crowdfunding industry report 2013
TRANSCRIPT
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Startup Hive
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2 massolution 2013, All rights reserved. Confidential.
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2013CF MASSOLUTION.COM2
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33 2013CF MASSOLUTION.COM
Every big change starts off small. And nobody appreciates that fact more than Victor Emanuel Dijon von Monteton.
Victor is a former orchestral conductor who now conducts business as a consultant at A.T. Kearney a skill just as prized in business as in music.
As one of the top management consultancies worldwide, A.T. Kearney prides itself in leveraging the power of diverse teams to bring the best mix
of skills to our clients. Our promise: Immediate Impact, Growing Advantage. To find out more, visit www.ATKearney.com.
But unlike Beethoven, we dont leave anything unfinished.
Every great composition starts with a single tone.
Ellenoff Grossman & Schole LLP
212 370 1300
www.CrowdESQ.com
Ellenoff Grossman & Schole is the leading law firm serving the security crowdfunding industry.
Recognized as a thought leader and expert on the nuanced legalities of the JOBS Act,
Douglas S. Ellenoff, a member of the firm, speaks prolifically at conferences and events.
Hes been a key representative and advocate for the industry and has actively engaged with
the SEC to discuss many aspects of the proposed new law. Additionally, EG&S is working with
securities professionals internationally to assist them with shaping smart legislation to foster
investment crowdfunding in their jurisdictions. EG&S is actively engaged with clients in the
crowdfunding industry, including funding portals, broker-dealers, technology solution providers,
software developers, investors and entrepreneurs.
FOUNDING SPONSOR
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44 2013CF MASSOLUTION.COM
1. Introduction ............................................................................................ 6a. Foreword ................................................................................................... 7
b. Key Findings ............................................................................................. 9
i. Highlights ........................................................................................... 9
ii. Predictions ........................................................................................ 9
iii. Key Messages .................................................................................. 10
iv. Developments ................................................................................. 11
c. About this Research ................................................................................. 12
i. The 2013CF Industry Report .............................................................. 12
ii. The Research Team .......................................................................... 14
iii. About massolution ........................................................................... 17
d. Crowdfunding Defined ............................................................................ 18
i. Definition and Taxonomy .................................................................. 18
ii. Crowdfunding Models ...................................................................... 19
2. The 2012 Crowdfunding Market .................................................. 21a. Market Growth and Composition ........................................................... 22
i. Crowdfunding World Map; Total Funds Raised ................................ 23
ii. Growth by Crowdfunding Model ...................................................... 25
iii. Predictions; Regions ......................................................................... 27
iv. Predictions; Crowdfunding Models ................................................. 29
b. Campaign Statistics .................................................................................. 31
i. Campaigns Worldwide ....................................................................... 32
ii. Crowdfunding Models ...................................................................... 33
c. Success Rates ............................................................................................ 35
i. Threshold-Pledge Systems ................................................................ 36
ii. Funding Probabilities ........................................................................ 38
iii. The Pledge vs. Pay Out Ratio ........................................................... 39
d. Most Active Categories ............................................................................. 40
i. Across all Models ............................................................................... 41
ii. Financial vs. Non-Financial Return ................................................... 43
iii. Individual Models ............................................................................. 45
4
TABLE OF CONTENTS
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55 2013CF MASSOLUTION.COM
3. Web 2.0 Financing ................................................................................. 50a. The Collaborative Web .............................................................................. 51
b. Crowdfunding Dynamics .......................................................................... 52
i. Introduction ....................................................................................... 52
ii. Social Ties .......................................................................................... 53
iii. Social Proof ....................................................................................... 55
iv. Third-level Acceleration: Strong Ties, Weak Ties, & Beyond ............ 56
c. Legal Frameworks ..................................................................................... 58
i. Global Overview ................................................................................. 58
ii. Europe ............................................................................................... 60
ii. USA ..................................................................................................... 61
iv. Key Markets and Initiatives ............................................................. 62
d. Direct Crowdfunding ................................................................................ 66
i. Case Studies ....................................................................................... 66
ii. Applicability ....................................................................................... 68
iii. Costs and Benefits of CFPs .............................................................. 68
4. Outlook ........................................................................................................ 70a. Emerging Crowdfunding Platforms ......................................................... 71
i. A New World Map .............................................................................. 72
ii. Niche Platforms ................................................................................. 74
iii. Crowdfunding Models and Threshold-Pledge Systems ................. 75
iv. Financial Backing .............................................................................. 77
b. Capital Inflow ............................................................................................ 78
i. Crowdsourcing Primer ....................................................................... 79
ii. Capital Inflow Distribution ............................................................... 80
c. Developments ........................................................................................... 82
i. Industry Focus / Niche Platforms ...................................................... 83
ii. Locavesting / Community Platforms ................................................ 83
iii. Hybrid Platforms .............................................................................. 85
iv. Enterprise Crowdfunding ................................................................. 85
v. Crowdfunding Economic Development ........................................... 86
vi. LIVE Crowdfunding ........................................................................... 86
Appendix ............................................................................................................... 87
Acknowledgments ................................................................................................ 88
5
TABLE OF CONTENTS (CONT.)
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6FOREWORD
KEY FINDINGS
ABOUT THIS RESEARCH
CROWDFUNDING DEFINED
INTRODUCTION
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SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
If you think that crowdfunding just means smaller companies that launch games
and device projects on platforms like Kickstarter, think again. Crowdfunding has
now emerged as a viable, scalable alternative to public and private finance.
These developments have implications for how governments frame economic
development programs, and leverage public investments.
Behind the scenes major, global companies are running the rule over crowdfunding
as a way to leverage their innovation portfolios into the marketplace. Crowdfunding
is helping enterprises interact with lead customers, and validate R&D outputs.
No financial institution can afford not to be informed about how crowdfunding is
evolving across the world and providing new opportunities for banks, investment
houses, and financial intermediaries.
We founded massolution in order to study and advise on how crowdfunding models
are emerging in different parts of the world, impacting government policy, informing
enterprise innovation and changing the role of financial institutions.
We hope you find our 2013CF Industry Report insightful and that you embrace how
crowdfunding will change the way business is done.
Carl Esposti
CEO/Founder
Massolution and Crowdsourcing.org
FOREWORD
Introduction
7
CROWDFUNDING HAS
NOW EMERGED AS A
VIABLE, SCALABLE
ALTERNATIVE TO
PUBLIC AND PRIVATE
FINANCE.
THE NEW FINANCIAL REVOLUTION
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
2012 was a year of acceleration for the crowdfunding markets! It was the year where
crowdfunding platforms raised a total of $2.7bn compared with $1.5bn in 2011. In
massolutions 2012CF Industry Report, we predicted that the total funding volumes
would reach $2.8bn; our forecast was therefore correct within a very low margin of
error (~5%), and we can thus confirm that the global crowdfunding markets have
accelerated from an annual growth of 64% in 2011 to an 81% growth in 2012. We
are forecasting $5.1bn in total global funding volumes in 2013.
2012 was also the year where in January, the Elevation Dock became the first
individual campaign to reach the $1m milestone. A few months later in April, Pebble
Technology showed how to reach this milestone in only 28 hours; a campaign that
resulted in over $10m total funds raised.
It was also the year where attention shifted towards crowdfundings potential
impact on entrepreneurial finance. Equity-based crowdfunding got the bulk of
media attention in the US when the Jumpstart Our Business Startups Act (JOBS Act)
was signed into law on April 5th.
Since crowdfunding markets are nascent and the concept itself not broadly
understood, discussions about its applicability and potential often strands in
polemic narratives that contributes very limited (if any) value to the discussion. The
2013CF Industry Report therefore provides clarity on the taxonomy for the industry.
In addition to this we have added a separate chapter, Web 2.0 Financing, to provide
a deeper understanding of the very core of crowdfunding. Namely, capital formation
on the collaborative web. We are grateful for eminent contributions of Bryan Zhang
(Cambridge University), Dan Marom (The Hebrew University), Kristof De Buysere
(Tilburg University), and Sean Carr (University of Virginia).
Kevin Berg Kartaszewicz-Grell, Ph.D.
Research Director (Crowdfunding), Massolution
FOREWORD
Introduction
8
WE ARE
FORECASTING
$5.1BN IN TOTAL
GLOBAL FUNDING
VOLUMES IN 2013.
