure17.
Figure17.NumberofNorwegianstartupandlaterstagefirmsinvestedinbyNorwegianandforeignVC
andprivateequityfirms,2010-2014.DatafromEVCA(2015)
0,0
20,0
40,0
60,0
80,0
100,0
120,0
140,0
2010 2011 2012 2013 2014
Startup
Laterstage
0
20
40
60
80
100
2010 2011 2012 2013 2014
Startup
Laterstage
62
Byexaminingfigure16andfigure17together,onecanseethereisagapthatisnotbeing
filled.Ifoneassumesthatentrepreneurdemandforcapitalhasnotdecreasedaccordingly,
thisleavesNorwegianentrepreneurswithamorelimitedsupplyofinvestorcapital.When
thesupplydecreases,thecompetitionfortheavailablecapitalintensifies(givenabove
assumption).Ultimately,thismightresultinadisruptiveinnovativeenvironment,where
potentiallyprosperousbusinessesandentrepreneurseitherfailtoobtaincapitalorlose
motivationduetotheunavailabilityofcapital.ToensurethefutureofNorwegian
innovation,itisimportantthatdemandismetwithsupply,butitseemsthatthisiscurrently
nottruefortheNorwegianmarket.
Figure18.ShareofamountinvestedinNorwegianstartups,bydomesticandforeignVCandPEfirms,2012-2014.DatafromEVCA(2015)
VenturecapitalandprivateequityfirmsthatinvestinNorwegiancompaniestendtohavea
preferenceforcertainsectors,asillustratedinfigure18.Overthelastyears,morethan50%
oftotalfundsinvestedhavebeeninvestedinenergy&environmentandcomputer&
consumerelectronics.
63
7.3. SMElendinginNorway
Figure19illustratestheoutstandingbusinessloansinNorway,2007-2012.Asonecansee,
theamountoftotaloutstandingbusinessloanscomprisesofalargeportionofSMEloans.
Figure19.OutstandingbusinessloansissuedinNorway,2007-2012.DatafromOECD(2015)
TheexplanationforthebigportionofSMElendingrelativetototalbusinessloansmightbe
twofold:ItcouldbethattheconditionsforSMEstoobtainloansaregettingmorerelaxed,or
itcouldbethatthecategorytotalbusinessloansisnotrepresentativesincebigger
companiesfinancethemselvesthroughothersourcesthanbankloans.
Largefirmsaregenerallyabletofinancethemselvesthroughthemarketbyissuingdebtand
equitysecurities,makingthemlessdependentonbankfinancing(OECD,2015).MostSMEs
andstartupsdonotsharethisbenefit,anditischallengingforthemtoobtaindebt
financing.Thismakesthemmorevulnerabletochangingconditionsandrequirementsinthe
creditmarket,whichcouldpotentiallymakeitmoredifficulttoobtaindebtfinancing.
InnovationNorwayisagovernmentorganizationthathelpsentrepreneurs,startupsand
SMEsbyofferingthemadvisoryservicesandfinancialsupport.Thefinancialsupport
InnovationNorwayoffersishigh-riskloans,low-riskloansorgrants(InnovationNorway,
2015a).Theloansarepricedabovemarketinterestrates,andpremiumsvaryinregardto
$-$25$50$75
$100$125$150$175$200
2007 2008 2009 2010 2011 2012
OutstandingbusinessloansInNorway,inbillion$
Businessloans,SMEs Businessloans,total Short-termbusinessloans,SMEs
64
thelender’srisk.Furthermore,thematurityisuptotenyears,whichisoftenthedurationof
theproject,andrequiredcollateralisusuallybelowthecollateralthatbanksrequire.The
grantsprovidedbyInnovationNorwayarenormallyonethirdoftheprojectcosts,butthey
alsovarydependingonthecompanysize(OECD,2015).Inordertoobtainsuchgrants,
InnovationNorwaymustfindthecompany’sapplication,businessplanandgrowthpotential
viableandwithinscope.
InInnovationNorway’sannualreport(2015b),itisemphasizedthatNorwegianstartupsand
growthcompaniesneedtogrowinternationally.Norwegianbusinesseswithgood
specializedbusiness-ideasandhighgrowthpotentialhavedifficultiesrealizingtheirgrowth
potentialinNorway,duetothesmallNorwegianmarket.ANorwegiancrowdfundingmarket
opentocrowdfundersabroadcouldhelpbringinmuchneededcapitaltofundfuture
innovationandventuresinNorway.
7.4. LegalaspectsconcerningfinancialcrowdfundinginNorway
TwoobstaclesforfinancialcrowdfundinginNorwayaretheNorwegianconcessionand
prospectrules.Theconcessionrulesstatethatsomeentitiesneedpermissionfromlegal
authoritiestoinitiatebusinessactivity,whiletheprospectrulesrequiresomeentitiesto
draftaprospectwhenofferingtradablesecurities.
7.4.1. LegalchallengesforequitycrowdfundinginNorway
Stockemission
Equitycrowdfundingrequiresthattheentrepreneurisajuridicalpersonintheformofa
company,sincetheexchangeconsistsoffundsforownership(companyequity).Thismeans
thattheentrepreneurhastochoosebetweendifferentcompanystructures.Themost
commonstructureinNorwayis“aksjeselskap/AS”,theNorwegianequivalentforalimited
liabilitycompany.Withthiscompanystructure,theentrepreneurandothershareowners
bearnopersonalresponsibilityforthecompany’sliabilities.ToestablishanAS,oneneedsat
leastNOK30000initialsharecapital,whichwasrecentlyreducedfromNOK100000(Altinn,
2014).Thelowpersonalriskandlowcapitalrequirementforestablishmentmakesthe
companystructurewellsuitedforequitycrowdfunding.Still,thereareafewlegalchallenges
regardingequitycrowdfundingforthiscompanystructure.TheLimitedLiabilityCompanies
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Act(1997)statesthatonly(current)shareownersorspecificallynamedpersonsmaybe
invitedtobuynewsharesduringanemission,cf.asl.§10-1.Thismeansthatissuingequity
sharesinacompanythroughacrowdfundingplatformtothepublicmayinfactbeillegalfor
anAS.However,theremightbeawayaroundthisconstraint.AsmentionedbyHermansen
(2014),asl.§10-1doesnotstatethatapproachingthepublicwithanoffertolaterbuy
equitysharesisillegal.Aslongasthereisnoformalcommitmenteitherbytheentrepreneur
ortheinvestorduringthecrowdfundingprocess,asl.§10-1seemsnottobeviolated.The
crowdfundingcampaigncantheninsteadbeusedasameanstolocatepotentialinvestors,
withnoformalcommitment,andtheninthenextroundthecompanycanspecificallyname
thoseinterestedinaformaloffertowardsinvestors.ACFPthatpracticesequity
crowdfundinginthiswayistheSwedishFundedByMe.Theirtermsofservice,underequity
crowdfundingsection3,statesthefollowing:
Duringthecampaign,aMembermayoffertoparticipateinthefundraisingbyspecifyingthe
amountsuchMemberwouldliketoinvest.AnyofferbyaMembertoinvest(including
submissionofaspecifiedamount)constitutesanon-bindingoffertoinvestbysuchMember.
SuchoffermaythereafterbeacceptedorrejectedbytheCompanybeingsubjecttothe
EquityCrowdfundingCampaign(FundedByMe,2015a).
Concessionrules
AccordingtotheSecuritiesTradingAct(2007),FinancialsecuritiescompaniesinNorway
needconcessionfromlegalauthoritiestodobusiness,cf.vphl.§9-1.Thefirstsentence
states(translatedfromNorwegian):“Investmentservicesprovidedonacommercialbasiscan
onlybeprovidedbybusinesseswhichhaveapprovalforthisfromthedepartment”.
Furthermore,investmentserviceisdefinedas“receptionanddisseminationoforderson
behalfofcustomerregardingoneormorefinancialinstrumentsasdefinedin§2-2”,cf.vphl.
§2-1.Astradablesecuritiesfallunderthedefinitionoffinancialinstrument,cf.vphl.§2-2,it
isnotimpossiblethatequityCFPswillbeclassifiedasasecuritiescompanyandhenceneed
concessionfromlegalauthorities.Thismightincreasetransactioncostsandcomplicatethe
crowdfundingenvironment.
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Prospectrules
Aprospectdocumentshouldincludeinformationthatisnecessaryfortheinvestortobeable
tomakeawell-foundedassessmentoftheissuer’sfinancialpositionandprospects,andof
rightsconcerningissuedsecurities,cf.vphl.§7-13firstsection.Thesedocumentscanbe
comprehensiveandtime-consumingtomake,andisthereforeapotentialbarrierforequity
crowdfundinginNorway.
Norwegiancompanieshavetwokindsofprospectrulesthatmightapplywhenissuing
shares:NorwegianprospectrulesandEuropeanprospectrules(EEAprospects).Theformer
ruleshavelessdemandinginformationrequirementthanthelatter(PwC,2012).Norwegian
prospectrulesapplywhenissuingsharestowards150peopleormoreandatatotalvalueof
atleast€1millionduringa12-monthperiod,cf.vphl.§7-2.Iftheentrepreneurissueshares
atatotalvalueof€5millionormore,duringa12-monthperiod,shemustinsteadfollowthe
mentionedEEAprospectrules,cf.vphl.§7-7.Thismeansthataslongasthecrowdfunding
campaigniseitherfocusedtowardslessthan150peopleorcollectslessthan$1million,the
prospectrulesdonotapply.
