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Venture Financing by Crowdfunding

Seminararbeit 2011 21 Seiten

BWL - Investition und Finanzierung

Leseprobe

Table of contents

I. List of Figures

1.Introduction

2. The world of crowdfunding
2.1. Crowdfunding tools
2.1.1. Crowdsourcing
2.1.2. Web 2.0
2.1.3. Fundraising
2.1.4. Social Media
2.2. Different forms of crowdfunding
2.2.1. Donations
2.2.2. Passive investments
2.2.3. Active investments
2.3. Advantages of using crowdfunding
2.4. Choice of the organization form
2.5. Limit and problems of crowdfunding
2.6. Forms of financing
2.6.1. Differences in support
2.6.2. Differences in risk
2.6.3. Differences in volume
2.6.4. Similar forms of fincancing
2.7. Geography and history of crowdfunding
2.7.1. Crowdfunding in Germany
2.7.2. Crowdfunding in Europe
2.7.3. International Crowdfunding
2.8. Practical example - the project “Protei”

3. Conclusion

II. List of references

I. List of Figures

Figure 1: Different sources of crowdsourcing

Figure 2: Relative number of different investments

Figure 3: Percental part of the funding goal

1.Introduction

What are the similarities of a garden that can be hung with magnets on the wall, a fleet of pollution collecting sailing drones and a bracelet which merges with the iPod touch to a watch? All three have made the leap from an idea to a real product. And all three were financed by crowdfunding.

In theory, before the discovery of crowdfunding, individuals have been indirectly financed projects by their savings. In doing so, banks acted as an intermediary between them who need the money and those who have it. The innovation in crowdfunding process is in comparison to other financing methods that it don't needs an intermediary, because the entrepreneurs seek their investors by themselves. The typical communication takes place via the internet.[1]

Crowdfunding is an option of financing which is especially used for artistic projects. It is also used to finance startups in information and communication, design, fashion or trade industry. The special thing about crowdfunding is the collection small amounts of money from many people by using the internet. Every amount is just a small part of the fund they need to achieve the project. If a project is successful, the investors might even receive interests on their deployed capital, but mostly they receive another form of reward.[2]

Three different market roles can be distinguished. The first one is the guy who has an idea, but is not able to finance the project on his own because he hasn't enough money. The second role figures the investor who wants to support the project. The third role is somebody who realizes the project. He has to develop an adequate strategy. It is possible that the guy who has the idea is also the guy who realizes the project. Alternatively, the guy investing in the project also supports the realization of this project. Double roles are common if we examine small projects. In order to combine the idea and the capital, there are different crowdfunding platforms in the internet which are acting as a mediator.[3]

Crowdfunding it is not just to raise funds, it is also the collection of information. Moreover, it is often advantageous for the project that it passes through the crowd the process of funding a higher level of awareness. This is essential for the future commercialization. Furthermore, one gets the investors feedback that can be incorporated in the development. Since investors usually slip into the role of the customer, it can be seen as an exchange of information between the organization and the customers. Often it is not only a pure crowdfunding financing. It can be a hybrid financing, in which a certain proportion of the required funding is obtained via crowdfunding, and the other part is obtained by usual forms of financing.

For the customer or investor the main motivation of the crowdfunding is not the profit maximization. Often, it is ideology or the desire to support a particular project out of pure conviction.

2. The world of crowdfunding

The only data analysis about crowdfunding is the paper of Lambert and Schwienbacher from the year 2010. Other existing studies describe only individual case studies.

2.1. Crowdfunding tools

2.1.1. Crowdsourcing

Crowdsourcing describes in contrast to classical outsourcing not the relocation of business tasks and structures to third-party providers, but the shifting of intelligence and working power to a crowd of free time workers in the internet. A free of charge or low paid amateurs generates capacity, solves special tasks and problems or helps in research and development projects.[4]

The concept of crowdsourcing as a neologism was invented in June 2006 by Jeff Howe and Mark Robinson.[5] Crowdsourcing is an interactive form of value creation, which underlies a competitive organization. It uses a high number of extrinsic and intrinsic motivated people with different knowledge by using modern information and communication systems on the base of web 2.0.[6]

Kleemann describes that crowdsourcing takes place when a profit oriented firm outsources specific tasks essential for the marketing or sale of its products to the general public (the crowd) in the form of an open call over the internet, with the intention of animating individuals to make a (voluntary) contribution to the firm's production process for free or for significantly less than that contribution is worth to the firm.[7]

Lambert and Schwienbacher expand the definition of crowdsourcing by calling crowdfunding „an open call, essentially through the internet, for the provision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights in order to support initiatives for specific purposes”.[8]

illustration not visible in this excerpt

Figure 1: Different sources of crowdsourcing

In Figure 1 Kleemann describes different types of crowdsourcing. Crowdfunding is not included but can be broadly defined as part of the "consumer support". Thus, crowdfunding can be considered as an element of crowdsourcing. In particular, it deals with consumers and other individuals providing financial assistance for the company.[9]

Kleemann renames this task force, he calls them working consumer. They participate in the production process and replace former times employees who were responsible for special tasks. He describes three relevant characteristics of the working consumer: [10]

They are part of the production process and generate value.

Their capacity can be regarded as an utilizable asset.

They are integrated in company structures and can be noticed as employees of the company.