A YEAR OF ACCELERATION
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
The 2012 worldwide crowdfunding volume reached $2.7bn raised from
over 1.1m campaigns. Worldwide crowdfunding volumes grew 81% in 2012,
which is an acceleration from the 64% growth in 2011.
Growth rates by region:
North American crowdfunding volumes grew 105% to $1.6bn.
European crowdfunding volumes grew 65% to $945m.
On average, all other markets grew close to 125%.
Growth rates by crowdfunding models:
Donations- and Reward-based crowdfunding grew 85% to $1.4bn.
Lending-based crowdfunding grew 111% to $1.2bn.
Equity-based crowdfunding grew 30% to $116m.
HIGHLIGHTS
KEY FINDINGS
Introduction
9
THE 2012
WORLDWIDE
CROWDFUNDING
VOLUME REACHED
$2.7BN RAISED
FROM OVER 1.1M
CAMPAIGNS.
$5.1bn will be raised via crowdfunding platforms in 2013.
North America will remain the largest market in 2013:
72% will be raised in North America.
26% will be raised in Europe.
The remaining 2% will be raised primarily in Asia and Oceania.
Lending-based crowdfunding to exceed $2bn in 2013:
Lending-based crowdfunding is expected reach $2.1bn.
Crowdfunding without financial return is expected to reach $2.8bn.
Out of the $2.8bn from non-financial crowdfunding, $1.4bn will be raised
via pure donation-based crowdfunding.
Equity-based crowdfunding is expected to reach $166m.
PREDICTIONS
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10 2013CF MASSOLUTION.COM
The total number of successful campaigns across all models is largely unchanged,
but the aggregate funding volume almost doubled! This indicates a new level of
market maturity, in part because crowdfunding models are picking up traction
among start-ups and SMEs who have higher funding requirements than the
usual crowdfunding campaign.
Social Causes is by far the most popular category and drives close to 30% of all
crowdfunding activity. We expect this position to change as start-ups and SMEs
continue to take additional market share.
As crowdfunding resonates with the broader public, crowdfunding platforms will
have to prepare for further disruption as direct crowdfunding, outside platform
domains, drives a greater level of market disaggregation.
There is increased activity as regulators, especially in North America and in
Europe, are preparing for equity- and lending-based crowdfunding.
Crowdfunding platforms will need to develop strategies to either respond to or
participate in enterprise crowdfunding, as large enterprises have begun to either
partner or host their own platforms.
KEY MESSAGES
KEY FINDINGS
Introduction
THE TOTAL NUMBER
OF SUCCESSFUL
CAMPAIGNS
ACROSS ALL
MODELS IS LARGELY
UNCHANGED, BUT
THE AGGREGATE
FUNDING VOLUME
ALMOST DOUBLED!
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11 2013CF MASSOLUTION.COM
Massolution has identified six major developments within the crowdfunding
market.
Niche Platforms As platforms try to benefit from market differentiation, a
clear niche-, industry-, and sector-orientation is emerging.
Community Platforms Local investing has proven to overcome traditional
obstacles between investor and investee; relationships of trust are built,
nurtured, and leveraged through community-based crowdfunding.
Hybrid Platforms In the future crowdfunding platforms will no longer be
defined as donations-platforms, rewards-platforms, etc. Platforms will be
merging the various crowdfunding models and will tailor these hybrids of models
to the campaign owners needs.
Enterprise Crowdfunding Large enterprises have begun to look into
crowdfunding. Each model carries a new potential for large companies: raising
social profile, market testing, and spin-ins of entrepreneurial ventures are some
of the most popular examples.
Crowdfunding Economic Development Major development banks and similar
institutions are seeking to leverage crowdfunding for economic developments.
Crowdfundings social profile and its strong connection to micro-finance are the
main drivers.
LIVE Crowdfunding Online crowdfunding has recently been augmented
with exclusive launch events. These events are attributes to any of the basic
crowdfunding models and will become more commonplace because they
provide the much needed feeling of exclusivity to early-bird crowdfunders.
DEVELOPMENTS
KEY FINDINGS
Introduction
MASSOLUTION
HAS IDENTIFIED
SIX MAJOR
DEVELOPMENTS
WITHIN THE
CROWDFUNDING
MARKET.
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
ACROSS THE MODELS
FINANCIAL VS. NON-FINANCIAL CROWDFUNDING MODELS
INDIVIDUAL MODELS
THE 2013CF INDUSTRY REPORT
The 2013CF Industry Report provides a unique and in-depth analysis of
the crowdfunding market trends and composition. The research report is
informed by several sources of data and external research:
362 crowdfunding platforms out of an estimated total of 813 (both active
and pre-launch), have participated in this survey via the industry website,
Crowdsourcing.org. The response rate of 45% is an increase of 6% compared
to massolutions 2012CF Survey, and the quality of the submissions has also
improved, which has resulted in an 85% acceptance rate.
Key was the 2013CF Survey, which was conducted during the first six weeks
of 2013 and resulted in the most comprehensive data collection on the
worldwide crowdfunding market to date. From the 2013CF Survey, we received
308 responses of a sufficiently high quality and integrity. These submissions
provided extensive data related to the analysis presented in this report.
The survey was divided into separate sections depending on whether the
responder represented a launched (active) platform, or a pre-launched platform.
As expected, given that the crowdfunding industry, in many respects, is still in its
cradle, the pre-launch ratio is fairly high: 28%.
Massolution has conducted significant follow-up research via other reliable
channels to complete the profiling of the global crowdfunding industry. 85%
of the total market estimate is explained by primary and secondary research.
The remaining 15% is extrapolated taking regional and model distributions into
account.
The 2013CF Industry Report extends the scope of industry snapshots and trend
assessments of last years report with a deeper dive into one of the core topics
in the crowdfunding literature. We do this in the chapter Web 2.0 Financing. The
chapter was made possible by the collective efforts of massolutions research
ABOUT THIS RESEARCH
Introduction
12
THE 2013CF
INDUSTRY REPORT
PROVIDES A UNIQUE
AND IN-DEPTH
ANALYSIS OF THE
CROWDFUNDING
MARKET TRENDS AND
COMPOSITION.
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1313 2013CF MASSOLUTION.COM
director Kevin Berg Kartaszewicz-Grell and four of the top tier researchers in
academia: Bryan Zhang (Cambridge University), Dan Marom (The Hebrew
University), Kristof De Buysere (Tilburg University), and Sean Carr (University
of Virginia). The insights presented in the third chapter thus draw upon these
researchers own data, along with additional outreach by massolution.
Massolutions research methodology (C-STEP), crowdfunding industry
taxonomy, and the application of standardized metrics used throughout
this report have been developed over the course of several research and
advisory engagements. C-STEP is a research methodology that facilitates
analyses and assessments of crowdfundings applicability across regions and
verticals. It provides a unifying framework for strategizing, mechanism design,
implementation, and execution against any goal. Please contact massolution at
[email protected] for further information.
ABOUT THIS RESEARCH
Introduction
THE 2013CF INDUSTRY REPORT (CONT.)C-STEPTM
Crowdfunding - Social
Transformation and
Economic Performance
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14 2013CF MASSOLUTION.COM14
The 2013CF Industry Report was made possible through the tireless efforts of:
THE RESEARCH TEAM
ABOUT THIS RESEARCH
Introduction
Kevin Berg Kartaszewicz-Grell
Research Director
Kevin is massolutions Research Director for Crowdfunding and
Crowdsourcing.orgs CAPS Program Director. Research interests
include: Information-flow in distributed networks and Network
driven asset allocation. He holds a PhD in finance, an MSc and a
BSc in mathematics and economics.
Maria Adamowicz
Senior Analyst
Maria is a multi-lingual researcher with a variety of financial and
analytical experience from various countries. She holds a double
MBA in Capital Markets (Warsaw University) and International
Business (HULT International Business School).
Francesco Schiavone, University of Naples
Academic Advisor / Regional Analyst; Italy
Francesco Schiavone is an assistant professor in management at
University Parthenope in Napoli (Italy). He is affiliated professor at
ESG Business School in Paris (France). His main research interest
are innovation, technological change, communities of practice,
crowdfunding.
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15 2013CF MASSOLUTION.COM15
THE RESEARCH TEAM (CONT.)