7.4.2. LegalchallengesforloancrowdfundinginNorway
Concessionrules
FundingactivityisdefinedintheTheFinancialInstitutionsAct(1988)astoprovide,brokeror
actasguaranteeforcreditorinanyotherwaycontributetofinancingofbusinessesother
thanself-owned,cf.finansvl.§1-2.Furthermore,onlysomefinancialinstitutionshavethe
righttoconductfundingactivity,e.g.fundingfirms,cf.finansvl.§1-4.Fundingfirms,
however,needconcessiontooperate,cf.finansvl.§3-3.Finansvl.§1-4alsostatesthat
brokeringofloansisnotlimitedbymentionedparagraph.Aloanbrokeragefirmisdefined
asafirmthatdoesnootherfundingbusinessthanbrokering,cf.finansvl.§1-5second
section.ThismeansthatifaCFPweretostructureitsbusinesssothatitisaloanbrokerage
firm,meaningitneveractuallyreceives/sendscapitalfrom/tothe
crowdfunder/entrepreneur,itseemsitwillnotneedconcessiontooperate.Itwillthenact
asanintermediary,athirdparty,andonlyorganizedealsbetweeninvestorand
entrepreneurwithoutcontrollingtheactualtransaction.IftheCFPreceivesmoneyfromthe
investorandthenitselfsendsittotheentrepreneur,itwillbedefinedasafundingfirmand
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thereforeneedpermissionfromlegalauthorities.Still,loanbrokeragefirmsarerequiredby
lawtodeliverareportabouttheirbusinessonaformofwhichtheauthoritiesdetermine,cf.
finansvl.§4-1.
TheSwedishCFPpreviouslymentioned,FundedByMe,seemstohavestructureditselfasto
avoidconcessionchallengessimilartotheNorwegianrules.Thefollowingisstatedinits
termsofservice,under“feesandpaymentterms”section1:
PaymentforfundinginanEquityCrowdfundingCampaignshallalwaysbemadefromthe
InvestortotheEntrepreneur,andpaymentofaLoanwithinLoanCrowdfundingshallalways
bemadefromtheLendertotheBorrower,andshallnotatanytimebemadeto
FundedByMe.Allpaymentshallbemadeinaccordancewiththeinstructionssetforthonthe
Website,e.g.bytheuseofthePaymentServiceProviderasspecifiedbyFundedByMe.Hence,
FundedByMeshallnottakepossessionofCampaignfundsatanytime(FundedByMe,2015a).
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8. Guide:Whyandhowtousecrowdfundingforraisingcapital
8.1. Traditionalfundingversuscrowdfunding:Costofraisingfunds
Thereareseveralfactorsanentrepreneurshouldevaluatewhenconsideringwhetherto
raisecapitalbytraditionalfundingorcrowdfunding.Thissectionbrieflyexaminesafew
factorsthatcouldaffectthecostofraisingfundswhencomparingthetwo.Traditional
fundingisusedasanumbrellatermforallfundingthatisnotcrowdfunding,while
crowdfundingisusedasanumbrellatermforreward,equityandloancrowdfunding.
Networkandexpertise
Intheliteraturereview,itisstressedthattraditionalfunding(e.g.venturecapitalorangel
investment)oftenbringsadditionalvaluetothecompanyintheformofstartupexpertise
andhighvaluenetworks.Asmostcrowdfundersareassumedtobesmall,andoften
unsophisticated,itisunlikelythattheentrepreneurwillreceivethesamebenefitsfrom
crowdfunding.Andifsomeofthepotentialcrowdfunderspossessexpertiseornetwork
beneficialtotheentrepreneur,theirindividualgainofsharingsuchinformationislowdueto
theirlowstakeinthecompany.Thealternativecostofforgoingsuchvalueshouldbe
includedwhencalculatingthecostofraisingfundsviacrowdfunding.
Furthermore,asventurecapitalistsorangelinvestorssometimesalsohaveexpertise
regardingtheproductorindustry,andvaluationofstartupsingeneral,theasymmetric
informationproblemmightbelowerthanforcrowdfunding.Iftheentrepreneurisofhigh
quality,andthetraditionalinvestorsrecognizethis,itcouldincreasetheirwillingnesstopay
afairerpricefortheequitythatisoffered.Asarguedintheliteraturereview,this
informationasymmetrycouldmakecrowdfundingmoreattractivetolowquality
entrepreneursandleadtoadverseselection.Anextremepotentialconsequenceofthisis
the“marketforlemons”,asdescribedbyAkerlof(1970),whereinvestorsareunableto
identifyandseparatelowqualityfromhighquality.Ifsuch,investorsarelikelytorequire
discountsevenfromhighqualityinvestors,astheycannotidentifythemtobeofhigh
quality.Thisshouldtheoreticallyincreasethecostofraisingfundsviacrowdfunding,butas
researchonthebehaviorofcrowdfunderssofarislimiteditistooearlytoargueifsucha
statementistrueorfalse.
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Acounter-argumenttotheasymmetricinformationproblemforcrowdfundingisthe
“wisdomofthecrowds”,asstudiedbyGalton(1907).Hefoundthat,duringacontestof
guessingtheweightofanox,theaverageguessfromasampleof787participantswas
within1%ofthecorrectanswer,betterthanguessesfromprofessionalslikefarmersand
butchers.Onemightarguethatthewisdomofthecrowdlogicmightapplytocrowdfunding
aswell.Thatis,thatthecrowdcanattimesbeequallyormoreeffectivethanprofessional
individualsorinstitutions(e.g.VCorangelinvestors)inevaluatingprojects,thuspotentially
reducingthepossibleconsequencesofasymmetricinformation.
Marketingfeedback
Ifanentrepreneursuccessfullyraisescapitalthroughrewardorequitycrowdfunding,she
alsogetsvaluablemarketinginformation.Fromtherewardmodel,sheobtainsinformation
aboutthedemandforherunfinishedproduct.Thiscouldreduceuncertainty(i.e.variance)
aboutfuturedemand.Fromtheequitymodel,shereceivesvalidationfromahighamountof
peoplethattheyseevalueinherproject.Importantly,inbothcasesshealsogetsthe
opportunityofreceivingfeedbackfromhercrowd.Thispotentialaddedvaluewouldnotbe
gainedifsheinsteadraisedcapitalthroughtraditionalfundingsources,whichtherebymight
indicatealowercostofraisingfundsviacrowdfundingthanviatraditionalfunding.
Investormanagement
Capitalraisedviatraditionalfundingmechanismstypicallyinvolvesfewinvestors.
Conversely,crowdfundingtypicallyinvolvesseveralhundredorsometimeseventhousands.
Whilealargecrowdpotentiallycomeswithbenefitssuchasvaluablefeedback,thetime
spentandcostsofcommunicatingwiththemislikelytobehigherthanfortraditional
funding.Thiscouldincreasecostofraisingfundsviacrowdfundingrelativetotraditional
funding.
Revealinginformation:Riskofimitationandincreasedsupplierpower.
Thereareafewriskslinkedtocrowdfundingthatarelessseverewhentraditionalfundingis
used.Oneistheriskofsomeoneimitatingthebusinessidea.Itliesinthenatureof
crowdfundingtodiscloseimportantproductdetailstothepublic.Dependingontheproduct,
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someriskcanbemitigatedbypatentsbutnotall.Anotherriskisthatpotentialsuppliersmay
takeadvantageofthepubliccampaigninformationwhencalculatingtheirprices.Thiscanbe
solvedbysecuringsuppliercontractspriortothecampaign,butstillhasthepotentialto
increaseinputcostsfortheentrepreneur.Whileitcouldbedifficulttocalculatethecostsof
mentionedrisks,itcouldmakecrowdfundingmoreexpensiverelativetotraditionalfunding.
Globalversuslocal
Traditionalfundingistypicallyonlyavailablefrominvestorsofgeographicalproximitytothe
entrepreneur,duetoreasonsarguedearlier.Theselectionofpotentialinvestorsmay
thereforesometimesbelimited,e.g.ifshelivesinasmallercity(althoughdemandfor
capitalmayalsobelower).Ifsupplyofcapitalislowordemandishigh,duetolocalfactors,
theentrepreneurmighthavetopayahigherpriceforthemoneyraised.Ascrowdfundingis
anInternetphenomenon,itispotentiallyborderless18.Ifshehasahighqualityproductidea
withhighpotentialdemand,shecouldexploitinvestors/backerswiththemostwillingnessto
pay.Therelativevalueaddedofthiseffectdependsonlocalfactorsthatlimittraditional
funding,butisstilllikelytoreducethecostofraisingfundsviacrowdfundingcomparedto
traditionalfunding.
Insummary,entrepreneurswhoexperiencelessproblemsregardingrevealingof
informationabouttheirproduct,ordonotreceivemuchadditionalbenefitsfromexpertise
andnetworkofinstitutionalinvestors,shouldconsidercrowdfundingasaviablesourceof
capital.
8.2. Choiceofcrowdfundingmodel:whattoconsider
Ithasbeenarguedthatstartupsoftenfacechallengeswhentryingtoobtainfunding.
Startupstypicallyownlittleassets,makingbankloansmoredifficulttoget.Furthermore,the
problemofasymmetricinformationforinvestorsisenhancedduetolackofavailable
historicaldata.VCandangelinvestingareavailabletosome,buttheyprefertoinvest
relativelylargeamountsandusuallyonlydosoifthepotentialupsideissignificant.Asa
18Althoughforrewardcrowdfunding,itispreviouslymentionedthattheentrepreneur’ssocialnetworkisfoundtobeofgreatimportanceandaccountforahighamountofthepre-sales.Asmostoftheentrepreneur’ssocialnetworkislikelytobelocal,thisrelativeeffectisdiminishedforrewardcrowdfunding.
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result,crowdfundinghasbecomeaviablefundraisingmethod.Therearehowever,as
mentionedearlier,severalcrowdfundingmodelstochoosefrom.Thenextsectionswilltry
toshedlightonhowthemodelsdifferfromeachotherandwhatimplicationsan
entrepreneurshouldbeawareofwhenconsideringcrowdfunding19.Asummarizingtable
(table7)ispresentedattheendofthesubchapter,consistingofreward,equityandloan
crowdfunding.
8.2.1. Rewardcrowdfunding
Rewardcrowdfundingisoneofthenon-financialcrowdfundingmodels.Fundersofthese
campaignsdonotexpectafinancialreturnontheirpledge,theyratherexpectnon-financial
rewardsbasedonthesizeoftheirpledge.Themodelisoftencomparedtopre-purchasing,
andamajorityofthecrowdfundersareassumedtobefutureconsumersoftheproduct.
