Introduction
Funding a business venture through public means is a process that has undergone a huge evolution in recent years. An individual has gone from garnering support from relentless person-to-person interaction and selling to now showing everything they have to offer online.
The most significant thing a business needs is a paying customer. Through crowdfunding, startups can find their paying customers and potentially gauge how many they will get going forward. An individual can host a funding portal that displays a proposed product, service or output that ‘backers’ can choose to fund. Backers, in the context of crowdfunding, are those that invest in and support a venture through the means of crowdfunding, and they play many key roles in determining the evolution of this area of entrepreneurship.
This article will provide a glimpse into various factors in how funding works through online sources such as Kickstarter or Patreon, while also explaining how this modern form of public fundraising has come to influence entrepreneurial pursuits.
Funding
Crowdfunding has vastly expanded its reach due to the digital platforms that carry crowdfunding campaigns. In the past, public funding was a much more grassroots act, as Cristiano Bellavitis from Venture Capital points out; “until recently, the usual financing cycle started with the three ‘Fs’ representing friends, family, and fools”. While these groups can still contribute to funding efforts today, the scope goes far beyond that, with more online crowdfunding platforms being developed each year. According to Hanna Forbes and Dirk Schaefer’s research on crowdfunding success, they found that the amount of online crowdfunding portals rose from 53 in 2009 to over 1000 in 2015. While these portals can vary in industry and subject, it is nevertheless a growing market for entrepreneurs to enter if they seek different ways of gathering funds.
As audiences get more and more specific and separate, it’s a positive sign that funding sources are matching these changes. It means that small, independent businesses now have a new potential tool to use for targeting, as different crowdfunding sites can apply to various interests, industries and more. Chances are an entrepreneur would gain the most funding from a larger site like Kickstarter or Gofundme, but having more options than ever means more opportunities than ever for alternate funding.
Crowdfunding is still a relatively new financial direction for startups, there is no single tried-and-true method on how to use them. This differs from the past of approaching banks and venture capitalists. In the ‘Guidelines for Successful Crowdfunding’, the authors provide an understanding of how to make an entrepreneur’s business successful through crowdfunding. However, it does not provide key details about how major funding platforms run their businesses (transaction fees, total funding cuts, etc). Each website varies on fees/support and this is not mentioned as something for the entrepreneur to be aware of. This information can easily be looked up or placed on a funding service’s terms of service, but it can be misunderstood. Being aware of the policies that your selected crowdfunding platform runs on is crucial, and not being aware of changes and key developments in them can really blind side an entrepreneur. Patreon, a popular subscription-based crowdfunding platform, ran into issues when they tried to changed their fee model. At the end of 2017, Patreon changed their transaction system by having their fee be paid on top of the backers’ donation instead of being taken out of the donation. This impacted the backers in $1-$2 payment tiers, since they needed to pay more than they originally signed up for.. Some withdrew their support due to financial reasons, while others felt they had their trust betrayed by Patreon and left on principal. With many outraged people, Patreon reversed the changes and an apology was made. Overall, while these changes are out of the hands of the entrepreneurs, it is vital that they are equipped with deep policy knowledge ahead of time so that they can fully comprehend and adapt to changes that are made. Therefore, policies and fees are considerable factors that this literature could have touched on more, as it could also contribute to an entrepreneur's plan for a successful crowdfunding business.
Influence
Crowdfunding has impacted the financial decisions entrepreneurs face by giving various avenues to select from. For entrepreneurs to have this kind of ease in finance gathering, the creativity can increase without worrying about the outside influence of a corporation affecting the product or service being proposed on baseless terms. Startups now do not need to worry about outside sources (a venture capitalist or one of the three ‘Fs’) negatively impacting their company, as Forbes and Schaefer put it:
“While crowdfunding carries risks, it also can result in great benefits for the campaigner. By exposing a product to the public, entrepreneurs are able to receive an extensive and varied set of feedback. Furthermore, campaigners can enjoy tremendous positive exposure to potential customers and future investors. Finally, crowdfunding favors those with innovative ideas as opposed to wealth. A campaign can be launched with minimal cost, no proof of sales and, in three of the models, no release of equity. It is an exciting option available to entrepreneurs.”