ABOUT THIS RESEARCH
Introduction
Sean Carr, University of Virginia
Academic Contributor
Sean is a lecturer and PhD researcher at the University of Virginias
Darden School of Business and director of intellectual capital at
the Batten Institute. Research interests include: entrepreneurship
and organizational dynamics. He holds an MBA, MSc, and a BA.
Kristof De Buysere, Tilburg University
Academic Contributor
Kristof has been trained in law, engineering (applied computer
science) and finance and is a lecturer and researcher at
the department of Business Law at Tilburg University (The
Netherlands). He also advises technology companies, especially
during their fundraising efforts.
Dan Marom, The Hebrew University
Academic Contributor
Dan is a PhD researcher at the Hebrew University, and co-author
of The CrowdFunding Revolution (with Kevin Lawton). He holds
an MBA (Cum laude) and a BSc in electrical engineering. His
research focuses on crowdfunding and entrepreneurial finance.
Bryan Zhang, Cambridge University
Academic Contributor
Bryan is a PhD researcher in crowdfunding at Cambridge
University. He is a Fellow of the Royal Society of Arts and a
Postgraduate Fellow of the Royal Geographical Society. He holds a
BA from Cambridge and an MSc from Oxford.
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16 2013CF MASSOLUTION.COM16
THE RESEARCH TEAM (CONT.)
ABOUT THIS RESEARCH
Introduction
Tim Haverkamp
Regional Analyst; the Netherlands
Tim is a Business Administration graduate at the Erasmus
University Rotterdam. He did his master in Entrepreneurship
and a second master in Financial Law. His master thesis was on
internationalization strategies of crowdfunding platforms.
Jia Qiao
Regional Analyst; China
Jia Qiao is a graduate of South East University, China. After
completing her Bachelor in Business Administration in 2010, she
went on to further studies in Enterprise Management, obtaining
her Masters in March 2013.
David Shin
Regional Analyst; Korea
David is the CEO of CrowdRI and MARKMOUNT, research and
media platforms about crowdsourcing & funding in South Korea.
He holds a BA from Hanyang University and is finishing his MSc at
the University of North Korean Studies in South Korea.
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1717 2013CF MASSOLUTION.COM
There is a revolution in how we work and how we fund business and
massolution is at the heart of it.
Massolution is a unique research and advisory firm that is pioneering the
use of crowd-solutions in government, institutions and in enterprises.
Massolutions pioneering work includes:
Consulting to enterprises on the adoption of crowdsourcing and
crowdfunding to leverage enterprise innovation portfolios
Supporting enterprises in the design and delivery of new work processes
that enable crowd labor solutions
Advisory work to Governments and institutions on national crowdsourcing
and crowdfunding strategies that drive social and economic impact
Advising nations on the design and build of future digital workforce
strategies to create new high-income digital jobs
Agency advisory on the use of the crowd to improve public sector processes
and drive new forms of capital formation.
Massolution is helping to write the guidelines for a new way to do and
fund business.
ABOUT MASSOLUTION
ABOUT THIS RESEARCH
Introduction
CROWDSOURCING, INC
Crowdsourcing, Inc operates two business units, massolution (Research and Advisory) and Crowdsourcing.org (Publishing and Events), and is headquartered in Los Angeles, California at:
11400 West Olympic Blvd.
Suite 200
Los Angeles, CA 90064
To reach a member
of the massolution or
Crowdsourcing.org team
please contact:
Media ContactJennifer Moebius
Twitter@Crowdsourcing_
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1818 2013CF MASSOLUTION.COM
DEFINITION AND TAXONOMY
Crowdfunders and Campaign Owners
Crowdfunding refers to any kind of capital formation where both funding needs
and funding purposes are communicated broadly, via an open call, in a forum
where the call can be evaluated by a large group of individuals, the crowd. The
outreach is referred to as a crowdfunding campaign and the person or company
who is in charge of the campaign is referred to as the campaign owner.
Open Calls
An open call in context of crowdfunding (and crowdsourcing in general)
is understood as a call-to-action; e.g. a call-for-support or capital, where
the message is not targeted at any specific intended recipient. This line
of communication serves as an indirect stakeholder screening since the
communication is established via the interested recipients feedback as opposed
to direct communication established by the sender.
Crowdfunding Platforms (CFPs)
In a crowdfunding context, the sender is the campaign owner, the recipient
is any member of the crowd that decides to support the campaign, and the
communication is predominantly established via a crowdfunding platform
(CFP) supported by the campaign owners personal means of communication
and outreach. In a modern context, the availability of personal communication
channels have accelerated rapidly, which has fundamentally changed the
nature of open calls, and thus the nature of crowdfunding. With the emergence
of Web 2.0, open calls transcend into open communication, and a request for
financial support or an investment proposal therefore turn into collaborative
social network activities. We have therefore included a separate chapter, Web
2.0 Financing, in this years report that will explore some of the implications that
the collaborative web has on crowdfunding.
CROWDFUNDING DEFINED
Introduction
CROWDFUNDING
REFERS TO ANY
KIND OF CAPITAL
FORMATION WHERE
BOTH FUNDING
NEEDS AND FUNDING
PURPOSES ARE
COMMUNICATED
BROADLY VIA AN
OPEN CALL IN A
FORUM WHERE
THE CALL CAN BE
EVALUATED BY A
LARGE GROUP OF
INDIVIDUALS, THE
CROWD.
-
1919 2013CF MASSOLUTION.COM
CROWDFUNDING MODELS
There are four well established crowdfunding models: donation-based, reward-
based, lending-based, and equity-based crowdfunding, and one emerging
model royalty-based crowdfunding. Each of these have different features to
match the different needs of campaign owners.
Massolutions taxonomy is thus determined by the proposed exchange between
campaign owner and crowdfunder. Other taxonomies attempt to analyze the
crowdfunding market based on the variety in types of campaign owners, the
different incentives the crowdfunders may have to support a project, and even
a raw division into which regions the crowdfunding activity takes place in.
Although these approaches may be well-motivated, the aggregation of
fundamentally different exchanges makes for a myopic analysis and renders
the reader uninformed about the economic reality underlying the aggregation,
as well as the incentives for crowdfunders to engage and campaign owners to
propose specific exchanges.
One immediate benefit of the exchange-based taxonomy is that it allows the
researcher to investigate how the different crowdfunding models apply to
different funding scenarios; e.g. based on a categorization of campaign owners,
the maturity of the campaign owner (or crowdfunder), the economic outlook of
the campaign owner, etc. The definition of each crowdfunding model is provided
in the margin.
CROWDFUNDING DEFINED
Introduction
DONATIONSCrowdfunders donate money
to campaign owners and
do not expect to receive a
tangible benefit from the
transaction.
REWARDSCrowdfunders support
campaign owners and receive
some kind of reward in return
for their contribution.
EQUITYCrowdfunders invest in
campaign owners and receive
equity or equity-like shares in
return for their investment.
LENDINGCrowdfunders lend money
to campaign owners and
expect the future repayment
of a principal with or without
interest.
ROYALTYCrowdfunders invest in
campaign owners and receive
a share of revenue earned in
return for their investment.
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20 2013CF MASSOLUTION.COM20
Threshold-Pledge Systems (TPS)
Across the various crowdfunding models, one of the most common
characteristics is the campaign owners communication of funding need and
purpose. Unless the campaign seeks support for an ongoing project (often
social and/or philanthropic), the aggregate funding goal will almost always
be communicated as a part of the open call. CFPs divide into three categories
as to whether the announced funding goal must be reached in order for the
campaign owner to be able to collect the funds. When a campaign owner has
to reach the funding goal, the CFP is said to use a Threshold-Pledge System
(TPS). The TPS feature is frequently considered synonymous with crowdfunding.
However, this is inaccurate; only 54% of the CFPs worldwide use this model. 28%
of the CFPs will pay out any amount raised to the campaign owner, regardless
of whether the funding goal was reached or not. A TPS is especially applicable
when the campaign owner seeks capital for a project that does not scale down.
Some platforms target campaign owners of both kinds, and the TPS decision is
given to the campaign owner when the campaign is launched; 18% of the CFPs
worldwide have an optional TPS.
CROWDFUNDING DEFINED
Introduction
Figure: Threshold-Pledge Systems availability.
Threshold-PledgeSystem
54%
No Threshold-PledgeSystem
28%
Optional
18%
CROWDFUNDING MODELS (CONT.)