Fundermotivation–extrinsicandintrinsic
Asdescribedintheliteraturereview,themotivationbehindcrowdfunders’decisionto
pledgetypicallyvaries.However,researchsofaronlysupportsorrejectspredetermined
hypothesis.Itdoesnotprovideobjectiveevidence,ascrowdfundingisstillarelativelynew
phenomenon.Still,scholarsseemtoagreethatcrowdfundersofrewardcampaigns,by
varyingdegree,aremotivatedbymorethanextrinsicdesires(Belleflammeetal.,2013;
GerberandHui,2013;PierrakisandCollins,2013;CholakovaandClarysse,2015).Thatis,the
crowdfundersasagroupareheterogeneous.Fourmotivatorsaredescribedbyliterature:
Desireforreward(extrinsic),theactofhelpingothers,beingapartofacommunityand
supportingacause(intrinsic).
Crowdfunderswho,inadditiontodesiringreward,aremotivatedbyintrinsicdesirescould
bewillingtopaymorethantheirsubjectivevaluationoftheproductitself.Ifoneassumes
thatthesemotivationsexist,itgivestheentrepreneuranopportunitytopricedifferentiate
hercrowdfundersbycarefullydesigningrewardsthatbuildonbothextrinsicandintrinsic
desires,andtoexploittheirdifferentwillingnesstopay.Crowdfunderscanthenself-select19Ageneralweaknessoftheguideisthatitofferslittleinsightintoimportanceofproductthemewhenconsideringcrowdfunding(mostrelevantforrewardcrowdfunding).Theliteraturethatisstudiedtypicallyexaminemodeldynamics,whilegivinglessattentiontothepotentialimplicationthatproductthemehasonthefindings(e.g.iftechnologycampaignssharecharacteristicswithmediaorfashioncampaigns).
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therewardthatfitstheirindividualpreferences,increasingbothconsumerandproducer
surplus.Thisconsumerdiscriminationeffectisoneofthemainstrengthsofreward
crowdfunding.Pricedifferentiatingisnotpossibletothesamedegreewithother
crowdfundingmodelsortraditionalfinancingforms,aswhentheproductisreleasedto
market,thosewhowouldbewillingtopayextrainordertohelprealizeproductionwillhave
topaythesameasotherconsumers.Hence,onemightarguethatrewardcrowdfunding,to
someextent,expandsthemarketoftheentrepreneur’sproduct.However,thisprice
discriminationeffectisdiminishediftheentrepreneur’scapitalrequirementislarge(as
discussedintheliteraturereview).
Althoughdesireforrewardisarguedtobethegreatestmotivatorformostcrowdfundersof
thistypeofcampaign,others(e.g.familyandfriends)couldvaluetheintrinsicpartmoreor
evenpledgewithoutplanningtoconsumethefutureproduct.Entrepreneurswiththisin
mindcouldcreaterewardlevelsthatfocusontheintrinsicmotivations,e.g.ahandwritten
postcardwithappreciationsfromtheentrepreneurandherteam(emphasizingthe“help
others”motivator),orexclusiveinsightandupdatesontheprogressoftheprojectorvoting
rightsregardingdesignoftheproduct(emphasizingthe“beingpartofacommunity”
motivator).Further,dependingonherproduct,theentrepreneurmayconstructher
campaigndesignsothatpeopleassociatewiththesedesires.Iftheproductfocusesonsocial
orenvironmentalcauses,e.g.aninnovativewatercleanseraimedatthethirdworldora
moreenergy-efficientlightbulb,onemightthinkthatsomeofthepotentialcrowdfunders
backtheprojectbasedonthedesiretosupportacauseratherthanthedesireforreward.
Thecommunicationofthismessagemightthenbemoreimportantthantheactualrewards.
Entrepreneurmotivation–rewardcrowdfundingismorethanjustfinancing
Themainmotivationofmostfundraisingmethodsistoraisefunds.Whilethesameislikely
tobetrueforcrowdfunding,rewardcrowdfundingbringsmorethanjustfinancing.Itcould
alsoworkasamarketingtool,i.e.awaytoexpandawarenessofworkandtoformlasting
connectionswithcustomers.WiththehelpofWeb2.0,theentrepreneurandmore
importantlythecrowdfundersmayusetheirsocialmediaplatformstoinfluenceothersinto
supportingthecrowdfundingcampaign.Ifthecampaignreachestherightcrowd,thisform
ofmarketingcouldproveveryvaluableasitcomesfromotherconsumersandnotjustthe
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entrepreneur(i.e.word-of-mouthmarketingversusmarketinginvestments).Word-of-mouth
customersarefoundtobringmorelong-termvaluetofirmsthanmarketing-induced
customers(Villanueva,YooandHanssens,2008)andalsocomeatamuchlowercost.Also,if
thecampaignissuccessfulitgivestheentrepreneuranopportunitytobuildafanbasethat
otherwisecouldtakeyearstobuild,bye.g.includingcrowdfundersintheproductionand
designprocess.Furthermore,althoughmoredifficulttoinfluence,newsmediaoutlets
sometimescovercrowdfundingcampaignswhichfurtherincreasepublicawarenessofthe
project.
Inadditiontoraisingfunds,expandingawarenessofworkandestablishingconnections,
gainingapprovalisfoundtobeamotivationforsomeentrepreneurs(GerberandHui,2013).
Ifanentrepreneurisuncertainthatthereexistsamarketfortheirproduct,reward
crowdfundingcouldbeawaytotestdemand.Anunsuccessfulcampaignmightindicatethat
theventureisriskyandthatimprovementsneedtobemadebeforeproductlaunch.A
successfulcampaignreducesstartupriskbyexposingpotentialdemandwhileinthesame
teamsecuringpre-ordersfortheproduct.Eithercampaignoutcome,theentrepreneurwill
haveincreasedherriskknowledgeoftheventure.
Anotherpotentialbenefitfromgainingapprovalisthatitreducestheasymmetric
informationproblem.Startupstypicallyhaveverylittlehistoricaldatatopresentwhen
applyingforexternalfinance.Shouldtheentrepreneurneedmorecapital,e.g.abankloanto
improveproductionoraventureinvestmenttoexpand,asuccessfulcrowdfundingcampaign
couldserveasacredible,costlysignalthatthestartupisofquality20.Theamountofmoney
raisedandnumberofsupporterscouldthenbeseenasaquantificationofthevalueofthe
startup.
Afinalrelevantmotivatorforentrepreneurstouserewardcrowdfundingoverother
fundraisingmodelsismaintainingcontrolofthestartup.Equitycrowdfunding(and
traditionalinvestment)comesattheexpenseofreducedownershipofthestartup,
20However,early(reward)crowdfundersmightfeelcheatedifthecompanysellsownershiptoexternalsourcesatalaterstage,ashappenedwhenOculusRift,avirtualrealityheadsetfundedonKickstarter,wasacquiredbyFacebookin2014:http://www.huffingtonpost.com/2014/03/26/oculus-rift-kickstarter_n_5034511.html
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sometimesreducingtheentrepreneur’screativecontrolovertheproject.However,the
crowd’sabilitytoactuallyimplementcontroloverstartupsisnotwelldocumented.
Idiosyncraticrisk,returnandsignaling
Crowdfundersfaceafewriskswhenbackingarewardcrowdfundingcampaign,which
entrepreneursshouldbeawareof.Thetwomainrisksarefraudandabilitytodeliver
reward.Whilethefraudrateone.g.Kickstarterislessthan5%(Mollick,2014),theriskof
fraudisstillprominent.Thecapitalisraisedupfrontandthereisnoclearlegalobligation
fromtheentrepreneurtodeliverthepromisedrewards.Honestentrepreneurswiththisin
mindshouldfocusoncampaigntransparency,sothatcrowdfundersarenotdeterredfrom
backingaprojectbecauseoffearoffraud.Theneedtotrusttheentrepreneurisfoundto
positivelyaffectlikelihoodforcrowdfundingsuccess(CholakovaandClarysse,2015).Ability
todeliverisanotherpotentialrisk.Notallsuccessfulcrowdfundingcampaignseventually
endupwithcrowdfundersreceivingtheirrewards.Givenhighinformationasymmetry
betweentheentrepreneurandthecrowdfunders,crowdfundersmaysearchforcredible
(costlyandobservable)signals(Spence,1973)thatreduceriskoffraudandfailuretodeliver.
Furthermore,crowdfundersofrewardcampaignsareassumedtobelesssophisticatedthan
traditionalinvestors,andtheydifferfromtraditionalinvestorsinthattheydonotreceive
anypartoffutureprofitsfromthecompanytheypledgeto.Instead,theyarelikelytobe
futureconsumersoftheproduct.Traditionaleffectivesignalsmaythereforebelesseffective
forthistypeoffunding,e.g.retainingequity,educationofboardmembersandprovidingrisk
details.Onemighteventhinkthatprovidingtoomuchdetailsofriskcoulddeterthose
crowdfunderswhoseonlymotivationisdesireforreward,astheriskofmanyprojectsishigh
relativetotheobjectivevalueofrewards.
Researchsuggeststhatpreparedness21positivelyaffectslikelihoodforrewardcrowdfunding
campaignsuccess(Mollick,2014).Includingawell-madevideoandregularlyproviding
campaignupdatesiscostlyandtime-consumingfortheentrepreneur,andcouldtherefore
signaldeterminacyandwillingnesstoworkhardfortheprojecttosucceed.Grammatical
errorsinthecampaignpitcharefound(byMollick,2014)tonegativelyaffectlikelihoodfor
21Measuredbyinclusionofvideoornot,whethertheentrepreneurprovidedupdatesthreedaysafterlaunchandifthecampaignpitchhadanyspellingerrorsinit.
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campaignsuccess,possiblyforthesamereasonsasitmayshowlackofdeterminacy.All
threefactorsarealsoeasilyobservedbythecrowdfunder.Thissuggeststhatbackinga
campaignmightberelatedtotherationalevaluationofthelikelihoodoftheentrepreneur’s
successincreatingtheproduct,i.e.abilitytodeliverreward(giventhatmentionedfactors
aregoodindicatorsofentrepreneurquality).Thisissimilartoothertypesofventure
financing,butthecomplexityofthesignalsdiffers.
Signalingpreparednessisthereforeimportantforentrepreneursconsideringreward
crowdfunding,asitisfoundtoincreasechanceforcampaignsuccessandcouldbeapartof
thecrowdfunders’riskevaluationoftheproject.