Smaller startups were unable to get the support they needed to succeed through traditional methods, but now have an online community through these crowdfunding platforms. In ‘How crowdfunding influences innovation’, Stanko and Henard explain the importance of the campaign backers contributing important input that can improve the entrepreneurs’ product. “The number of backers attracted is an important predictor of a product’s future market performance,” Stanko and Henard have figured out that the engagement within the community of backers drives the startups to put the effort in to launch the best product they can. While it was previously mentioned that crowdfunding is good for avoiding alterations and influence from venture capitalists and corporations, there is a form of influence from outside sources that crowdfunding positively encourages. The backers themselves, in many cases, can have a direct say in how the product takes shape. This can bode well for the entrepreneur, as it ensures changes are coming because the consumer base wants it, as opposed to a potentially arbitrary choice by a big, corporate investor. Many startups get so much from this support that they continue to launch numerous campaigns for extra funding, these startups are called ‘Serial Kickstarters’.
A case study that effectively showcases the impact crowdfunding can have on a company is Pebble Watch, an innovative smartwatch brand that started in 2012. Pebble Watch failed to receive venture capital funding so turned to Kickstarter, a well known crowdfunding website. In just over a month, Pebble’s campaign raised over $10.3 million and became the most successful campaigns on kickstarter, and remains so today. Later, Pebble would continue to create multiple Kickstarter campaigns to raise money with direct customers with each campaign raising over $10 million alone. Many startups are following Pebble’s lead and choosing this direction since it is easy, cheap and shows quickly how many paying innovators/early adopters the company can obtain.
In ‘how crowdfunding influences innovation’, a main focus is on the importance of backers. It discusses the various ways backers can affect the final product on a crowdfunding campaign, and how the audience itself can serve as a more important factor than the money raised in a campaign when determining its long term market success. In the final section of the article, the authors give some recommendations for an entrepreneur looking to start a crowdfunding initiative. One aspect that should have been addressed is the different tiers of donations and the feedback those backers give. With backers giving different donations, should that impact how the startup takes various critiques into account? Would a backer of $50 input matter as much as a backer of $2? This article could have touched upon this in order to serve additional recommendations that entrepreneurs can build upon. It is clear that this article is meant to be utilized by aspiring crowdfunding-based businesses, and this information could have made this publication into an even better tool for them.
Conclusion
Startups have more funding possibilities since the digital boom. The significance of a paying customer is important for businesses, crowdfunding give these businesses an easy way to grow and a direct connect with their backers. Entrepreneurs are able to raise funds in a cheaper, sufficient without influence from venture capitalists or corporations. While some startups prefer not to have an outside opinion, many want the feedback of their customers. Crowdfunding gives backers the chance to see tangible differences made in the development of a product or service based on their direct feedback. As a whole, the dynamic between entrepreneur and backer is what separates this form of fundraising from any other major method.
After examining some of the literature around crowdfunding, the significant impact of crowdfunding on startups raising funding is very prominent and growing. This new form of funding has allowed startups to attain initial financial goals directly from consumers while getting feedback from them. Going forward, it would be interesting to see more research completed that examines the crowdfunding companies as a whole (Kickstarter, Patreon, etc.) and keeps a critical eye on them as they grow in size and power. As more projects get put through crowdfunding, there is potential to see more case studies surrounding ethics and business transparency, which are crucial areas of interest to keep aware of.
Sources
Bellavitis, C. et al. (2017) ‘Entrepreneurial Finance: New Frontiers of Research and Practice: Introduction’, Venture Capital, 19(1–2), pp. 1–16. doi: //www-tandfonline-com.elib.tcd.ie/loi/tvec20.
Forbes, H. and Schaefer, D. (2017) ‘Guidelines for Successful Crowdfunding’, Elsevier, 60, pp. 398-403.
Ohlheiser, A. (2018) ‘Facing a rebellion of furious creators, Patreon backs away from a new fee’, The Washington Post, 13 December, Available at: //www.washingtonpost.com/news/the-intersect/wp/2017/12/13/facing-a-rebellion-of-furious-creators-patreon-backs-away-from-a-new-fee/?noredirect=on&utm_term=.cdf698934264.
Stanko, M. A., and Henard, D. H. (2016). ‘How crowdfunding influences innovation’, MIT Sloan Management Review, 57(3), 15-17. Retrieved from //elib.tcd.ie/login?url=//search.proquest.com/docview/1778414483?accountid=14404