-
21
MARKET GROWTH AND COMPOSITION
CAMPAIGN STATISTICS
SUCCESS RATES
MOST ACTIVE CATEGORIES
THE 2012CROWDFUNDING MARKET
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22 2013CF MASSOLUTION.COM
The 2012 Crowdfunding Market
MARKET GROWTH AND COMPOSITION
Introduction
Data on crowdfunding is scarce, but extremely important for all market
constituents to inform market strategies and have a clear understanding of
which crowdfunding sectors are expanding rapidly.
Crowdfunding saw tremendous growth in 2012 in terms of dollars raised,
exceeding growth in 2011. In this section, we examine and analyze this
development, looking at specific regions and crowdfunding platform models.
Our forecasts for crowdfunding in 2013 are based on a two-period lagged
regression and also take into account model-specific and regional variation.
In this section we will be addressing which models and regions are seeing
greatest growth, and we will take a closer look at the level of activity within each
of the major categories.
CROWDFUNDING
SAW TREMENDOUS
GROWTH IN 2012 IN
TERMS OF DOLLARS
RAISED, EXCEEDING
GROWTH IN 2011.
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
NORTHAMERICA
ASIA
OCEANIA
Total funds raised during 2012 in USD
$1,606 million
$76 million
$33 million
AFRICA$0.065 million
EUROPE$945 million
SOUTHAMERICA$0.8 million
WORLDWIDE$2.7bn
23
The global crowdfunding market grew 81% in 2012 to a total funding volume of
$2.7bn. Compared with 64% growth in 2011, crowdfunding is accelerating.
CROWDFUNDING WORLD MAP: TOTAL FUNDS RAISED
MARKET GROWTH AND COMPOSITION
The 2012 Crowdfunding Market
Figure: Global crowdfunding volumes; the Crowdfunding World Map.
-
Crowdfundings increasing adoption across the world is providing access to a
new source of capital for entrepreneurs in many countries, however, North
American and European platforms are still overwhelmingly dominant, raising
significantly more capital than platforms in all other regions combined.
North American platforms raised in excess of $1.6bn, which is a 105% increase
compared to 2011. In 2011, the North American crowdfunding market grew at
the lesser rate of 86%.
European platforms raised close to $945m, which is a 65% increase compared
to 2011. In 2011, the European crowdfunding market grew at the lesser rate of
42%, and the global acceleration is thus driven by acceleration in both North
American and European crowdfunding markets.
North America and Europe still account for more than 95% of the total market.
Crowdfunding in Asia and Oceania is accelerating, however, the aggregate 2012
funding volumes are below $50m and $100m, respectively.
South American and African CFPs are also emerging and funding volumes
are accelerating from a zero base at a much higher rate than other regions,
where crowdfunding is more established. Crowdfunding markets outside North
America and Europe, accelerated from at 59% growth rate in 2011 to 125% in
2012.
The 2012 Crowdfunding Market
MARKET GROWTH AND COMPOSITION
24
CROWDFUNDING WORLD MAP (CONT.)THE GLOBAL
CROWDFUNDING
MARKET GREW 81%
IN 2012 TO A TOTAL
FUNDING VOLUME OF
$2.67BN.
2013CF MASSOLUTION.COM
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM25
The growth in 2012 funding volumes was primarily driven by lending-based and
donation-based crowdfunding.
Lending grew 111% to a total volume of $1.2bn, while donation-based
crowdfunding grew 45% to a total volume of $979m. The growth in lending
volumes mainly stems from crowdfunded micro-loans and from local SME loans.
In the aggregate, crowdfunding without financial return, donation- and reward-
based, grew 85% to a total close to $1.4bn. Therefore, the additional growth
(85% compared with the 45% growth in donations) stems from campaigns where
rewards are offered in return for fundingeither combined with an option to
donate or as a pure reward-based crowdfunding campaign.
GROWTH BY CROWDFUNDING MODEL
MARKET GROWTH AND COMPOSITION
The 2012 Crowdfunding Market
Figure: Growth by crowdfunding model.
0
1000
2000
3000
EquityDonation Lending Reward Mixed others
2010 2011 2012
460.4
49.9
316.5
15.7
675.7
88.9
554.9
61.5
979.3
115.7
1169.7
383.3
12.4
Mill
ions
of U
SD $
-
This growth can best be explained by start-ups and SMEs adaptation of reward-
based crowdfunding. The path from prototype to marketplace drastically
shortens for products and services that can appeal to the crowd.
In many juristictions equity-based crowdfunding is still pending regulators
acceptance, which means that growth on a global scale is limited. In 2012, the
market grew 30% to 115.7m. [1]
Lending- and reward-based crowdfunding accelerated 35% and 232%,
respectively (change in growth rates), while the growth in donations-based
crowdfunding is stable at 45% growth compared to 47% in 2011. Equity-based
crowdfunding grew slower in 2012 at 30% growth than in 2011 when the growth
was 78%.
An analysis of funding activity by category for each crowdfunding model is
provided later in this chapter.
The 2012 Crowdfunding Market
MARKET GROWTH AND COMPOSITION
26
GROWTH BY CROWDFUNDING MODEL (CONT.)
2013CF MASSOLUTION.COM
[1] Against revised numbers for 2010/2011. See Appendix for further information.
LENDING- AND
REWARD-BASED
CROWDFUNDING
ACCELERATED
35% AND 232%
RESPECTIVELY.
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM27
The predictions in this section are derived from a two-period lagged regression
of total funding volumes using subsamples of all combinations of region and
crowdfunding model.
Extrapolations were made based on 204 survey responses from our 2013CF
survey and 135 survey responses from 2012CF survey supplemented by data
collected by massolutions on-going tracking of the crowdfunding market. On
this basis we predict that crowdfunding volumes in 2013 will be $5.1bn.
PREDICTIONS; REGIONS
MARKET GROWTH AND COMPOSITION
The 2012 Crowdfunding Market
Figure: Growth in funding volume worldwide in millions of USD
(research based estimate for 2013).
WE PREDICT THAT
CROWDFUNDING
VOLUMES IN 2013
WILL BE $5.1BN.
0
2000
4000
6000
EuropeNorth America Other Regions
2010 2011 2012
3698.2
1330.0
109.7
Mill
ions
of U
SD $
2013 (est.)
3000
5000
1000
-
North American crowdfunding is expected to reaffirm its solid lead in terms
of aggregate funding volume in 2013. Close to $3.7bn will be crowdfunded in
North America. This market is expected to evolve faster due to the growth in
lending-based crowdfunding.
Although equity-based crowdfunding is increasing in scale in Europe, the size
of the market is still small in comparison to the size of the the current lending
market in North America. This difference is of such magnitude that we predict
that North America will remain ahead of Europe in 2013. Even accounting for
accelerated growth in Europe, the funding volume gap will not be bridged during
2013. We predict, largely due to the popularity of lending-based crowdfunding in
North America, that this region will account for 72% of the total funding volume
in 2013, compared to 60% in 2012.
Outside North America and Europe, crowdfunding is a relatively new concept and
for this reason, we will see rapid growth outside the established crowdfunding
markets within three years. Asia and Oceania account for most of the growth
outside North America and Europe.
The 2012 Crowdfunding Market
MARKET GROWTH AND COMPOSITION
28
PREDICTIONS; REGIONS (CONT.)
2013CF MASSOLUTION.COM
NORTH AMERICAN
CROWDFUNDING
IS EXPECTED TO
REAFFIRM ITS SOLID
LEAD IN TERMS
OF AGGREGATE
FUNDING VOLUME
IN 2013. CLOSE TO
$3.7BN WILL BE
CROWDFUNDED IN
NORTH AMERICA.
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
0
2000
4000
6000
EquityDonation Lending Reward Mixed others
2010 2011 2012
1430.3
165.9
2123.4
1344.2
74.1
Mill
ions
of U
SD $
2013 (est.)
3000
5000
1000
29
Lending- and donation-based crowdfunding are expected to remain the most
popular crowdfunding models, but we predict that in 2013, total funding
volumes for reward-based models will be close in comparison.
Lending-based crowdfunding is expected to grow 82% to a total above $2bn,
accounting for more than 40% of the total 2013 funding volume. This model
will continue to grow in popularity for crowdfunded micro-loans (personal and
commercial) and for SME loans.
PREDICTIONS; CROWDFUNDING MODELS
MARKET GROWTH AND COMPOSITION
The 2012 Crowdfunding Market
Figure: Growth in funding volume by crowdfunding model in
millions of USD (research based estimate for 2013).