All-or-nothingversuskeep-it-all
Asmentionedearlier,therearetwodifferentrewardcrowdfundingmodels:TheAONmodel
andtheKIAmodel.Thechoiceofmodelaffectsthecrowdfunder’sriskofreceivingrewardin
additiontotheentrepreneur’srisk-returntradeoff.Fromacrowdfunder’sperspective,the
riskoftheentrepreneurinitiatinganunder-fundedprojectispresentiftheKIAmodelis
used.Anunder-fundedprojectisassociatedwithhigherriskofprojectfailure,thustheKIA
modelincreasesriskbornebythecrowd.TheAONmodel,however,shiftstheriskuponthe
entrepreneur.Ifthecampaignfailstoreachthegoal,nomoneyistransferredtothe
entrepreneur.Fromanentrepreneur’sperspective,theKIAmodelallowshertokeep
pledgedmoneyevenifshefailstoreachhergoal,whichcouldbepreferredbyrisk-averse
entrepreneurs.ChoosingtheAONmodelcouldthereforeserveasaneffectivesignal,being
bothcostlyandobservable,fromtheentrepreneurtothecrowdfunders:Itcouldsignalthat
theentrepreneuriswillingtoriskreceivingnofundingatallandthatshewillonlyinitiatethe
projectifenoughcapitalisraised.Theriskofreceivingnofundingcouldbetoohighforlow
qualityentrepreneurstobenefitfromthemodel,hencechoosingtheAONmodelcouldalso
signalentrepreneurquality.Thisinturncouldlettheentrepreneursethigherfundinggoals
thanwiththeKIAmodel,astheriskofthecrowdisreduced.
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AstudybyCummingetal.(2015)22foundthat34%ofallAONcampaignsreachedtheirgoal,
whileonly17%ofKIAcampaignsdidthesame.Also,AONcampaignsonaveragesoughtto
raise$31397,versus$20478forKIAcampaigns.
Themodeldecisionisthereforearisk-returntradeoff:TheAONmodelseemstoincrease
likelihoodoffundingsuccessandalsoletstheentrepreneursetahighergoal,butinthe
sametimeitbringssignificantlymorerisk.TheKIAmodelseemstohavelowerchanceof
meetingthegoal,buttheentrepreneurisstillsecuredthepledgedamountifthecampaign
failstodoso.
However,therelikelyaresituationswherethisrisk-returnrelationshipregardingAONversus
KIAisoflessimportance.Iftheproject’sfixedcostsareverylow,e.g.asformobileapp
developers,thereislessneedforahighamountofcrowdfunderstosharethecostsamong.
Shecantheninitiatetheprojectevenifshegetse.g.40%funding,aslongaspledgescover
marginalproductioncosts,withoutreducingthequalityoftheproject.Iftheentrepreneur
managestoclearlysignalthistocrowdfunders,theKIAmodelmightbeoptimal.
Furthermore,notallrewardCFPsofferbothcampaignmodels,e.g.Kickstarterwhichonly
allowstheAONmodel.ThecrowdfunderisthennotabletodifferentiatetheAONquality
signalfromthoseofotherentrepreneurs,whichreducestheeffectivenessofthesignal
(Spence,1973).
Importanceofsocialnetworkandgeographyeffects
Aspreviouslyargued,startupsandinvestorsfaceadditionalinformationasymmetries
regardingthequalityoftheentrepreneur’sproject.Thisproblemmaybeevengreaterfor
early-stagecrowdfunding,asgatheringinformationandmonitoringprogressisless
beneficialwhenpledgesorinvestmentsaresmall.Anentrepreneur’ssocialnetworkisthen
likelytobeofimportanceforcrowdfundingcampaigns.Familyandfriends(F&F)have
“inside”informationaboutprojectqualitythatotherinvestorscannotobtainthemselves.
Crowdfundersmaythereforeinterprettheinvestmentdecisionofothersasasignalof
projectquality(i.e.“herding”behavior(Banerjee,1992)).
22TheystudiedIndiegogo,arewardCFPthatacceptsbothKIAandAONmodels
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ResearchthatsupportsthissuggestionisthatofMollick(2014),Zhengetal.(2014)and
Agrawaletal.(2015).ThefirsttwofoundthatentrepreneursonKickstarterwhohadmany
Facebookfriendsweremuchmorelikelytoachievecampaignsuccessthanthosewhohad
few.Furthermore,Agrawaletal.(2015),whoinadditionexaminedthegeographyof
crowdfunding,foundthatF&Faremostlikelylocalandthattheyinvestearlierthanother
investors.Theyalsofoundthatdistantinvestors’desiretoinvestincreasesasthe
entrepreneuraccumulatescapital.Eventhoughthereareconsiderablelimitationsto
mentionedresearch,asstatedintheliteraturereview,onecantrytodrawafew
observations:
First,alargenetworkofF&Fseemstoincreasechanceoffundingsuccess.Thisdoesnot
necessarilymeanthataddingmoreFacebookfriendspriortolaunchingacampaignincreases
chanceforfundingsuccess.Thesourceoftheeffectcouldratherbetheincreasedpossibility
ofF&Fmoneythatalargesocialnetworkbrings.TheFacebooknetworkisthenmoreofa
proxyfortheentrepreneur’s“offline”network.However,onemightalsoarguethatalarge
Facebooknetworkincreasestheentrepreneur’scredibility.Adishonestentrepreneur
probablywouldnotlinkherFacebookprofiletothecampaign,andafakeprofilecouldbe
lesslikelytohavemanyFacebookfriends.
Second,F&Finvestearlierthanotherinvestors,whichisimportantbecauseotherinvestors
aresuggestedtobeaffectedbypriorinvestmentdecisions.Areasonforthismightbethat
F&F(andpossiblyleadinvestorsforequitycrowdfunding)arelikelytohaveinformation
aboutentrepreneurcommitmentandquality.Thisinformationcouldbedifficultandeven
unprofitabletoobtainforothercrowdfunders,asthecostofdoingsowouldbehighrelative
toaveragepledgedorinvestedamount.Othercrowdfundersmaythenwaitandsee
whethertheentrepreneurmanagestoobtainfundingfromF&F.Ifthisinterpretationofthe
signal(earlyinvestmentbyF&F)iscorrect,however,isuncertain.ItcouldbethatF&Ffeel
obligedtobacktheentrepreneurduetosocialcontracts,therebyreducingthequalityofthe
signal.Evenso,empiricalstudiesarguethatearlyinvestmentisimportant.
Third,thefindingsofMollick(2014)andZhengetal.(2014)originatedfromdatafrom
Kickstarter(andDemoHour),arewardCFP,whilethefindingsofAgrawaletal.(2015)
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originatedfromdatafromSellaband,aprofit-sharingCFP.Comparingdatafromdifferent
CFPswithdifferentcrowdfundingmodelsisapotentiallimitationwhentryingtomake
conclusions,butstill,itcouldalsoindicatethatmentionednetworkeffectsapplytoboth
rewardandequitycrowdfunding.Thisisnottoounlikely,aseventhoughthecrowdofthe
twomodelsdiffer,theybothsufferfromthesameasymmetricinformationregarding
entrepreneurialqualityandcommitment.
Moreover,astudyoftheKickstartercommunityfoundthat70%ofbackersonKickstarter
onlysupportasingleproject,andthat95%ofthesebackersjoinedKickstarterandpledged
inthesameday(KuppuswamyandBayus,2015).Inotherwords,serialbackersseemrare.
ThiscouldindicatethatentrepreneurswhouseKickstarterattractmostoftheirfundingby
utilizingtheirsocialnetworkoffriendsandothers(i.e.followerswhoindirectlyknowthe
entrepreneurthroughsocialmediaconnection),makingsocialnetworkforentrepreneurs
evenmoreimportantforrewardcrowdfundingthanforothercrowdfundingmodels(where
serialinvestorsaremorecommon).
Theentrepreneur’ssocialnetworkisthereforelikelytoaffectthecampaignoutcome,as
earlysupportseemstoincreasethelikelihoodthatlatercrowdfundersalsosupportthe
campaign.Onecannotyetmakeanycredibleconclusionsastowhythisherding
phenomenonoccurs,butsincemostearlysupporttypicallycomesfromF&F,itistempting
tosuggestthatitoccursduetothesignalingeffects,e.g.ofqualityandcommitment,that
comeswithF&Fsupport.However,theherdingbehaviormightalsocomefromthefactthat
thecloserthecampaignistoreachitsgoal,thehigheristhemarginalimpactofeachpledge
(forAONcampaigns).Thiscouldenhancetheintrinsicmotivationsofeachcrowdfunder,as
theymayfeeltheirpledgeisthenofmoresignificancefortheentrepreneurorthecause.
EarlyinvestmentfromF&Fmighttheninitiatea“snowballeffect”,asthemarginalimpactof
eachpledgeonlyincreasesthecloseroneistothegoal.
Eitherway,earlysupportislikelytopositivelyaffectthechanceoffundingsuccess.Itisthen
importantforentrepreneurswhoconsiderrewardcrowdfundingtoproperlyutilizetheir
socialnetwork.However,keepingmomentumfromthebeginningofthecampaignuntilthe
endisverydifficultandrare,aswillbediscussedinthefollowingsection.
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Rewardcampaigndynamics:The“Kickstartereffect”
ThefundingcycleofrewardcrowdfundingcampaignsoftenfollowaU-shape,asmentioned
intheliteraturereview.Morefundingoccursduringthefirst(mostlyfromF&F)andlast
weekofthecampaigncomparedtothemiddleperiod.Thisillustratesthedifficultyof
sustainingandincreasingfundingactivitythroughoutthecampaign.Afterthefirstweek
thereistypicallylowfundingactivity,nomattertheproductcategoryorcampaignlength.
But,ifenoughmoneyispledgedandthecampaignapproachesitsend,theU-shapecanbe
explainedbytwopotentialeffects:thegoal-gradienteffectandthedeadlineeffect.The
goal-gradienteffectpredictsthatindividuals’motivationtoreachagoalincreaseswhenitis
nearitsdesiredendstate.Asdiscussedintheprevioussection,thiseffectcouldoccursince
themarginalimpactofeachpledgeincreasesthecloserthegoalis,creatingthesnowball
effect.However,eventhoughmentionedeffectcouldoccuranywhereinthecampaign
cycle,ittypicallyoccursintheend.Thisagaincouldbeexplainedbythedeadlineeffect,
whichpredictsthatmoreactivitytypicallyhappensclosetothedeadline.Together,these
effectscouldbethesourceofthesuddenspikeinfundingactivitytowardstheendofthe
campaigns(commonlyreferredtoasthe“Kickstartereffect”23).
