Crowdfunding’s impact on business value creation
Finding Your Crowd: A comprehensive guide to Canadian crowdfunding
Crowdfunding. Some of you might think of it as the ultimate, democratic financing method, where anyone with a great business concept can earn the fortune needed to bring it to reality, and some of you might dismiss it as a ploy or a gimmick (and some of you might not think of it at all – but that’s okay because we are going to cover all of these outlooks and more.) The truth about crowdfunding is probably somewhere in the middle of the spectrum between those two dispositions (as the truth so often is). Whether or not you like it, hate it, or don’t know what it is, crowdfunding is a reality. It’s been used for years by entrepreneurs, artists and businesses to create new projects, new products, new charities – new everything. In this series of the Business Toolbox, I’m going to take you through crowdfunding from concept to famous campaigns.
If any of you read my first post, you might remember that I did an independent research project on small market (Canadian) crowdfunding in my fourth year of business school. I worked with an IT/MIS/business and technology professor named Dr. Rebecca Grant. Dr. Grant is awesome and she took me on as a directed studies student when I asked, based only on my very vague idea for a research project and a hunch that I was a good student (I had had her as a professor the year before). I conducted original research under her supervision for over a year and she helped me get the opportunity to present the project at the Annual Meeting of the Decision Sciences Institute in Seattle two years ago in November. That’s a pretty rare opportunity for an undergraduate and I’m really thankful for her work! (Lesson: be nice to your professors and mentors and, ask for opportunities because some people will be willing to take a chance on you.) I know quite a bit about crowdfunding and, as always, I’d be happy to answer your questions at the end of class (just kidding, but really, please leave questions in the comment section if you have any!)
So first, the basics:
What is crowdfunding?
One of the most popular definitions of crowdfunding among academics, is Schweinbacher and Larralde’s (2010), definition, who stated that crowdfunding is “an open call, essentially through the Internet, for the provision of financial resources either in form of donation or in exchange for some form or reward and/or voting rights in order to support initiatives for specific purposes.” Basically, crowdfunding means using the internet to collect money for a project or idea.
Although it can exist in other forms, crowdfunding generally refers to an online campaign created by an individual, entrepreneur, business or artist to collect funds from potential customers, fans and other members of the “crowd” to create some kind of project. Campaigns can exist on crowdfunding websites like Kickstarter, Indiegogo, CrowdSupply, GoFundMe, Kiva.org, Fundable (etc.) or they can exist on individual websites. Each of the official crowdfunding platform websites serves a particular niche of crowdfunding projects and crowdfunders. For example, while GoFundMe is generally focused on personal financing projects (such as raising money for a friend’s medical bills), other platforms like Kickstarter specifically forbid this kind of campaigning and are instead focused on businesses and creative projects. Similarly, while Kiva.org exists for providing microfinancing to entrepreneurs in underserved markets, CrowdSupply allows only campaigns for physical products that substantially exist.
Crowdfunding is often a timed-campaign with a hard deadline on how long the campaign creator will accept pledges for. Also, the money that is contributed is often not actually sent to the creator until that deadline has passed. Campaigns almost always have some kind of listed funding goal – or how much money the creator needs to actually complete the project and there are some platforms that won’t give the creator any of the pledges unless they garner enough to surpass that goal.
I think we’ll end today’s foray into crowdfunding by looking at some essential crowdfunding vocabulary:
Creator: The person/people/business/organization that makes the crowdfunding campaign; also the beneficiary of any earned pledges.
Contributor: The person/people/business/organization that pledges to give money to the creator for the campaign. These pledges are collected onto the campaign page on whatever platform the creator has chosen.
Funding Goal: The amount that the creator sets at the start of the campaign that it needs to raise to be “successful.” All-or-nothing platforms like Kickstarter require that the campaign meet or surpass this goal before the creator gets any of the pledged money.
Pledge: The amount of money that a Contributor chooses to give to the campaign upon the campaign’s completion. For most projects conducted through a crowdfunding platform, the pledges won’t be provided to the Creator until the project is completed – and sometimes – only if the project met its funding goal. Pledges are generally collected through credit card transactions although any online payment system could theoretically be used (ex: PayPal, online debit, e-transfer, etc.).
Perk/Reward: Some campaigns offer incentives for their contributors to pledge money to the campaign; these are called “perks” or “rewards.” The kind of perk offered is an important factor in determining what kind of campaign one is. While some campaigns (donation-based) offer only token perks like a shoutout on social media or a thank-you email, others might offer mementos of the campaign (reward-based) or even a copy or unit of the product/service being crowdfunded. Perks are not required by law to be sent out – this is one of the major differences between crowdfunding and online shopping.
Campaign Duration: This is often a set period of time during which the campaign is active or live. Some platforms require that the campaign within a constrained timeframe (ex: Kickstarter mandates that campaigns run between 1 and 60 days long.) while others can run indefinitely (ex: if you create your own campaign on a personal website). Although there is some research that suggests 30 days is the “optimal” Campaign Duration, this is often determined using huge sample sizes and the needs of individual campaigns will differ depending on their specifics.
Successful: You might think this is a word that shouldn’t need defining, but in the context of crowdfunding “successful” has a pretty specific meaning. All campaigns are successful if they garner enough pledges to surpass their funding goals. This may seem obvious but think about what it really means – if a campaign surpasses its funding goal but the money is mismanaged and the product is never actually created and perks are never sent out, it’s still considered “successful.” Passing the funding goal is the only measure of “success” in this context; whether or not the campaign ever comes to mean anything offline is irrelevant.