LENDING- AND
DONATION-BASED
CROWDFUNDING ARE
EXPECTED TO REMAIN
THE MOST POPULAR
CROWDFUNDING
MODELS.
-
Donation-based crowdfunding is expected to grow 46% to a total of $1.4bn,
accounting for 28% of the total 2013 funding volume. Donations will continue
to be popular for social and personal causes, but will gain less traction for
commercial ventures.
Reward-based crowdfunding has gained tremendous popularity, and in many
cases, has been combined with other models, in particular donation-based
crowdfunding. We predict that as reward structures keep evolving and as the
market gains further trust in reward-based models, 2013 will be the year where
more than $1bn is raised via reward-based crowdfunding.
The 2012 Crowdfunding Market
MARKET GROWTH AND COMPOSITION
30
PREDICTIONS; CROWDFUNDING MODELS (CONT.)
2013CF MASSOLUTION.COM
2013 WILL BE THE
YEAR WHERE MORE
THAN $1BN IS RAISED
VIA REWARD-BASED
CROWDFUNDING.
-
31 2013CF MASSOLUTION.COM
The 2012 Crowdfunding Market
CAMPAIGN STATISTICS
Introduction
In this section, we take a closer look at crowdfunding campaign statistics. Our
research shows that over 1 million crowdfunding campaigns (of all kinds) were
successfully funded in 2012.
The majority of the campaigns were conducted on donation-based platforms,
followed by lending-based, the two most established crowdfunding models.
Median campaign sizes across lending-, reward-, and donation-based
crowdfunding models were all under $5,000. While the median size of equity-
based campaigns were significantly higher at $190,000, over twice the median
size of equity-based campaigns in 2011.
This information serves as a great starting point for entrepreneurs looking
to crowdfund an idea. The section provides details of typical crowdfunding
campaign sizes of successful campaigns across each model of the most popular
models.
THE MEDIAN SIZE
OF EQUITY-BASED
CAMPAIGNS IN 2012
WAS $190,000, OVER
DOUBLE THE 2011
MEDIAN.
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
Figure: Number of crowdfunding campaigns; Crowdfunding World Map.
32
Consistent with the distribution of global crowdfunding volumes, the majority of
campaigns were hosted on North American or European CFPs.
More than 1.1 million crowdfunding campaigns received funding during 2012.
680,000 campaigns were donation-based and close to 250,000 were lending-
based. 625,000 campaigns were hosted on North American CFPs and 470,000
hosted on European CFPs.
CAMPAIGNS WORLDWIDE
CAMPAIGN STATISTICS
The 2012 Crowdfunding Market
NORTHAMERICA
Total numbers of crowdfunding campaigns in 2012
625 thousand
EUROPE470 thousand
WORLDWIDE1.1 million
OTHERREGIONS8 thousand
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
Figure: Number of crowdfunding campaigns by model.
33
Donation-based crowdfunding has a very different appeal than the other
models. Its application is therefore also very different.
Donation-based campaigns typically have smaller funding goals, and therefore
a high volume of campaigns account for the large contribution to total funding
volume from this model.
62% of all successful campaigns in 2012 were donation-based, while lending-
based crowdfunding accounted for 22%.
CROWDFUNDING MODELS
CAMPAIGN STATISTICS
The 2012 Crowdfunding Market
62% OF ALL
SUCCESSFUL
CAMPAIGNS IN 2012
WERE DONATION-
BASED, WHILE
LENDING-BASED
CROWDFUNDING
ACCOUNTED FOR
22%.
0
400
800
Donation Others
2009 2010 2011
62%
22%
15%
Num
ber
of c
ampa
igns
(tho
usan
ds)
2012
600
1000
200
Debt Donations-Reward Mix
1200
1%
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
Figure: Median campaign sizes in USD across crowdfunding models.
34
The typical campaign sizes across the different crowdfunding models are: $1,400
for donation-based campaigns, $2,300 (donation-reward mix), $2,300 (rewards),
$4,700 (lending), and $190,000 (equity).
The number of successful campaigns was almost unchanged compared to 2011,
while the funding volume in the same period grew by 81%. This is due to the
fact that donation-based campaigns accounted for almost half of the aggregate
funding volume and that the typical funding volume per campaign more than
doubled in 2012.
CROWDFUNDING MODELS (CONT.)
CAMPAIGN STATISTICS
The 2012 Crowdfunding Market
LENDING$4.7 thousand
MIXED OTHERS$4.3 thousand
REWARD$2.3 thousand
DONATION-REWARD MIX$2.3 thousand
DONATIONS$1.4 thousand
EQUITY$190 thousand
-
35 2013CF MASSOLUTION.COM
The 2012 Crowdfunding Market
SUCCESS RATES
Introduction
One of the most important data points to analyze when it comes to crowdfunding
are the actual success rates of crowdfunding campaigns. Success rates are
analyzed via funding probabilities and pay out vs. pledge ratios.
In order to understand a campaigns likely success rate, one must first become
familiar with the Threshold-Pledge System (TPS). This section looks at the use of
TPS across the different crowdfunding models.
We examine funding probabilities by both crowdfunding model and region. From
a model perspective, lending-based campaigns have the highest probability of
succeeding, largely due to the popularity of micro-loans which have the highest
funding probability across all types of campaigns. From a regional perspective,
campaigns in North America succeed more frequently that all other regions.
We finish the section by evaluating the pledge vs. pay out ratio, which is a partial
measure of crowdfundings efficiency; if the ratio is high, individual pledges are
more likely to be allocated to the campaign owners as intended, rather than
being returned to the crowdfunder. Again, we categorize the data by both
crowdfunding model and region.
SUCCESS RATES
ARE ANALYZED
VIA TWO KEY
METRICS: FUNDING
PROBABILITIES AND
PLEDGE VS. PAY OUT
RATIOS.
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
Figure: Availability of Threshold-Pledge Systems across crowdfunding models.
36
In order to understand why funding probabilities are relevant for crowdfunding
campaigns, it is crucial to realize that besides the five basic crowdfunding
models (donations, rewards, lending, equity, and royalty), CFPs differ in their
use of the Threshold-Pledge System (TPS).
When a campaign owner has to reach the funding goal to receive funding, the
CFP is said to use a TPS; 54% of the CFPs worldwide use this model. 28% of
the CFPs will pay out any amount raised to the campaign owner, regardless
of whether the funding goal was reached or not. A TPS is especially applicable
THRESHOLD-PLEDGE SYSTEMS
SUCCESS RATES
The 2012 Crowdfunding Market
0
60%
40%
80%
20%
100%
Threshold-Pledge System
No Threshold-Pledge System
Optional
Rewa
rd
Equit
y
Lend
ing
Dona
tion-R
ewar
d Mix
Dona
tions
Mixe
d Oth
ers
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
Figure: Threshold-Pledge Systems availability.
37
when the campaign owner seeks capital for a project that does not scale down.
Some platforms target campaign owners of both kinds, and the TPS decision
is given to the campaign owner when the campaign is launched; 18% of the
CFPs worldwide have an optional TPS. When a campaign owner elects not to
use a TPS, they are assured of receiving any contribution of funds made to their
campaign. Campaigns that serve a social or personal (noncommercial) cause
are less likely to use a TPS and many CFPs that specialize in donation-based
crowdfunding will therefore not offer a TPS option.
A TPS reduces the execution/delivery risk if the campaign owner sets the
funding goal at the funding level required to get a product from prototype to
market. If the funding goal is not reached, additional funding will be needed
to complete the process. If these funds cannot be raised, the product is less
likely to reach production. In this situation, a TPS will lower the risk of a product
experiencing delays or being canceled due to a lack of funding, and hence the
TPS has mitigated the delivery risk. For this reason, reward-based crowdfunding
often makes use of a TPS.
THRESHOLD-PLEDGE SYSTEMS (CONT.)
SUCCESS RATES
The 2012 Crowdfunding Market
Threshold-PledgeSystem
54%
No Threshold-PledgeSystem
28%
Optional
18%
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
Figure: Funding probabilities for crowdfunding campaigns by model (left) and by region (right).
38
We can estimate the funding probabilities for each crowdfunding model by
comparing the number of successful campaign to the total amount of campaigns
posted.
This reveals that most models funding probabilities are aligned around a 50/50
chance of reaching the goal.