Campaignlengthandgoalsize
Onemightthinkthatsettingalongercampaignduration(e.g.90or60daysratherthan30)
increaseschancesofbeingsuccessfullyfunded,asitgivescrowdfundersmoretimeto
discoverthecampaign.However,mentionedU-shapeandcampaigndynamics(Kuppuswamy
andBayus,2015)illustratethatmostcampaignsexperiencelowfundingactivityinthe
middleofthefundingcycle,nomatterthelength.Researchersevenfindasignificant
negativerelationshipbetweencampaigndurationandfundingsuccess(Mollick,2014;
Cummingetal.,2015).Whileonemayonlyspeculateastowhythisisthecase,as
explanatoryresearchontheareaislimited,statisticscontradictssettinglongerdurations.
Onereasoncouldbethatcrowdfundingcampaignsarefatiguingandtime-consumingfor
entrepreneurs,sothatlongerdurationsmakethedaysspenttryingtoconvincethecrowd
lesseffective.Anothercouldsimplybethatlowerqualityentrepreneurstendtochoose
longerdurations(forwhateverreasons),orthatlongerdurationssignallackofconfidence.
23https://www.kickstarter.com/blog/the-kickstarter-effect
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Further,aswillbebrieflydiscussedinthenextsection,empiricalresearchsuggeststhat
highergoalsizesdecreaseschancesforfundingsuccess.Ifentrepreneurswithhighfunding
goalstendtosetlongercampaigndurations,asmorecrowdfundersareneededtobe
successfullyfunded,thiscouldalsobeareasonwhylongercampaigndurationsseemto
decreasefundingsuccess.Moreexplanatoryresearchonthisareaisthereforeneededin
ordertoknowtherealeffectsofcampaigndurationonfundingsuccess,buteitherway,
entrepreneursconsideringrewardcrowdfundingshouldbeawarethatcampaignswith
longerdurationsarestatisticallylesslikelytoachievefundingsuccess.Theentrepreneur
shouldthereforedoacarefulconsiderationofwhatdurationthatbestfitshercampaign.
Settingalowgoalsizecouldalsobetemptingforentrepreneurs,suchthatthegoal-gradient
effectmoreeasilyoccurs.Thiscouldhoweverbeunwise,aspledgingactivityisfoundtofall
offonceaprojectreachesitsgoal24(KuppuswamyandBayus,2015).Areasonforthismight
bethattheintrinsicmotivationcoulddisappeariftheentrepreneurhasalreadyreachedher
necessaryfundingamount.Ifthegoalistoolow,theentrepreneurriskshavingtogoforward
withaprojectthatisactuallyunderfunded,increasinglikelihoodofprojectnon-deliveryor
needtoraisemorecapital.Moreover,campaignswithhighprojectgoalsarefoundlesslikely
tobefunded(Mollick,2014),furtheremphasizingtheimportanceofsettingappropriate
fundinggoals.
8.2.2. Equitycrowdfunding
Equitycrowdfundinghasbeenrestrictedbylegalcomplicationsinmanycountries25,butis
startingtobecomeaviablealternativeforearly-stagefunding.Asdiscussedinsection7.4.1,
thecrowdfundingmodelhasyettobeexplicitlymentionedintheNorwegianlegislation,but
shouldbelegalaslongastherearenobindingcommitmentsbetweentheinvestorandthe
entrepreneurduringthefundingcampaign.
24Interestingly,KuppuswamyandBayus(2015)findthattheoppositeoccursforDesign,GamesandTechnologyprojects,i.e.projectsthatoffertangiblerewards–successfullyfundedprojectsseemtoreceiveevenmorefundingbeforetheirfundingcycleends.25Legalchallengesforequitycrowdfundingandhowitcomplicatestheprocessfortheentrepreneuriscoveredinpreviouschapters
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Oneofthemaindifferencesbetweencrowdfundersofequity(andloan)campaignsand
crowdfundersofrewardcampaignsisthatfortheequitymodel,thecrowdfundersarenot
necessarilyconsumersofthefutureproject.Theyexpectafinancialreturnontheir
investment,ratherthannon-financialrewards.Thisfinancialreturnmayoriginatefrom
dividendsandcapitalgainsfromownershipofequityintheentrepreneur’sstartup.The
mainfocusofthisthesis,however,isontheentrepreneurandhowshecanusethemodelto
raisecapitalforherstartup.Thus,financialaspects,e.g.valuationofequityorcrowdfunders’
returnoninvestmentcomparedtorisk26arenotcovered.
Funderandentrepreneurmotivation
Totheauthors’knowledge,thereisnotmuchempiricalresearchonthemotivationfor
funderstoparticipateinequitycrowdfundingcampaigns.Still,somescholarsbelievethat
alsothesecrowdfundersexperienceintrinsicmotivation(orincreaseinutility),inadditionto
desirefinancialreturnwhenparticipating(PierrakisandCollins,2013),i.e.community
benefits(Belleflammeetal.,2013).However,incontrasttorewardcrowdfunding,these
communitybenefitsareassumedtobeequalforallcrowdfunders,i.e.thecrowdfunders’
increaseinutilityishomogeneousanddoesnotdependontheidentityofthecrowdfunder.
Thismakesiteasier(theoretically)fortheentrepreneurtoexploitcommunitybenefits,than
iftherewardmodelisused.Thisisespeciallybeneficialiftheentrepreneurrequiresahigh
amountofcapital(e.g.>$100000).Therationaleisthatifalotofcapitalisrequired,itcould
bedifficulttoattractenoughconsumers(asforrewardcrowdfunding)topre-purchasethe
product,comparedtoinvestors(asforequitycrowdfunding)lookingforafinancialreturn.
Thereareonlysomanyconsumerswhopotentiallyarewillingtobuyaproductinadvance,
asitwilldependonthetheirtastefortheproduct.Investorslookingforafinancialreturn,
however,arenotnecessarilyfutureconsumers.Theirtastefortheproductistherefore
assumedtobeoflessimportance.Iftheamountofrequiredcapitalishigh,then,itcouldbe
easiertopleaseequitycrowdfundersastheysharethesamecommunitybenefits,thanwith
rewardcrowdfunding,wherethecrowdisassumedtobeheterogeneouswithregardsto
communitybenefitsandmotivation.
26Totheauthors’knowledge,thereisverylittle(ifany)empiricalresearchonrisk-returnforparticipantsinequitycrowdfunding,specifically.
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Fortheentrepreneur,thismeansthatifsherequiresahighamountofcapitaltostarther
project,equitycrowdfundingcouldgivehigherreturnsthanrewardcrowdfunding.Thisis
becauseitwillthen(theoretically,asassumedbyBelleflammeeta.,2013)beeasierto
convinceinvestorswhogainequallyfromcommunitybenefits.Alternatively,iftheamount
requiredissmaller,rewardcrowdfundingcouldbemorebeneficialfortheentrepreneur.She
canthenexploitconsumerswithhighwillingnesstopay.
However,asmentionedintheliteraturereview,CholakovaandClarysse(2015)foundno
significantpositiverelationshipbetweentheintrinsicmotivators(helpothers,belongingtoa
community,supportacause)andthedecisiontoinvestinaproject27.Therefore,more
researchisneededbeforeonecanmakeanycrediblesuggestionsaboutwhetherthe
theoreticalcommunitybenefitsbyBelleflammeetal.(2013)existforequitycrowdfunding,
butitcouldstillbevaluableknowledgeforentrepreneursexperimentingwiththe
phenomenon.
Anillustrationonhowthemotivationforequitycrowdfundersmightdiffer,comparedto
traditionalinvestors,isgiveninfigure20below:
Figure20.Illustrationofdifferentmotivationlevelsforequitycrowdfunding
27ImportanttonotethattheyonlysurveyedparticipantsfromoneCFP,Symbid.ItisimpossibletoknowifthefindingsapplytootherCFPsaswell,whichrequiresmoreresearch.
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Theaimoffigure20istoillustratethatthemotivationofequitycrowdfundersmightdiffer,
andthatevenifacrowdfunderisnotmotivatedenoughbyfinancialreturnsorintrinsic
benefitsalone,theycanchoosetoinvestifthemotivationscombinedarehighenough.The
traditionalinvestor,however,isassumedtoonlydesirefinancialreturns.
Onemightalsoarguethatsometimes,ifthecombinationofacrowdfunder’sdesirefor
financialreturnsandintrinsicbenefitsishighforenoughcrowdfunders,theycouldeven
valuetheequitymorethantraditionalinvestors.
Crowdfunderandentrepreneurliquidity
Crowdfunders’investmentliquidityforthistypeoffundraisingislow,atleastcomparedto
loancrowdfundingandinasensealsorewardcrowdfunding.Loancrowdfunderssetdates
onwhentheywanttheirloanback,whetherthroughperiodicalinstallmentsoreverythingat
once.Rewardcrowdfunders,eventhoughtheydonotexpectafinancialreturn,arelikelyto
gettheirdesiredcompensationearlierthanthoseofequitycrowdfundingcampaigns(of
coursedependingonthetypeofproducttheypledgeto).Assecondarymarketsfor
crowdfundedstocksarerare,equitycrowdfunderstypicallyhavetowaituntilthestartups
theyinvestinareacquiredbyothercompaniesorthroughIPOs.Furthermore,startups
rarelypaydividends,atleastnotbeforetheyareprofitable(ESMA,2014).Forthesame
reasons,equity(orreward)crowdfundingaffectsstartups’liquidityinamorepositiveway
thanwhatloancrowdfundingdoes.
