1. was surprised to see the positive reaction from

1.      
Introduction

The term crowdfunding refers to the
raise of capital from the public in order to fund a cause or the creation of a
product. It is a type of crowdsourcing, with the difference that the public
does not offer only ideas to shape the product but also the money required for
it to be produced. Crowdfunding firstly appeared in 2003, with the launch of
music funding platform ArtistShare (Freedman and Nutting, 2015), but became a
viable business model after 2010. In 2015 34.4 billion dollars while 149.093
were funded. While there are different types of crowdfunding rewards based
crowdfunding received the majority of attention from the media as it embodies
the general idea of crowdfunding: people helping visionaries to accomplish
their dreams that were not deemed viable by other companies.

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A good example of what can be
achieved with crowdfunding is the story of Palmer Luckey and his product,
Oculus Rift. Palmer Luckey started assembling in his basement his own VR
(Virtual Reality) machines from junk parts he was buying. After a few years he
attracts the attention of video game industry giant John Carmack. Carmack
decided to present Luckey’s prototype in the E3 gaming convention. The
prototype receives the audience’s attention and applauds. Thus in the following
days Luckey creates the company Oculus and prepares for launching a
reward-based campaign in Kickstarter. With the modest goal of 250,000 dollars
and a desire to sell just 100 prototypes, Luckey was surprised to see the
positive reaction from his potential customers. In the first 24 hours   Oculus Kickstarter campaign 670,000 from
2750 backers. By the end of the campaign after 40 days he had gathered
2,437,429 dollars from 9,522 backers(Russell, Twidie, 2014). A few years later
in 2015 Facebook acquired Oculus for the fee of 2 billion dollars.

 

 Oculus success turned the heads of many
towards crowdfunding. New entrepreneurs as well as industry veterans were
starting to working in their dreams projects with the shackles of traditional
funding removed. Along with the successes came failures. In 2015 a 66% of
crowdfunding projects was unable to reach the funding goal (Kickstarter.com,
2018). The ever growing popularity of crowdfunding lead to the need of
forecasting tools in order to help the companies that resort to these ventures
to plan ahead of time or make corrections to the campaign strategy. This paper
argues that the average pledge is actually more important than the number of
pledgers in the race to the completion of a crowdfunding campaign. Firstly a
literature review will be provided. Then a theoretical background on
crowdfunding will be provided. The different types of crowdfunding will be
analyzed while a more in-depth look will be provided on the rewards-based
crowdfunding. Then the two sided relation between crowdfunding and marketing
will be explored. Finally the statistical methods that will be used to prove
the goal of the study, will be examined.

 

2.      
Literature Review

 

 

3.      
Theoretical Background

Having already given a general idea
of what crowdfunding is, this chapter will delve deeper on the subject. The
different types of crowdfunding will be pointed out. Lastly a view on
rewards-based crowdfunding will be provided, indicating the advantages and
disadvantages of this particular model.

Types of crowdfunding

1.      
Rewards-Based Crowdfunding

 

In rewards-based crowdfunding
backers contribute typically small amounts of money in exchange for a small
reward. The rewards depends on the nature of the project. They can vary from a
thank you note to a copy of the product, or the name of the backer in the
credits (Giucidi, Nava, Lamastra & Verecondo 2012). Due to the nature of
this type of crowdfunding it is generally preferred among the technology and
art industries. The most prolific reward based crowdfunding platforms are Kickstarter
and Indiegogo. High profile projects include, videogame Star Citizen
(175,000,000 over the course of 4 years), smartwatch Pebble Time (20,000,000$
over the course of 40 days) and beehive box Flow Hive (13,000,000 over the
course of 40 days).

2.      
Donation-Based Crowdfunding

As the name suggests in donation
crowdfunding the backers of the project (here referred as donators) donate
money on a project or cause without expecting something in return (Belleflamme,
Lambert & Shwienbacher, 2012). It should be noted though that in some cases
where the campaign is started from a qualified charity organization, donors are
entitled to tax reliefs (Marotta, 2016). Popular donation crowdfunding
platforms are GoFundMe and CrowdRise. Popular projects contain American Red
Cross (4,700,000$ since its conception) and the Robin Hood foundation
(2,600,000$ since its conception).