Lendingbased crowdfunding is the exception with a 91% funding probability.
This relatively high figure stems primarily from crowdfunded micro-loans.
As lending-based crowdfunding is more popular than other models in North
America, this draws the funding probability across all models for this region to
90%.
FUNDING PROBABILITIES
SUCCESS RATES
The 2012 Crowdfunding Market
Successful Unsuccessful
0%
20%
40%
60%
80%
100%
Dona
tion-R
ewar
d Mix
Equit
y
Dona
tions
Rewa
rd
Mixe
d Oth
ers
Lend
ing0%
20%
40%
60%
80%
100%
Asia
Euro
pe
Ocea
nia
Othe
r Reg
ions
Sout
h Ame
rica
North
Amer
ica
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
Figure: The pledge vs. pay out ratio for crowdfunding campaigns by model (left) and by region (right).
39
Besides funding probabilities, the pledge vs. pay out ratio informs us about
what percentage of funds pledged on a crowdfunding campaign was paid out to
campaign owners. Funds that are not paid out to a campaign owner are simply
returned to the crowdfunder, having not created any economic value, and thus
the pledge vs. pay out ratio is a partial measure of crowdfundings efficiency in
terms of individuals investment preferences.
As noted earlier, donation-based crowdfunding platforms make less use
of TPS, which means that any funds that are pledged will also be paid out.
Donations therefore score relatively high with this measure (94%). Equity-based
crowdfunding has an average funding probability (45%), but a high pledge vs.
payout ratio (93%). This indicates that equity-based crowdfunding is an efficient
way to invest in terms of investment preferences.
THE PLEDGE VS. PAY OUT RATIO
SUCCESS RATES
The 2012 Crowdfunding Market
Paid out Not paid out
0%
20%
40%
60%
80%
100%
Mixe
d Oth
ers
Rewa
rd
Dona
tions
-Rewa
rd M
ixDe
bt
Equit
y0%
20%
40%
60%
80%
100%
Afric
a
Euro
pe
North
Amer
ica
Ocea
nia
Sout
h Ame
rica
Asia
Dona
tions
-
40 2013CF MASSOLUTION.COM
The 2012 Crowdfunding Market
MOST ACTIVE CATEGORIES
Introduction
Just as the traditional capital formation industry has identifiable successes that
can guide investors, so too crowdfunding data, collected by massolution, allows
us to highlight what is working best in crowdfunding campaigns.
If you want to understand where success and failure lies, this data is essential. It
can tell us which categories of projects are rising, falling or emerging, and which
types of projects succeed per platform-type.
For example, we can observe that across all crowdfunding models, social causes
is a very active. But that is not the case with environmentally oriented campaigns,
a type you might imagine is close to social causes.
Unlike traditional capital formation multilayered reward structures are integral
to crowdfunding. So what works, and what does not? That is one of the key
questions for anybody approaching this sector.
UNLIKE TRADITIONAL
CAPITAL FORMATION
MULTILAYERED
REWARD
STRUCTURES
ARE INTEGRAL TO
CROWDFUNDING.
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
Social Causes
Business and Entrepreneurship
Films and Performing Arts
Music and Recording Arts
Energy and Environment
Fashion
Art (general)
Information and Communication Technology
Journalism, Books, Photo, and Publishing Arts
Science and Technology
27.4%
16.9%
11.9%
7.5%
5.9%
5.5%
4.8%
4.8%
3.5%
3.2%
41
Crowdfunding first gained popularity as a way to fund creative, philanthropic,
and social endeavors. This popularity prevails, but crowdfundings application
for entrepreneurial ventures has gained traction as well, especially crowdfunding
models with financial return.
Massolution measures platform activity across two parameters: the number
of successful campaigns and the funding volumes within individual categories.
From these parameters we derive comparable statistics across 15 categories
The 10 most popular are presented in the bar chart. The presentation and
analysis in this section is informed by comprehensive survey data from 49 CFPs.
ACROSS ALL MODELS
MOST ACTIVE CATEGORIES
The 2012 Crowdfunding Market
Figure: Crowdfunding Platform activity across the 10 most active categories.
-
Social Causes is still the most active category (27.4%), followed by Business &
Entrepreneurship (16.9%), and the two major art categories: Films & Performing
Arts (11.9%) and Music & Recording Arts (7.5%). Energy & Environment (5.9%)
is the emerging category among the five most active categories. Some of the
ventures in this category could be added to the Social Causes category while
others could be added to Business & Entrepreneurship, but because of an
increased focus on green technologies and visionary energy solutions and
due to their broad appeal, Energy & Environment has branched out as its own
category that is expected to grow rapidly in the years to come.
The 2012 Crowdfunding Market
MOST ACTIVE CATEGORIES
42
ACROSS ALL MODELS (CONT.)
2013CF MASSOLUTION.COM
ENERGY &
ENVIRONMENT
CAMPAIGNS ARE
EXPECTED TO GROW
RAPIDLY IN THE
YEARS TO COME.
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM
Social Causes
Business and Entrepreneurship
Films and Performing Arts
Music and Recording Arts
Energy and Environment
Fashion
Art (general)
Information and Communication Technology
Journalism, Books, Photo, and Publishing Arts
Science and Technology
Donation and/or Rewards Financial Return
0% 5% 10% 15% 20% 25% 30%
43
If we inspect the most active categories to see which crowdfunding models are
driving activity, several interesting observations can be made.
The high level of activity in the Social Causes category is driven by all
crowdfunding models, which lends to the conclusion that crowdfunding in itself
has an engaging effect and an appeal to common or social challenges.
FINANCIAL VS. NON-FINANCIAL RETURN
MOST ACTIVE CATEGORIES
The 2012 Crowdfunding Market
Figure: Financial versus Non-Financial crowdfunding activities.
-
The activities in the Business & Entrepreneurship and in the Energy &
Environment categories are mainly driven by crowdfunding models that offer
some kind of financial return. This can be explained by the for-profit mindset
of the campaign owners in these categories and the fact that, especially for
campaigns in the Energy & Environment category, it is challenging to establish a
suitable reward structure. However, emerging CFPs within this niche might take
that particular challenge and create a crowdfunding model that does not rely on
financial return within the Energy & Environment category.
When we compare the two major art categories, it is interesting to see that Film
& Performing Arts make use of both financial and non-financial crowdfunding,
while the activity in the Music & Recording Arts category is mainly driven by
non-financial crowdfunding; reward-based crowdfunding is especially popular
in the latter category. The concentration on non-financial crowdfunding can be
explained by cultural biases among recording artists, or by the relatively low
funding requirements in this category.
The 2012 Crowdfunding Market
MOST ACTIVE CATEGORIES
44
FINANCIAL VS. NON-FINANCIAL RETURN (CONT.)
2013CF MASSOLUTION.COM
FILM & PERFORMING
ARTS MAKE USE OF
BOTH FINANCIAL
AND NON-FINANCIAL
CROWDFUNDING.
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM45
Non-financial crowdfunding is popular, especially the donation-based model.
It is applied across all the biggest categories except for Energy & Environment.
As expected, the Social Causes category has more activity on platforms using
this particular model.
Business & Entrepreneurship has less, which is explained by the for-profit
mindset of most of the campaign owners in this category.
This model is also very popular for creative projects that do not fall into one of
the two art categories we discuss above.
INDIVIDUAL MODELS: DONATIONS
MOST ACTIVE CATEGORIES
The 2012 Crowdfunding Market
Figure: Donation-based crowdfunding activity.
Social Causes
Films and Performing Art
Business and Entrepreneurship
Music and Recording Arts
Art (general)
32.6%
14.1%
12.8%
9.3%
7.9%
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM46
The crowdfunding model that, beyond any doubt, gets the most media attention
is the reward-based model. Activity within this model (where the crowdfunders
are offered a tangible non-financial return) is more evenly spread out, as artists,
entrepreneurs, and businesses adopt this funding model.
Social Causes is again the most active category. In fact, the activity across the
different categories using reward-based crowdfunding is more or less similar
to the overall picture except for the Energy & Environment category, where
reward-based crowdfunding is still nascent.
INDIVIDUAL MODELS: REWARDS
MOST ACTIVE CATEGORIES
The 2012 Crowdfunding Market
Figure: Reward-based crowdfunding activity.