Signaling
InordertosuccessfullyraisecapitalviaanequityCFP,startupsneedtofindwaystoclearly
signaltheirvaluetosmallinvestors28.Howthesesignalsareinterpreted,aspreviously
discussed,mightdifferfromwhatpriortheorysuggests.Butstill,ifoneassumesthat
crowdfundersarerationalintheirinvesting,thepredictionsofSpence(1973)shouldhold:
thesignalmustbeobservableandcostlyinorderforittobeeffective.Otherwise,thesignals
couldbeinterpretedas“cheaptalk”.Retainingequityandprovidingdetailedinformation
aboutrisks(reducinguncertainty)andhumancapital,i.e.educationofboardmembers
28Corporatefinanceliteraturedefinessmallinvestorsasthosewho(1)investrelativelysmallamountsofmoney,and(2)receivearelativelysmallstakeofacompanyinreturn(Ahlersetal.,2015).
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(indicatingprojectquality)aresignalsthatarefoundtobeeffectiveforequitycrowdfunding
campaigns(Ahlersetal.,2015),andcanconsequentlypositivelyimpactthelikelihoodof
fundingsuccess.Further,eventhoughcapitalgainsdependonit,entrepreneurexit-plans
throughacquisitionorIPOdidnotincreaselikelihoodforfundingsuccess(Ahlersetal.,
2015).Onereasoncouldbethatsincesuchplansarenotbindingandconsistofotherfactors
thatcannotbecontrolledbytheentrepreneur(e.g.themacroenvironment),crowdfunders
interpretsuchsignalsascheaptalk.
Byretainingasubstantialequityshareinthecompanythatisnotofferedduringtheequity
crowdfundingcampaign,theentrepreneurcaneffectivelysignalunobservable
characteristicsofherproject:Itiscostlytoretainownershipinterestsandthepotential
benefitisfuturecashflows.Iftheentrepreneurdoesnotbelieveinfuturecashflows(i.e.if
theentrepreneurisoflowquality),thecostofproducingthesignalwouldoutweighits
benefits.Itisalsoeasilyobservedbytheinvestor,whileinthesametimehelpingtoalignthe
interestsoftheentrepreneurandherinvestors.
Inordertofurtherreduceuncertainty,theentrepreneurcouldincludefinancialforecastsof
herproject,e.g.vision,sales,EBIT(DA)andnetearnings.However,theauthorsofthisthesis
areskepticalaboutthevalueofsuchforecastsforcrowdfunders.Informationasymmetry
createsincentivesforentrepreneurstopresentoverlyoptimisticpredictionsoftheirproject,
which(rational)investorsshouldanticipate,therebyreducingthequalityofthesignaling
effect29.
PercentageofMBAgraduatesamongexecutiveboardmembersispositivelyrelatedwiththe
numberofequitycrowdfunders(Ahlersetal.,2015).Iftheentrepreneur’steampossesses
education,sheshouldsignalthisclearlyduringherfundingcampaign.
Lastly,equitycrowdfundingmightbemoresuitablethanrewardcrowdfundingforsome
typesofventureswherepre-purchasingisdifficult,e.g.restaurantsorbusiness-to-business
ventures.
29Seee.g.Wickham(2006)foradescriptionoftheentrepreneur-investorPrisoners’Dilemma
85
8.2.3. Loancrowdfunding
Loancrowdfundingisanotherfinancialcrowdfundingmodel.Aswithequitycrowdfunding,
crowdfundersofthismodelarenotnecessarilyconsumersoftheentrepreneur’sfuture
product.Theexpectedfinancialreturnoriginatesfrominterestsonthesuppliedloan,which
isrepaideitherwithperiodicalinstallmentsorattheendofitsduration.
Theauthorsofthisthesisfoundconsiderablylessresearchonthiscrowdfundingmodelthan
onrewardandequitycrowdfunding30.Furthermore,loancapitalismoredifficulttogetfor
startups,therebyreducingitsrelevanceforthisthesisandforentrepreneursofstartups.The
modelmaybemostrelevantforbusinesseswithestablishedrevenuesandcredithistory.
Loancrowdfundingisthereforenotcoveredtothesameextentasrewardorequity
crowdfunding.
Moreover,onemightargue(notbasedonanyempiricalresearch)thatloancrowdfunding
sharemanyofthepsychologicalcharacteristicsofequitycrowdfunding,asbothmodelsoffer
financialreturns.However,manyloanCFPsrequirethecompaniestohavebeenactiveforat
leasttwoyearsandtogenerateacertainamountofrevenues(e.g.LendingClub,Zopa).This
couldpotentiallyreducetheeffectofmentionedintrinsicmotivations(e.g.helpothersor
supportacause),asthecompaniesmightnotdependonthefundingtostayinbusiness.It
couldalsoserveasanimportantsignal:afewyearsofbusinessshouldprovideatleastsome
sortofcredithistory,whichcrowdfunderscouldevaluate.Thetypicalentrepreneurofother
crowdfundingmodelsisnotassumedtohavesuchcredithistory.Effectivesignalsmight
thereforebedifferent,butresearchonthetopicisneeded.
Atablethatsummarizesafewofthemaincharacteristicsofthethreecrowdfundingmodels
ispresentedbelow.
30Moreover,theresearchthatwasfoundoftenfocusedonpeer-to-peerlendingtoindividuals(e.g.theCFPProsper.com),notpeer-to-peerlendingtobusinesses.
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Crowdfundingmodel
Reward Equity Loan
Formofsupport Donation/pre-purchase
Investment Loan
Formofreturn Rewardsandintangiblebenefits
Dividendsandcapitalgains,ifthebusinessdoeswell.
Interestsandrepaymentofloan.
Fundermotivation Intrinsicand/ordesireforreward
Intrinsicand/ordesireforfinancialreturnoninvestments
Intrinsicand/ordesireforfinancialreturnonloan
Importanceofnetworkpriortocampaign
Veryhigh High Low31
Marketingvalue High Moderate LowEntrepreneurLiquidity
Good Good Bad
Creativecontroloverproject
Good Bad,dependsonshareofownershipsold
Good
SuitableforB2CorB2Bventures?
B2C Both Both
Table7.Characteristicsofdifferentcrowdfundingmodels
8.3. ChoiceofCFP:Whattoconsider
ThischapterexaminesfiveCFPalternativesforNorwegianentrepreneurs.Individualtraits
andwhattheCFPsofferentrepreneurs(e.g.marketing,legalhelp)arepresented.LoanCFPs
arenotconsideredduetolessrelevanceforNorwegianstartups.
8.3.1. ChoiceofequityCFP
Thefollowingsectionisbasedonthepremisethattheentrepreneurownsastartupthatis
classifiedasaNorwegianlimitedcompany(AS),andthatsheintendstoobtainadditional
fundingthroughequitycrowdfunding.Additionally,thefirstdiscussionisbasedonthe
premisethattheNorwegianInvesdoraffiliateisoperationalandreadytouseforthe
Norwegianentrepreneur.
31Basedonanecdotalsummaryofinformationobtainedbytheauthors.
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Iftheentrepreneurplanstodoanequitycrowdfundingcampaign,shemustfindtheCFP
thatoffersthebestservicesforherneedsandthatbestfitsherlegalenvironment.As
previouslymentioned,therearealimitednumberofCFPsthatofferequitycampaign
servicestoNorwegianentrepreneurs.ManyoftheCFPsthattheauthorshavebeenin
contactwithstatedthatintheory,theycouldworkwithaNorwegianstartup,butthatit
mightprovedifficultinpractice(duetothelegalenvironment).Basedonourresearch,we
suggestthreeequityCFPsthataNorwegianentrepreneurmightfindsuitable:Seedrs(UK),
FundedByMe(Swe)andInvesdor(Fin/Nor).Thefirstsectionprovidesabriefsummaryon
howthethreeCFPsassisttheentrepreneurinthecampaignprocess.Furthermore,table7
presentskeyinformationfromeachofthethreeCFPs.
Pre-campaign
Seedrs:TheSeedrsteammustfirstreviewandapprovetheentrepreneur’scampaign,
evidence,businessplanandvaluationinorderforittobefeaturedontheplatform.This
maytakeuptotwoweeksandwillbeatwo-waycommunicationprocessbetweenthe
Seedrsteamandtheentrepreneur(Seedrs,2015b).
Invesdor:First,theInvesdorteamwilldoabackgroundcheckandevaluateifthe
entrepreneur’scompanyiseligible.Afterwardstheentrepreneurmustpitchhercampaignto
Invesdoranditspartners(Invesdor,2015).
FundedByMe:Beforethecampaigngoeslive,itmustbereviewedandapprovedbythe
FundedByMeteam.Theentrepreneurneedstopresentexecutivesummary,businessplan,
financialforecastsandvaluation(FundedByMe,2015b).
Duringcampaign
Seedrs:Onthisplatformtheentrepreneurhastheoptionofhavinga“hidden”or“public”
campaign.Hiddencampaignsareonlyvisibletotheentrepreneurs’networkandtheCFPs
leadinvestors.Campaignsoftenstartoutashiddenandbecomepublicwhenaminor
fundinggoalisreached(Seedrs,2015b).
Invesdor:CampaignsonInvesdoralsostartashidden.Whenthecampaigngainsenough
support,typicallybetween20%-30%ofthefundinggoal,itwillbeavailabletothepublic.
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Theentrepreneur’scampaignwillbefeaturedonsocialmediaupdatesandbi-weeklyemail
newslettersfromInvesdor.Inaddition,thecampaignwillalsobefeaturedonallthepartner
CFPsoftheNordicCrowdfundingAlliance(Invesdor,2015).
FundedByMe:Thecampaignwillbepublicbydefault,andfeaturedonsocialmediaupdates
fromFundedByMe(FundedByMe,2015b).
Post-campaign
Seedrs:Ifthecampaignissuccessful,theSeedrsteamwillperformalegalduediligenceon
thecompanyandtheentrepreneur.IfthecompanyisaNorwegianAS,Seedrswillhelpthe
entrepreneurtoincorporateaUKlimitedcompanyasaholdingcompany.Inaddition,the
SeedrsteamwillalsoassistintryingtoobtainSEISorEISeligibility32forthecompanyshares.
Oncealllegaldocumentshavebeensigned,fundsfromthecampaignwillbetransferredto
thecompany.SeedrsholdsthesharesthatarepurchasedinanSPV33andactsasanominee
onbehalfoftheshareholders.Thisisinordertoprotectinvestorrightsandalsotomitigate
theinvestormanagementproblemthattheentrepreneurhastoface(Seedrs,2015b).
