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Crowdfunding as a tool for startups to raise capital 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. Norwegian School of Economics Bergen, Autumn 2015

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Page 1: Crowdfunding as a tool for startups to raise capitalCrowdfunding as a tool for startups to raise capital Why and how to use it Lasse Magnus Klæbo Andersen Lars Joakim Mauritzen Supervisor:

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

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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).

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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

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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

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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)

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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).

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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.

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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.

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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

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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

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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.

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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.

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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).

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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

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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

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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.

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TheresearchfromGompersetal.(2006)suggeststhatVCfirmsarenotjustrisk-bearersand

suppliersoffunds,butalsoconsultantswhoputthefundsintherighthandsandensures

thatitisusedeffectively.Furthermore,thestudyshowsthattheexperienceoftheVCisof

lessimportanceiftheentrepreneurhasahistoryofsuccessfulventures.Thismayindicate

thatpriorsuccessisasignalofqualityorthatVCsaddlittlevaluetotalentedentrepreneurs

(Gompersetal.,2006).

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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

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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)

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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

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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,

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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

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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

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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

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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)

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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.

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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

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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.

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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

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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

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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).

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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

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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

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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).

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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

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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

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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

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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).

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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

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However,asaforeignentrepreneuritmightprovedifficulttoraisefundsthroughequity

crowdfundingintheUS.ThroughemailcorrespondencewithUSequityCFPs,albeitpriorto

theadoptionofregulationcrowdfunding,theauthorsfoundthatUSequityCFPsarewilling

toworkwithforeignentrepreneursonlyiftheentrepreneurincorporatesaUSlimited

company.

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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.

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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.

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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

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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

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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

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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

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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.

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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

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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

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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.

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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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