Social Causes
Films and Performing Arts
Business and Entrepreneurship
Music and Recording Arts
Fashion
17.7%
17.7%
16.3%
11.1%
8.2%
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM47
The simplest financial agreement one can think of is a loan. These agreements
promise a pre-determined repayment schedule and, commonly, an interest
payment, as well. The expected total repayment is therefore capped at the
time lender and borrower agree on the terms of the agreement. Lending will
therefore not provide the high potential of other financial agreements, and for
this reason, lending-based crowdfunding is most used by small businesses.
The Business & Entrepreneurship category is therefore the most active category
on lending-based campaigns, followed by Energy & Environment campaigns.
Social Causes and creative ventures are less active in the use of this model
presumably because they cannot guarantee the required repayment.
INDIVIDUAL MODELS: LENDING
MOST ACTIVE CATEGORIES
The 2012 Crowdfunding Market
Figure: Lending-based crowdfunding activity.
Business and Entrepreneurship
Energy and Environment
Social Causes
Art (general)
Music and Recording Arts
54.2%
25.0%
12.5%
4.2%
4.2%
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM48
Not surprisingly, most of the activity within the equity-based crowdfunding
space relates to commercial enterprises.
The Business & Entrepreneurship category is the most active, followed by Social
Causes, which is less active on equity-based campaigns when compared to
other models.
Information & Communications Technology (ICT) campaigns have been
separated from the Business & Entrepreneurship category because campaigns
in this particular category are expected to be the front-runners of equity-based
crowdfunding. The reasons for this is not related to the particular risk structure
of campaigns in this category, but merely due to the fact that crowdfunding
is better recognized by both prospective campaign owners and crowdfunders
interested in this field.
INDIVIDUAL MODELS: EQUITY
MOST ACTIVE CATEGORIES
The 2012 Crowdfunding Market
Figure: Equity-based crowdfunding activity.
Business and Entrepreneurship
Social Causes
Information and Communication Technology
Film and Performing Arts
Energy and Environment
29.1%
23.3%
14.9%
14.6%
5.1%
-
SECTION OVERVIEW
ACROSS THE MODELS
FINANCIAL VS.
NON-FINANCIAL
CROWDFUNDING
MODELS
INDIVIDUAL MODELS
2013CF MASSOLUTION.COM49
When a campaign owner offers a share of a revenue-stream without offering
a stake in the company driving the revenue, we refer to this as a royalty-based
crowdfunding campaign.
Since this is the youngest model, we expect it to evolve and change its activity
profile to reflect exactly what this model brings that the others do not.
As of today, the activity is mainly driven by the Business & Entrepreneurship
category, Social Causes, Energy & Environment, Films & Performing Arts, and
Fashion.
The model is especially applicable when the crowdfunder is only interested in
one of the campaign owners activities, which explains the relatively high activity
in the categories: Film & Performing Arts and Fashion.
INDIVIDUAL MODELS: ROYALTY
MOST ACTIVE CATEGORIES
The 2012 Crowdfunding Market
Figure: Royalty-based crowdfunding activity.
Business and Entrepreneurship
Social Causes
Energy and Environment
Film and Performing Arts
Fashion
32.3%
15.6%
12.5%
12.5%
10.4%
-
50
THE COLLABORATIVE WEB
CROWDFUNDING DYNAMICS
LEGAL FRAMEWORKS
DIRECT CROWDFUNDING
WEB 2.0 FINANCING
-
51 2013CF MASSOLUTION.COM
Web 2.0 Financing
THE COLLABORATIVE WEB
Modern (online) communication tools and networks have changed the nature
of open calls, and thus the nature of crowdfunding. With the emergence of the
collaborative web (Web 2.0), open calls transcend into open communication,
and a request for financial support or an investment proposal therefore turn
into collaborative social network activities.
Crowdfunding is still a relatively new phenomenon, yet an understanding of how
its dynamics facilitate powerful interactions between social and financial capital
has begun to emerge. Researchers around the world are asking important
questions, such as, what transforms early investors/supporters into advocates
and promoters? How does a campaign activate its network of friends and
family? And, most importantly, how does a second-level network (friends and
family) energize a third-level of outside supporters (i.e., complete strangers)?
This section, CROWDFUNDING DYNAMICS, will present perspectives about the
hidden, social dynamics of crowdfunding, with a special look at the phenomenon
of third-level acceleration. Sean Carr from the University of Virginia is the main
contributor to the section.
Given the many unknowns about the dynamics of crowdfunding, policy makers
and regulators have been struggling to assess the appropriate measures for
investor (and entrepreneurial) protection; in many jurisdictions, crowdfunding
has not even been considered yet. To give our readers an idea of the various
developments in crowdfunding regulation, the section LEGAL FRAMEWORKS
presents the needed overview. Kristof De Buysere from Tilburg University is the
main contributor to the section.
The final section, DIRECT CROWDFUNDING, takes a deeper dive into a relatively
new research subject, namely the emergence of crowdfunding campaigns that
are hosted outside and independent of any structured online platform. Dan
Marom from The Hebrew University is the main contributor to the section.
OPEN CALLS
TRANSCEND
INTO OPEN
COMMUNICATION ON
THE COLLABORATIVE
WEB.
-
Whoever you are, I have always depended on the kindness of strangers.
from A Streetcar Named Desire
Tennessee Williams (1947), American playwright
By now, we have seen that crowdfunding campaigns can be wildly, even
fantastically, successful, raising millions of dollars from many thousands
of contributors. Even moderately effective crowdfunding efforts can attract
hundreds of people willing to extend a loan, offer a donation, or make an
investment in some person or project. Since not all these supporters have a
personal connection with the project or person being funded, what are the
dynamics that enable a campaign to win support outside its inner circle of
friends and family? How much does the support of friends and family influence
ultimate success? How does a project make the leap from having a very close
network of familiar supporters to a broad group of complete strangers?
Crowdfunding platforms, enabled by Web 2.0 technologies that leverage social
medias greatest strengths, provide a structure that facilitates communication,
trust, and, ultimately, the kindness of strangers. But a clearer picture about how
this happens is beginning to emerge. While the phenomenon of crowdfunding is
still new, researchers have recently started to understand the mechanisms that
enable these powerful interactions between social and financial capital to occur.
What follows are a few perspectives from academia and elsewhere about the
hidden, social dynamics of crowdfunding.
Web 2.0 Financing
CROWDFUNDING DYNAMICS
52 2013CF MASSOLUTION.COM
This section was contributed
by Sean Carr, University of
Virginia.
INTRODUCTION
-
SOCIAL TIES
Web 2.0 Financing
CROWDFUNDING DYNAMICS
53 2013CF MASSOLUTION.COM
All economic transactions are, to one degree or another, embedded in networks
of personal and social relationships, and these relationships tend to affect
the allocation and cost of capital. For decades, many economists, sociologists,
psychologists, and historians have examined this phenomenon, asking the
question: How do the forces of financial and social capital intersect, and what
happens when they do?
The economic and financial historian Naomi Lamoreaux [1], for example,
studied the relationships between individual business enterprises and banks
in eighteenth- and nineteenth-century New England. She found that access
to capital was highly contingent upon personal alliances and kinship-based
social relations. That is, firm financing generally followed from blood relations
and marriage. Likewise, the economic sociologist Brian Uzzi [2] conducted
ethnographic field studies of commercial banks and small- to medium-sized
firms in the Chicago area in the 1990s. He, too, found that when bankers and
firm owners had pre-existing personal relationships with one another (not just
business relationships), the firms often experienced better access to capital on
more favorable terms.
More recently, social network-based research like this has blossomed in the
study of entrepreneurship, and much of it has examined the influence of
founders and firms personal networks on the development and performance
of new ventures. Scholars have found that an entrepreneurs social network
has the potential to influence every stage of the entrepreneurial process,
including the discovery of an opportunity, team formation, the acquisition and
assembly of resources, and the growth and performance of the venture itself.
The general finding from this line of research has been that entrepreneurs who
are embedded in rich social networks (i.e., they have very broad and diverse
networks of social ties) will be more successful at overcoming the obstacles to
resource mobilization than those whose networks are poor.
HOW DO THE FORCES
OF FINANCIAL AND
SOCIAL CAPITAL
INTERSECT?
-
SOCIAL TIES (CONT.)