3.      
Equity Crowdfunding

Equity crowdfunding firstly appeared
in 2010 by the company “Grow VC Group”. It allows the public to fund projects
while in return they get shares. It should be noted that it is considered
illegal in countries like Canada as the law regulates public acquisition of
shares (Mittra, 2012). Angelist and Crowdfunder are among the most popular
equity crowdfunding platforms. An indicative example of equity crowdfunding is
Elio Motors. Elio Motors taking advantage of the newly signed JOBS Act started
its own equity crowdfunding campaign in order to fund its product, a three
wheeled car. The campaign was deemed successful gathering 12,000,000 dollars in
2012 and was succeeded by a second campaign at 2015 that secured 25,000,000
dollars.

4.      
Debt Crowdfunding

Debt crowdfunding is a relatively
new way of crowdfunding. Also known as crowdlending, it is a process similar to
a bank loan albeit with lower interests. The firm that requests the loan
receives it from a number of different lenders. The backers receive their money
after a certain period of time, in accordance with the interest rate. Loan is
received with the requirement that it gathers the asked amount. The key
differences from a traditional loan are the multitude of persons involved
instead of one and the lower rates. Popular platforms are Lending Club and
Funding Circle.

 

 

Rewards-based Crowdfunding:
Advantages and Disadvantages

 

Pros

Rewards-based crowdfunding has
surfaced as a viable way to fund projects from small sized businesses. One of
its upsides is the fact that it is a fairly cost-less way to gather funds. The
posting of a crowdfunding campaign is usually free of charge as the crowdfunding
platforms get a cut after the completion of the campaign. Added to that no
previous work experience is required for the posting of the campaign, while no
credit checks take place. Due to the lack of traditional investors all equity
is retained by the members of the company. That way there is no fear of
obstructing the vision of the creators by outside factors.   Furthermore the crowdfunding campaign can
work also as a marketing campaign. Creating an original product that could
ponder to a wide audience can increase the word of mouth factor especially in
the early stages. This does not only increases the potential customer base but
also increases the potential pledge amount raised (Hu, Li & Shi, 2015).
Finally a rewards-based campaign can be used as a showcase of the audience that
is interested in the product thus giving the company directions on required
production.

On the other side a reward based
campaign can also have its downsides not only for the company but also for the
customers. Even though it is not usual there have been examples in the past of
companies not delivering the product either due to them underestimating the
costs of the production or due to absence of a product (Shaqfat, Lee, Malik
& Kim,2016). Such is the case of Skarp Laser. Skarp Laser is razor product
that claims to use instead of razor blades, a laser beam. The campaign launched
on Kickstarter had managed to gather 4,000,000 dollars before being shut down a
few days before its completion. The project found a second life on the
generally less strict Indiegogo securing over 500,000 dollars in 2015 (McAlone,
2015). As of January 2017 the company has yet to deliver the product or present
a working prototype. 

As mentioned before, rewards based
crowdfunding can be really useful for small sized businesses. This is due to
the ability to gather easily relatively small amount of money. On the other
hand with a few exceptions, such as previously mentioned Star Citizen,
companies seem to be unable to gather large amounts of money (over 1
million).  In order to address this
shortcoming it has been observed that companies retreat to a hybrid model using
the crowdfunding campaign as a vehicle for attracting interest from potential
investors (Agrawal, Catalini & Goldfarb).

The accessibility of rewards-based
crowdfunding can sometimes work against it. Crowdfunding does not only draw
veterans but also teams of unproven creators who have found a way in to realize
their ambitions. Due to the lack of past experience they tend to overestimate
their abilities and overextend or are simply unable to deliver a prototype.
Both cases usually result to bankrupt companies and company members. It should
be noted though that this is not exclusive to inexperienced creators. There
have been cases like Unsung Story, a videogame where a team of industry
veterans secured sufficient funding but where forced to halt development due to
running out of funds.

Finally during the course of the
campaign companies do not only share their ideas with their potential investors
but also blueprints or early concepts of the products. Consequently these ideas
are made known to potential business rivals. A good example of this is the
story of Yekutiel Sherman. Sherman’s product was a phone case that worked also
as a selfie stick. The crowdfunding campaign was a success, surpassing its
funding goal but after a week from its start an identical product appeared on
Aliexpress, Alibaba’s global branch. Being 75% cheaper than Sherman’s product
the knockoff product resulted in leaks from the original crowdfunding campaign
(Liu, 2016).