2.1.2. Web 2.0

Web 2.0 corresponds primarily to the changed usage and perception of the internet. The users create, edit and share contents in a quantitatively and qualitatively mass. Interactive applications facilitate them to reach their goals. The creating and sharing of the content through the internet is not only part of the big media companies, also many users are doing that by using social media which connects them. The marketing is trying to replace the push- principle by the pull-principle and to motivate the users to help to design new websites.[11]

Many authors describe the development of the web 2.0 as precondition for developing the crowdsourcing. They argue that the structure of the web 2.0 is mandatory necessary for companies which want to build consumer networks.[12]

2.1.3. Fundraising

Fundraising is the systematic analysis, planning, execution and controlling of all the activities of a non-profit-organization which are looking forward to provide the needed resources (cash, contribution in kind and services) by a consequent adjustment on the needs of the resource suppliers without market adequate material trade-off.[13]

2.1.4. Social Media

Social Media describes all the platforms which interactively support the users by offering digital channels for communication to share information. There are two categories of social media:

The main goal of the first category is just communication. In the second category they use also communication, especially the web 2.0 platforms, but the focus is on the content which is generated, edited and shared by the users.[14]

2.2. Different forms of crowdfunding

There are different business models of crowdfunding. This distinction is based on the reward. The three most common forms are donations, passive investments and active investments.[15]

2.2.1. Donations

Many of the companies who choose crowdfunding as financing method want to receive the funds in form of donations. They don't offer a reward after successful implementation of the project to the investors. According to a study by Lambert & Schwienbacher from the year 2010, 22 % of the crowdfunding activities rely on donations.[16]

In most cases, the non-profit-organizations seek donations of crowd funding. This is partly because they tend to pursue charitable purposes. Second, their preference in comparison with the profit-organizations is not to maximize profit. In their products or services the quality has highest priority. Thus, the non-profit-organizations have better opportunities to donate.[17]

2.2.2. Passive investments

In case of a passive crowdfunding model the entrepreneurs offer different forms of reward to the investors. Among these are profit participation, special products, price reduction, merchandising articles and the possibility to be one of the first buying the product or using the service, a possible reward for an investment. In most of these crowdfunding models the investors are not actively involved in the development. For example, a voting on the product characteristics or the active support of the project development is not provided here. The entrepreneurs are just interested in raising the necessary funds, however they are not willing to transfer an active task to the investors.[18]

2.2.3. Active investments

In an active crowdfunding approach, investors receive in addition to a reward the opportunity to actively participate in the project development. In this way, they will become a part of the company. It's a win-win situation, because the company's value increases the capital on the one hand, and on the other hand the knowledge of the crowd as information flows into the project. The active crowdfunding includes important elements of crowdsourcing. Through feedback on potential product demands or product characteristics, the investors acting also as customers in a double role, the entrepreneur is able to determine the market potential of the product. It also increases the chance to indentify the best customer wishes for the average customer. It should be noted that any refunding system generates different forms of information and thus varies in the credibility of the signal. For example, the ability to pre- order sends a signal that is picked up directly from the product, because investors from which the signal is sent are consumers in a double role, who are directly interested in the product. Generally, at the active crowdfunding, the spread of detailed product information is of course important, but not the most fundamental point. More important is the fact that this special form of crowdfunding generates a generally good atmosphere on the market. It is also not mandatory that all investors act in a double role as customer.[19]

2.3. Advantages of using crowdfunding

Startups in Germany are often faced with the problem of financing their ideas, because there is not always sufficient capital in the equity market. This is mainly a problem for technology companies with a high initial capital requirement. Without the necessary capital, startups needing seed capital hardly have a chance to survive. The result: Innovative potential remains untapped and valuable ideas get lost, without ever having made a wide audience.[20]

The motivation of the entrepreneur to choose crowdfunding has not purely monetary character. In addition, a rapidly increasing level of awareness before the launch of the product is an advantage of this form of financing. Social media for instance YouTube, Facebook, Twitter, or blogs are used to raise the popularity. Direct communication with the crowd helps to disseminate product details over the internet as quickly as possible [21]

[...]


[1] See Schwienbacher/Larralde (2010), p. 4.

[2] See Imprint (a).

[3] See Belleflamme/Lambert/Schwienbacher (2011 ),p. 10.

[4] See Brabham (2008a), pp. 80f.

[5] See Schwienbacher/Larralde (2010), p. 5.

[6] See Howe (2006), p. 2.

[7] See Schwienbacher/Larralde (2010), p. 6.

[8] Schwienbacher/Larralde (2010), p. 4.

[9] See Schwienbacher/Larralde (2010), p. 6.

[10] See Kleemann (2008); pp. 2-4.

[11] See Brabham (2008a), p. 79.

[12]See Brabham (2008a), p. 86.

[13] See Urselmann (2007), pp. 1-17.

[14] See Anonymous author (2010), p. 31.

[15] See Schwienbacher/Larralde (2010), p. 13.

[16] See Schwienbacher/Larralde (2010), p. 13.

[17]See Schwienbacher/Larralde (2010), p. 13.

[18] See Schwienbacher/Larralde (2010), p. 13.

[19] See Schwienbacher/Larralde (2010), p. 14.

[20] See Imprint (b).

[21] See Schwienbacher/Larralde (2010), p. 5.

Details

Seiten
21
Jahr
2011
ISBN (eBook)
9783640975204
ISBN (Buch)
9783640974955
Dateigröße
688 KB
Sprache
Deutsch
Katalognummer
v176160
Institution / Hochschule
Technische Universität München
Note
2,3
Schlagworte
crowdfunding crowd funding venture capital private equity social media fundraising crowdsourcing web 2.0

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Titel: Venture Financing by Crowdfunding