Crowdfinancing, bridging the valley of death?

Abstract

Crowdfunding is an emerging financial instrument, which can roughly be described as a phenomenon where a large number of financial contributions are made to support specific initiatives or enterprises in an online environment. The form can be a donation, prefinancing a product or service or in return of a financial reward. The latter form is also known as crowdfinancing. A growing number of startup companies are looking into new sources of finance, such as crowdfinancing, as they experience low entrance to traditional financial resources. The goal of this research is to discover the motivations of entrepreneurs to choose for crowdfinancing and to define their preferred crowdfinancing value proposition, from the point of view of the entrepreneur and the crowdfinancing platform. First, a case study among five Dutch crowdfinancing platforms is conducted, using interviews with the founders of these platforms and internet data research. The aim of this is to sketch their view on the current value proposition of the crowdfinancing platforms towards entrepreneurs. Second, four entrepreneur using two of these crowdfinancing platforms are interviewed to uncover their motives to choose for this method of acquiring capital. Third, the results of former interviews were processed and used as input for setting up a questionnaire, which is filled out by a sample of 25 predominantly innovative for-profit startups. Fourth, the results are used to validate the crowdfinancing value proposition on a larger scale, and are compared with other research in this field. The main findings are: (1) Strong reasons use crowdfinancing are: an extra opportunity for capital, company PR, lower cost of financing, addressing new customers, obtaining engaged investors, market validation and participating in something innovative. (2) Conditions that discourage crowdfinancing the most are when the crowd gets direct influence in the company e.g. in the case of equity or when the entrepreneur is personally liable for the financing, which may be required in the case of debt. (3) Demotivators and dissatisfiers of crowdfinancing arise when entrepreneurs think that the customers of a company are not the same as the ones who might invest through crowdfinancing or when their intellectual property cannot be protected. (4) The preferred financial participations in a crowdfinancing context by the entrepreneurs are prefinancing a product or service in combination with either loans or revenue shares. (5) Three out of four entrepreneurs in the sample intend to make use of a crowdfinancing platform in the future; they expect facilitation of contracts, transactions and selection and screening of companies as a service.