Invesdor:Invesdorchecksthateveryinvestorhaspaidfortheamountofsharesthey
subscribedto.Theentrepreneurmustcarryouttheregistrationofthenewshareholders.
Oncethisisdone,thefundswillbepaidouttotheentrepreneur’scompany(Invesdor,
2015).
FundedByMe:Whenthefundingroundissuccessfulandclosed,theentrepreneurcontacts
andinvoicesthesubscribedinvestorsinexchangeforcertificateofsharespurchased.
FundedByMeonlyworksasanintermediary,connectinginvestorswiththeentrepreneur
(FundedByMe,2015b).
32Seechapter6.2foranexplanationoftheterms33Specialpurposevehicle
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Equity Seedrs Invesdor FundedByMe
Initialcost None €500 €500Successfee 7,5% 6%+legalfee€500
+€5perinvestor8%
Transactionfee,paidbyinvestor
7,5%onpotentialcapitalgainsifstockissold
Dependingoninvestor’sbankprovider
None
Campaignduration 60days 30-90days,determinedbytheentrepreneur
90days
Whocaninvest? Europeanresidents Europeanresidents EuropeanresidentsOverfundingpossible?
Yes Yes No
KIAorAON? AON AON AONAdvantages SEISandEIS,well
establishedinvestorbase
PartnerofNCA,MiFIDlicense,NorwegianCFP
Quickregistrationprocess,“Investeraravdrag34”(taxbenefitsforSwedishresidents)
Disadvantages Additionaltaxation,transactioncosts(i.e.UKholdingcompany)Longregistrationprocess
Highcosts NotproperlyregulatedthroughSwedishlaw35,cangiverisetofutureconflicts.Highcosts
Table8.EquityCFPs:keyinformationfromSeedrs(2015b),Invesdor(2015)andFundedByMe(2015b)
34Seelinkformoreinforegarding“investeraravdraget”:http://www.skatteverket.se/privat/skatter/vardepapper/investeraravdrag.4.10cbb69314111c2d94ba38b.html35Swedishlawsdonotexplicitlyregulatecrowdfundingplatforms,andFundedByMedoesnothavelicensetooperatebySwedishfinancialauthorities(theybelievetheydonotneedoneastheyonlyactasanintermediary).Thiscouldbeproblematicinthefuture,e.g.iffraudoccurs.
90
8.3.2. ChoiceofrewardCFP
Thefollowingsectionisbasedonthepremisethattheentrepreneurownsastartupthatis
classifiedasaNorwegianlimitedcompany(AS),andthatsheintendstoobtainadditional
fundingbypre-sellingherproductsthrougharewardcrowdfundingcampaign.
Iftheentrepreneurintendstoinitiatearewardcampaign,thelegalenvironmentisofless
importance(lessregulationisrequiredwhenthereisnopossibilityforinvestorfinancial
return).ThechoiceofCFPshouldbebasedoncosts,whatservicestheCFPoffers(e.g.KIAor
AONcampaignmodel),thedemographyofitsmembersandtheCFPsreputation.Kickstarter
(US)andIndiegogo(US)bothhaveastrongreputationandarewellestablishedintheglobal
crowdfundingindustry.FundedByMe(Swe)hasalargeEuropeancrowdandyearsof
experienceinrewardcrowdfunding.ThethreeCFPsrequiretheentrepreneurtoprovidea
certainamountofinformationabouttheprojectpriortolaunchingthecampaign,butthe
requirementsarelessstrictthanforequitycrowdfundingcampaigns.Theauthorsalso
examinedNorwegianCFPs(e.g.Bidra,NewJelly),butfoundmostcharacteristicstobe
inferiorrelativetotheCFPsmentionedabove.
Pre-campaign:
AllthreeCFPsprovidetheentrepreneurwithasimplifiedstep-by-steptooltocreatea
campaign.Priortolaunch,CFPstaffwillreviewthecampaignandproject.Theentrepreneur
thenreceiveseitherrefusalorconstructivefeedbackand/orapproval.Thecampaignusually
goeslivewithin1-4days,whichisalotfasterthanforequitycrowdfundingcampaigns
(FundedByMe,2015b;Kickstarter,2015b;Indiegogo,2015c).
Duringcampaign:
CampaignsonFundedByMewillbefeaturedonsocialmediaupdates(FundedByMe,2015b).
OnKickstarter,ifthestafffindstheentrepreneur’sprojectcompellingandinteresting,the
projectmayhavetheopportunitytobefeaturedunderthecategory“Staffpick”,whichgives
theprojectincreasedcredibilityandexposure(Kickstarter,2015b).Indiegogoprovides
entrepreneurswithaccesstoAmazonLaunchpad,whichcanbecharacterizedasamarketing
tool.Thismayincreasethecampaignsvisibilitythroughoutthecampaignperiod(Indiegogo,
2015c).
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Post-campaign:
IfthecampaignissuccessfulonFundedByMeandtheentrepreneur’sbankdetailshavebeen
verifiedinadvance,thefundswillbetransferredtotheentrepreneurwithin1-2days
(FundedByMe,2015b).AsuccessfulcampaignonKickstartergivestheentrepreneuraccess
toafeaturethatworksasablogfortheproject.There,theentrepreneurcanpostupdates
aboutherproductionandcommunicatewithcrowdfunders.Thiscanbecharacterizedasan
informationhubandacommunicationtool.Theentrepreneurwillreceivethefundswithin
14daysafterthecampaignends(Kickstarter,2015b).Ifthecampaignissuccessfulon
Indiegogo,theentrepreneurwillreceivethefundswithin15businessdays(Indiegogo,
2015c).
Reward FundedByMe Kickstarter Indiegogo
Initialcost None None NoneSuccessfee 6% 5% 5%Transactionfee None 3-5%forbackers 3-5%forbackersDuration 45days 1-60days Nolimit,butthey
recommend40daysorless
Whocanpledge? Norestrictions Norestrictions NorestrictionsOverfundingpossible?
Yes Yes Yes
KIAorAON? AON AON AON&KIAAdvantages Overallquick
process,Scandinavian
Reputation,largecrowd,mid-andpost-campaigntools
Reputation,largecrowd,hasbothAONandKIAmodels,mid-campaignmarketing
Disadvantages MorelimitedcrowdthanKickstarterandIndiegogo
Upto14daysbetweencampaignendandreceptionoffunds
Upto15daysbetweencampaignendandreceptionoffunds
Table9.RewardCFPs:KeyinformationfromFundedByMe(2015b),Kickstarter(2015b)andIndiegogo(2015c)ThissubchapterpresentedthreeCFPsforbothrewardandequitycrowdfunding.WhichCFP
thatisoptimaldependsontheneedsoftheentrepreneur.TheselectionofCFPsinthe
discussionaboveisbasedonthesubjectiveevaluationofcharacteristicsbytheauthors.
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8.4. Casestudies
Inthischapter,twocasestudiesarepresented:FutureHomeandSomeone.io.Thecase
studiesarenotrepresentativetogeneralizeorconcludeonhowtosuccessfullyraisecapital
throughcrowdfunding.Thepurposeisrathertoillustratehowacrowdfundingcampaign
mayproceed,whilesheddinglightonpracticalaspectsandimplications.
8.4.1. FutureHome:Rewardcampaign
FrontpageofFutureHome’sIndiegogocampaign.FromIndiegogo,2015.
ThiscasestudyisbasedoninformationgatheredfromIndiegogo,FutureHome’sblogand
emailcorrespondencewithSigbjørnGroven,CFOatFutureHome.
Thecompany
FutureHomeisaNorwegianstartupcompanythatsellsanappandacontrolunitthatmake
itpossibletocontrolawiderangeofhouseholdelectronicdevices.Thefourfoundershave
yearsofrelevantworkexperienceandeducationinthefieldsofelectricalengineering,
management,finance,entrepreneurshipandautomation.Asoftodaythecompanyhas11
employees,includingthefounders(PROFF,2015).
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InearlyNovember2014,thecompanyendedasuccessful60-dayAONrewardcrowdfunding
campaignonIndiegogo,raising$200870frompre-salesanddonationsfrom140individuals,
withaninitialgoalof$200000.
Thecampaign
Atfirst,theteamwasundertheimpressionthatpresentingavideoandproductinformation
onthecampaignwouldbeenoughtogetsufficientorders,butthroughoutthecampaign
theychangedtheirapproach.Insteadoftelling“thestory”thatmanyrewardcampaignsdo,
theteamshifteditsfocustowardsdirectsalesanddemonstrations.FutureHome’scampaign
soughttopresentinformationinaneasyandunderstandablemanner,byusingvideoand
illustrations.Thecampaignalsoprovidedabriefintroductionoftheteamandashort
summaryofwhytheyneededfunds.Themainfocusofthecampaignseemedtobeshowing
theapplicabilityoftheproducts.Thecampaignoffered12rewardlevels,rangingfrom$5to
$15000.Thisprovidedbackerswithmultipleoptions,frommerelydonating$5tothe
developmentofFutureHome,tobuyinga$15000Villa-kit.
Theinitialfundinggoalwas$200000,whichishighforarewardcampaign.SigbjørnGroven,
CFOatFutureHomeexplainedthatthehighgoalwasanecessity,asFutureHomeneededa
pre-specifiednumberofunitssoldinordertoobtaintheproductionpricesthattheyhad
negotiatedpriortothecampaign.ThisalsoexcludedtheKIAmodel.
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OneofthestuntstheFutureHomefoundersperformed:Personallythankingbackersviaawebcam.
FromFutureHome’sblog.
Asmentioned,sustainedfundingactivitythroughoutcrowdfundingcampaignsisvery
difficulttoachieve(cf.U-shape).FutureHomemanagedtobefeaturedinnewsmediaprior
toandduringthecampaign,whichprobablyhelpedthemspreadawarenessoftheirproduct
tothepublic.Furthermore,FutureHomealsocreatedseveralstunts,intendedto“goviral”.
Oneofthestuntswas“Controlouroffice–Chaosmode”.Thisprovidedthepublicwiththe
opportunitytousetheproductsonlineinreal-time,inFutureHome’soffices.Foralimited
period,overathousanduniqueuserscontrolledtheofficelights,coffeemakerandblinds.