 

 

 

4. Crowdfunding
and marketing

As mentioned in the previous chapter a
successful crowdfunding campaign can also be a successful marketing campaign.
In this chapter the relation of marketing and crowdfunding will be analysed as
well as the common mistakes companies make in correlation with marketing. In
his work … (…)

Crowdfunding and marketing are usually
considered two abstract concepts that are no by any means connected. That
belief though is wrong. ?he two terms are interconnected and cannot exist without one
another. In this chapter the relation between crowdfunding and marketing will
be analyzed and there will be provided examples that prove the importance of
marketing in crowdfunding.

In their work … point out the relation
between the two concepts. During a crowdfunding campaign the product and the
company receive free press attention due to the reasons subsequently analyzed.

The crowdfunding campaign can in many ways
viewed as a marketing campaign. If viewed such as this then it offers some
advantages that a regular product with a regular launching would had to work
mauch more in order to achieve it.

1.      
Network expansion

Hui et al (2013)  indicate the opportunity given by a
crowdfunding campaign to raise awareness of the product with the audience. A
crowdfunding campaign entails not only raising funds but present the product to
the potential customers. Among their findings was that sometimes the benefits
of the raise in the popularity surpassed the benefits of the funds secured.

2.      
Product Validation

With the launch of a crowdfunding campaign
the creators establish a form of two sided communication with the audience.
Through it the creators receive feedback and in return elaboration the
specifics of the product, trying to make it more appealing to the customers. It
can be argued that through the process of rewards-based crowdfunding the value
of the product can be determined. Using the final number of backers the
manufacture of the product can be vindicated or rejected, thus giving a
valuable tool to the crowdfunders.

3.      
Branding

Connected with the previous two points a
successful crowdfunding campaign can make a product’s name a successful
product. Such is the case of Pebble a product of a crowdfunding campaign that
was considered for a while a leading brand in the industry (Brown et al, 2016).
Furthermore in their work Jobber and Ellis Chadwick (2016) point out that being
first on the market with a unique product can also create brand value.

 

2. Crowdfunding can work as a marketing
campaign but as … suggests it is a two way relationship. It is vital to their
that the creators take some steps in order to raise the awareness of the
crowdfunding campaign prior its launch. According to … promoting the product is
the most time-consuming activity the crowdfunders take over the its time
period. The steps required will be analysed in the subsequent paragraphs.

2.1 Pricing and quality

The usual incentive in a rewards-based
campaign is a preorder of the product. It is important for the creators not
only to find an audience but also to price it accordingly. In what is commonly referred
as the “lemons problem” cannot distinguish good and bad quality of a product in
a market with asymmetrical information (Tomboc 2013). The creators role should
be not only to inform properly their audience of the product’s quality but also
price taking account of the profile of it’s prospective customers, cost of the
product as well theirs competitors pricing. (Hu, Li &Shi, 2015).

2.2 Existing Connections

According to Agrawal et Al (2011) reaching
out to families and friends can make a difference especially on the early
stages of the campaign. Due to the first 24 hours being the most important in
the campaign (Lu, Xie, Kong & Yu, 2014) an early accumulated amount of
funds will validate the products to the eyes of the audience and thus motivate
them to participate in funding the project (Agrawal et al, 2011).

2.2 Business and Media Connections

Communicating with

 

 

 

5. 
Statistics

A common question of entrepreneurs
preparing to venture in the world of crowdfunding is whether they should keep a
small entry fee in order to attract more backers or use a high fee hoping that
by using a high price they will make up for the leak of the potential
customers.

This essay centers on rewards-based
crowdfunding. The highest profile rewards-based platform is Kickstarter.
Kickstarter is a peculiar case due to the limit it imposes to crowdfunding
campaigns. If a campaign fails to meet its goal then it is considered a failure
and is unable to secure any funds. This approach is dffferet than the one taken
in other platforms like Indiegogo where the crowdfunder does not need to set a
goal.

The study uses a pool of 10.000 randomly
chosen projects, with failures and successes equally distributed. In order to
achieve a more precise result, any crowdfunding campaigns that were not able to
secure more than 50 dollars were removed due not only the small number of
backers but also due to the danger of them not being serious attempts of
crowdfunding. On the same note high profile Kickstarter campaigns from
individuals that can be considered industry giants such as singer Neil Young or
videogame company Square Enix were dismissed as were deemed as anomalies.)

In order to calculate the average pledge
the following formula was used:

 

6. 
Conclusion