Web 2.0 Financing
CROWDFUNDING DYNAMICS
54 2013CF MASSOLUTION.COM
It should seem intuitive (or even obvious) that social ties also should matter in
crowdfunding, but little empirical work so far has explained the role of social
ties in this context. One notable exception is a recent working paper by Wharton
Business School professor Ethan Mollick [3], who conducted a cross-sectional
analysis of all projects financed on the popular reward-based crowdfunding site,
Kickstarter. Since Kickstarter enables project owners to link their project pages
to their Facebook accounts, he measured the number of Facebook friends for
each project sponsor. Mollick found that if the project sponsor from the Film
category had only ten friends on their Facebook account, then their probability
of getting their project fully funded on Kickstarter was about 9 percent. If the
project sponsor had 100 Facebook friends, then their funding probability rose
to 20 percent; if the sponsor had 1,000 Facebook friends, then their likelihood of
getting fully funded was 40 percent. While the number of virtual friends may
not be equivalent to a persons actual friends, it can serve as a rough proxy for
the extent of a project owners personal network. And even though the impact of
these virtual ties on funding may not be surprising, it does offer strong evidence
for the importance of social ties.
SOCIAL TIES
ARE IMPORTANT
COMPONENTS
TO DRIVE
CROWDFUNDING
SUCCESS.
-
SOCIAL PROOF
Web 2.0 Financing
CROWDFUNDING DYNAMICS
55
So, we know that social ties matter in crowdfunding, but it is less clear exactly
how and why they matter. There are two related theories that may be instructive.
First, one theory suggests that social ties matter in economic exchanges because
they create expectations of trust and reciprocity among economic actors,
resulting in governance mechanisms and transfers of private information that
would not otherwise occur strictly through arms-length relationships. A second
theory suggests that social ties provide a signal to others that the person or
project is worthy of a commitment. The well-known psychologist Robert Cialdini
has referred to this phenomenon as social proof. [W]hen people are uncertain,
Cialdini said, they look to the actions of others to guide their actions [4].
Moving us toward a better understanding of how social ties matter and what
mechanism may be at work, a team of researchers from the University of
Arizona and the University of Maryland examined 56,584 loan requests from the
lending-based crowdfunding site Prosper.com [5]. They found that if a borrower
had one or more friends who were among their lenders, then their likelihood
of securing their full loan amount more than doubled. Interestingly they also
found that for 95% of all the loan requests that included loans from friends, only
4.4% of the total amount raised was provided by the friends. In other words,
the presence of even just a few friends in the borrowers network of lenders
provided a sufficient positive signal to other potential lenders. So, in this case, it
appears that a borrowers later-stage lenders may have been disproportionately
influenced by the initial commitments (i.e., social proof) of the borrowers early-
stage lenders. In a related study using Prosper listings, another team from the
University of Nebraska and Radford University also found that social capital was
even more influential when the borrower had poor credit history; the presence
of friends as lenders not only increased the probability of getting funded but
also resulted in their receiving more favorable interest rates [6].
2013CF MASSOLUTION.COM
SOCIAL PROOF
EXPLAINED.
-
Web 2.0 Financing
CROWDFUNDING DYNAMICS
56
THIRD-LEVEL ACCELERATION: STRONG TIES, WEAK TIES, AND BEYOND
Forty years ago, the economic sociologist Mark Granovetter wrote a seminal
paper (among the most influential in the social sciences), called The Strength of
Weak Ties [7]. This paper introduced the theory that, under certain conditions,
a persons weak social ties (such as friends-of-friends or acquaintances) will be
more important and more effective than their strong ones for diffusing an idea
across a social network. Returning for a moment to the work by Ethan Mollick,
1,000 Facebook friends should be, almost by definition, comprised of weak
ties. Given Mollicks finding that having more Facebook friends is a predictor
of funding success, it would appear then that there is indeed strength in these
weak ties.
However, we can still only say for certain that weak ties have strength in the
aggregate. The studies discussed in this article also suggest that strong ties may
have a very important role in the early phases of a crowdfunding effort. Early
strong ties may help build trust and norms of reciprocity, while also providing
signals (social proof) for later-stage supporters.
In general, then, we should expect that people with whom a project owner has
strong ties are more likely to be motivated to help them than those whose ties
are weak. The logic behind this is that strong ties matter during the first phase
of funding because they provide necessary signals of quality and legitimacy
(i.e., proof). Then, during the second stage of funding, these early signals will
influence commitments from weaker ties in the persons network. Finally,
having built upon the foundation of strong ties and working through a larger set
of weak ties, project owners have the potential to influence prospective lenders,
donors, or investors with whom they have no ties at all.
The evidence is still scant, but in essence, that is third-level acceleration
potentially the holy grail of crowdfunding.
2013CF MASSOLUTION.COM
THIRD-LEVEL
ACCELERATION IS
POTENTIALLY THE
HOLY GRAIL OF
CROWDFUNDING.
-
Web 2.0 Financing
CROWDFUNDING DYNAMICS
57
References
[1] Lamoreaux, N.R., Banks, Kinship, and Economic Development: The New England Case. The Journal of Economic History, 1986. 46(3): p. 647-667.
[2] Uzzi, B., Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking Financing. American Sociological Review, 1999. 64(4): p. 481-505.
[3] Mollick, E., The Dynamics of Crowdfunding: Determinants of Success and Failure, in Working Papers Series. 2012, The Wharton School of the University of Pennsylvania: Philadelphia, PA. p. July
11, 2012.
[4] Cialdini, R.B., Influence: The Psychology of Persuasion. 1993, New York: William Morrow &
Company, Inc.
[5] Lin, M., N.R. Prabhala, and S. Viswanathan, Judging Borrowers by the Company They Keep:
Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending. 2011.
[6] Greiner, M.E. and H. Wang. The Role of Social Capital in People-to-People Lending Marketplaces.
in Thirtieth International Conference on Information Systems (ICIS). 2009. Phoenix, AZ: AIS
Electronic Library (AISeL).
[7] Granovetter, M.S., The Strength of Weak Ties. American Journal of Sociology, 1973. 78(6): p. 1360-1380.
2013CF MASSOLUTION.COM
-
This section is a synthesis of a global crowdfunding legal frameworks survey,
which sampled the strategic viewpoints of more than 20 industrial experts in
15 countries, and independent academic research in various key jurisdictions.
Web 2.0 Financing
LEGAL FRAMEWORKS
58
This section was contributed
by Kristof De Buysere,
Tilburg University.
GLOBAL OVERVIEW
Donation- and reward-based crowdfunding rarely face any legal barriers. These
models are therefore widely available in most jurisdictions, and they are also
offered without any complex transactional structures.
Investment crowdfunding, and especially equity-based crowdfunding, however,
may incur a substantial number of legal issues, as the general solicitation
of investment vehicles such as loan and equity is heavily regulated, even for
small investments. Platforms that facilitate these types of crowdfunding may
face substantial regulations, as they come close to resembling intermediated
investment services.
As a result, equity-based crowdfunding is never straightforward and currently
has limited availabilities in many key markets, as illistrated in the table below.
There are, however, a few exceptions, where platforms operate under the ceiling
of an existing promotion regime as broker-dealers for accredited investors.
For instance, regulatory roadblocks may prevent users from directly buying equity
in investees. As a workaround, CFPs can organize indirect investment routes via
special vehicles (crowdfunded funds) where it is simpler to purchase a unit
than to buy an equity unit in the underlying company. Another example is legal
constructions based on nominee shareholders. Such constructions concentrate
the control over the equity units in the hands of one entity (controlled by the
CFP) and also offer the advantage of simplifying the investor relationship for the
investee, as only one entity will serve as the underwriter and as the subsequent
voter. Besides these constructions, other models exist where transaction
engineered investment contract are offered instead of equity. Such structured
2013CF MASSOLUTION.COM
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Web 2.0 Financing
LEGAL FRAMEWORKS
59
GLOBAL OVERVIEW (CONT.)
contracts can mimic equity by varying degrees. The cash-flow rights may be
virtually identical or may, for instance, rather be calculated on a percentage
of the revenue (eventually for a limited period of time). In turn, lending-based
crowdfunding and (quasi-)equity-based CFPs that use such a structured contract
approach share the property that crowdfunders obtain a contract and become
creditors, instead of security holders.
Countries Equity Rewards Lending Royalty Donations
USA Canada Mexico UK The Netherlands Spain France Austria Germany Australia China Hong Kong SAR Israel Russia Turkey
Table: Crowdfunding model availability by k