Eventhoughattentionfromthecrowdwaspresent,FutureHomestruggledtoobtain
enoughsales.Aweekbeforethecampaigndeadline,FutureHomewasrepresentedata
homeowner’sexhibitioninStavanger,Norway.Here,theteamwasabletodemonstrate
FutureHome’sproducttotargetcustomersandestablishcontacts.Afewdayslater,one
hourpriortothedeadline,FutureHomesuccessfullysecuredthefundinggoal.
Post-campaign
Initially,FutureHomewantedtoruntheircampaignonKickstarter,basedontheCFP’sgood
reputation.Atthetime,Norwegianentrepreneurscouldnotcreatecampaignson
Kickstarter,soIndiegogoservedasthesecondbestchoice.Inretrospect,theteam
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recognizesthatmakingtheirownCFPsolelyforthepurposeoftheFutureHomecampaign
couldalsohaveservedasaviablealternative,sotheywouldnothavebeensubjectto
Indiegogo’ssuccessfee.SeveralCFPsdefendtheirfeesbasedonthemarketingtoolsthey
provide.TheFutureHometeamendedupbringinginapproximately95%oftotalsales
themselves,withoutassistancefromIndiegogo.
Priortothecampaign,theteamfocusedonunderstandingsuccessfactorsanddifferences
betweengoodandbadcampaigns.Theteamspentonemonthonpreparationsforthe
campaign,andinhindsighttheyrecognizetheyshouldhavespentmore.Forfuture
crowdfundingentrepreneurs,theyemphasizetheimportanceofunderstandinghowa
campaignworks,alongwiththeimportanceofliningupbackersandnewsmediafromthe
beginningofthecampaign.
FutureHometoday
Thecompanyhassuccessfullybroughtinmoreinvestors.Boardmembers,abusinessangel,
employeesandtheinitialfoundershaveinvestedatotalofNOK10million($1,16million)in
thecompany.Basedontherecentemissionofshares,thecompanyisvaluedatNOK50
million($5,78million)(Gjerde,2015).
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8.4.2. Someone.io:Equitycampaign
ThiscasestudyisbasedoninformationgatheredfromFundedByMe,Someone.io’sblogand
emailcorrespondencewithDanHesketh,brandstrategistatSomeone.io.
FrontpageofSomeone.io’scrowdfundingcampaign.FromFundedByMe,2015.
Thecompany
Someone.ioisaNorwegianITcompanythatsellsaSocialTaskManagementapp.The
purposeoftheproductistoincreaseemployeejobsatisfactionandoverallteam
productivity.Theirteamconsistedoffourexperiencedandhighlyeducatedindividuals.
Combined,theirbackgroundcomprisedofmanagement,creativestudies,webdevelopment,
computerscience,communication,analytics,marketing,advertising,salesandbranding.
Thecompanylaunchedabeta-versionoftheappinMay2015andsimultaneouslycreated
thecampaignonFundedByMe,andthecampaignwentliveonSeptember11,2015.The
campaignendedsuccessfullyNovember9,2015,receiving€129508from45different
investors,7,9%morethantheinitialgoalof€120000.Someone.iosold12,7758%oftotal
companyequityviaFundedByMe.
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Thecampaign
Thecampaignincludedaninformativevideowiththegoalofhighlightingthecustomerneed
andpotentialfortheirproduct.Furthermore,businessplan,financialforecastandvaluation
werealsoincluded,althoughverysimplifiedsothatmostpeoplewouldunderstandit.After
thecampaignwentlive,approximately€40000wasraisedwithinthefirstthreeweeks,
wheremanyoftheinvestmentscamefromexistingshareholders.Afterthat,fundingactivity
droppedsignificantlyforfiveweeks.Duringthosefiveweeks,theteamparticipatedin
severalpitchingcontestsinNorwayandSweden,theyadvertisedonline,hadpersonal
meetingswithpotentialinvestorsandprovidedupdatesabouttheircampaignto
crowdfunders.Theteamusedthefeedbackfromcrowdfunderstoimprovethecampaign
pitch.EventhoughSomeone.ioworkedhardtosustainfundingactivity,theydidnotmanage
toavoidmentionedU-shape.TheturningpointcamewhenSomeone.iowasfeaturedina
headlinearticleintheonlinenewspaper“HackerNews”.Theteamusedthisopportunityto
buildmomentum,i.e.generalinterestandfundingactivity,beforethelastfourweeksofthe
campaign.
Figure21.Aggregatefundingfromcampaignstartuntilend.NumbersinEuro.Figurenotself-
constructed(Someone.io,2015)
Afterthis,Someone.iopitchedtheircampaignonseveralNorwegianinvestmentforums,
whichattracteddomesticandinternationalattention.Inthebeginningofthefinalweek,the
campaignhadstillraisedlessthan50%ofthefundinggoal.Fromtheirpreviousexperience,
theyknewthatinvestorsrespondedwelltopositivekeyperformanceindicators(KPIs).The
teamincludedupdatedKPIsinthecampaign,whichshowedpotentialinvestorshistorical
growthindemandforSomeone.io’sproduct.Thisupdatecausedanimmediatespikein
fundingactivity,andresultedinthefundinggoalbeingreachedwithindays.
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Whilenotrepresentativetogeneralize,financialforecastsandgrowthestimatesdidnot
havethedesiredeffectonfundingactivity(couldbebecauseinvestorsknowthe
entrepreneurhasincentivetobeoverlyoptimistic).Whatseemedtoworkforthisparticular
campaignwerehardfacts,i.e.historicaldatafromsales.Investorsmighthaveinterpreted
suchdataasacrediblesignalforthequalityoftheproduct,asitwouldbemoredifficultto
manipulatebytheentrepreneur.
Post-campaign
Someone.iochosetouseFundedByMemainlybecausetheapplicationprocesswas
considerablyquickerthanotherequityCFPs.Theprocesstookthemoneweek,wherease.g.
Seedrshasaminimumapplicationprocessof3-4weeks.Anadvantagebyusing
FundedByMeisthatSomeone.iocouldusetheNorwegianlimitedcompanystructure(AS).
Theteamalsoemphasizedthatentrepreneursconsideringusingequitycrowdfundingshould
startbysecuringfundingfromexistingshareholders(togainmomentum),planmarketing
andupdatethecampaign,pitchandpresentationthroughoutthecampaign.Onetraitthat
Someone.iohad,wasthefactthattheirproductwasalreadybeingboughtandused.This
providedtheteamwiththeopportunityto“brag”aboutKPIsontheircampaign.
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9. Summaryandfinalthoughts
Crowdfundingrepresentsanewwayforentrepreneurstoraisecapitalforavarietyof
projects,madepossiblewiththeexistenceofWeb2.0.Thisthesishasexaminedthe
crowdfundingindustryandtheleadingEuropeancrowdfundingmarkets,inorderto
ascertainthepossibilitiesforNorwegianentrepreneurstoparticipateinthecrowdfunding
environment.Ourresearchsuggeststhatrewardcrowdfundingcouldserveasaviable
alternativetoraisefundsforNorwegianentrepreneurs,irrespectiveofcountryborders.In
contrast,equityandloancrowdfundingarestilloftenrestrictedtodomesticresidentsdueto
legalconstraints,limitingboththecrowdandtheamountofCFPsavailabletothe
entrepreneur.However,thecrowdfundingenvironmentislikelytoadjust,aslegislators
acrossEuropestrivetoreducebarriersandfacilitatetheconcept,bothfordomesticand
cross-bordertransactions.Withthisinmind,onecanexpectloanandequitycrowdfunding
toevolveintomoreviablealternativesforNorwegianentrepreneursinthefuture.
Anextensivereviewofrelatedliteraturehasbeenperformedinordertostudythe
characteristicsoftraditionalfundraising,signalingandcrowdfunding.Theliterature
emphasizedtheimportanceofnetworkandpreparednessforachievingcrowdfunding
success,whichisalsoillustratedinthecasestudies.Inaddition,theliteraturesuggestedthat
crowdfundersareheterogeneouswithrespecttomotivationandgoals,althoughmoresofor
non-financialcrowdfundingthanforfinancialcrowdfunding.Areasonforthisheterogeneity
isarguedtobethatcrowdfunders,inadditiontoextrinsicmotivation,oftenexperience
intrinsicmotivationtofund.Itisfurthersuggestedthatinrewardcampaigns,this
heterogeneitycanbeexploitedbyentrepreneursbyenablingcrowdfunderstoself-select
rewardlevelsthatmaximizetheirindividualutility,therebyincreasingbothconsumerand
producersurplus.Crowdfundersinequitycampaignsaregenerallymoremotivatedby
financialgainandthereforelessheterogeneous.Evenso,equitycrowdfunderswhoareless
motivatedbyfinancialreturnscouldstillchoosetoinvestaslongastheyhaveintrinsic
motivationtowardstheprojectthatincreasestheirwillingnesstosupport(illustratedin
figure20).
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Bothcrowdfundingandtraditionalfundinghaveuniqueindividualbenefits.Therefore,if
bothsourcesofcapitalareavailabletotheentrepreneur,atrade-offevaluationhastobe
madewhendecidinghowtoraisecapital.However,crowdfundingandtraditionalfunding
arenotnecessarilysubstitutes.Crowdfundingcouldserveasaviableseed-capital
fundraisingtool,whichwouldgivetheentrepreneurenoughfundingtostartabusiness.She
wouldthenhaveobtainedcrediblevalidationfromthecrowdthatherprojectisofvalue,
signalingqualitytopotentialexternalinvestorsandbanks.Therefore,itmightbemorelikely
thatcrowdfundingservesasacomplementaryformoffunding,servingagappreviously
unservedbytraditionalfundingsources.Howthephenomenonisadoptedbyentrepreneurs
remainstobeseen.
Moreover,therearedistinctivevariationsinthecharacteristicsofthedifferent
crowdfundingmodelsthatshouldbeaddressedbytheentrepreneur,whicharepresentedin
theguide.Furthermore,theoptimalchoiceofmodeldependsonseveralentrepreneurial
factors,e.g.venturestageandentrepreneurrisk-profile.Onecanthereforenotrecommend
onemodelovertheothers:Itdependsonentrepreneurpreferences,andevery
entrepreneurisdifferent.
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