MGMT160: Crowdfunding

growth stage

Startup has become an efficient, profitable entity with sufficient size and market penetration

two purposes of crowdfunding

(1) alternative funding source and (2) offers nonmonetary resources through organizational learning

benefits of CF for startups

-Alleviates the capital crunch many startups face non monetary benefits like... -problem/solution validation -product validation -market validation -market penetration/growth and then Establishes a loyal community of engaged customers

best practices on how to attract a crowd and its contributions

-cue utilization theory -signals -cues

crowdfunding

-requesting monetary contributions toward a commercial or social business goal -encompasses the outsourcing of an organizational function (capital formation) to a strategically defined network of actors (crowd) in the form of an open call via dedicated websites (crowdfunding platforms)

startup stage

Ascertained the feasibility of an idea and the credibility of the business model to deliver the offering to an attractive target market

Harnessing cues and signals for Donation crowdfunding

Choose a specialized platform and all-or-nothing payout model Be transparent and accountable Publicize backer information

JOBs Act Title IV Regulation A+

Enables privately held companies to accept investments from both accredited and unaccredited investors.

best crowdfunding for growth stage

Equity CF is best because: Needs a higher level of capital than the previous stage that is not usually attainable via donation or lending CF Can get more funding because it has some objectively verifiable data to back it up Risk of failure is lower so it can offer more credible monetary rewards

pre startup stage

Exploring feasibility of a business idea in terms of if a viable offering solves a significant customer problem and identifies a target market, partners, distributors, and competitors

traditional funding sources

FFF (friends, family, and fools), angel investors, venture capitalists, and seed funding

donation crowdfunding

Founder receives money from a crowd without any tangible return for that contribution, without the expectation of a specific return to the funder (pure donation)

charity

Fundraisers usually do not offer anything in return for the donations that they receive

Title III Retail Crowdfunding

If soliciting non-accredited investors, can only raise $1,000,000 in 12- month period.

market validation

Illustrates how a new product will perform before officially going to market

rewards-based

Legally, reward-based sites have usually been organized as donation sites

market penetration/growth

Marketing via promoting a product or a direct sales channel

Harnessing cues and signals for Lending CF

Offer tangible rewards Detail the startup founder's credentials Frequently update a funding crowd

Debt

Peer-to-peer lending that is part of FinTec

Harnessing cues and signals for Equity CF

Provide third-party verifiable reports Attract reputable early investors Target a crowd that can empathize

lending crowdfunding

Raises funding with the expectation that founders will repay supporters

problem validation

Refining the product or service with potential customers via feedback

Equity

Sites where entrepreneurs can sell shares of their company

Title II of JOBS Act

Title II allows a company to employ "general solicitation" to market securities offerings provided they follow the rules and guidelines of Rule 506 of Regulation D.

problem/solution validation

Validating the overall business idea

equity crowdfunding

Venture raises money from a crowd in exchange for an ownership stake in the firm in the form of equity or bond-like shares -Fastest growing CF strategy and the average campaign value is high

best crowdfunding for pre-startup stage

donation crowdfunding Donation CF is best because: High risk of project failure -> founder is not in a position to promise tangible or monetary rewards More operational flexibility Keeps the risk of disappointing crowd members low

spectrum of typology crowdfunding

from no tangible reward (pure donation) to tangible reward (investor/entrepreneur led)

cues

information that includes signals as well as additional information available through third parties or the general environment

signals

information under the direct control of the entity, such as its own published information or certifications to accepted standards

best crowdfunding for startup stage

lending crowdfunding Lending CF is best because: Startup is catching some early traction so it can credibly offer tangible rewards such as monetary interest or a presales product Provides a real-life estimate of demand and customers' willingness to pay (especially with presales model) Builds initial group of early adopters This stage requires substantially more funding than the last and lending allows a founder to generate more capital with higher minimum donations

cue utilization theory

when faced with ambiguity about the quality of an entity (person, product, firm, institution), individuals use surrogate information to make inferences about the entity's quality

what problems does crowdfunding solve?

• Coordination • Gatekeeping • Inexperience • Patronage

benefits of crowdfunding over VCs for the entrepreneur

• Crowdfunding investors appear willing to invest in riskier ideas than venture capitalists • Pre-sales allow the entrepreneurs to get a sense of the probably demand for their products before investing heavily in developing them • Entrepreneurs can retain a larger share of their ventures if they fund themselves through pre-sales rather than VCs

benefits of crowdfunding over VCs for the investors

• Excitement about crowdfunding likely from the potential to invest in the next Amazon, etc. • May eliminate some of the costs associated with VC investing (e.g. management fees, carried interest, etc.) • Crowdfunding debt investors looking to eliminate the profits of the middleman (i.e. banks, etc.) • Syndicates in crowdfunding may play the role of VCs (e.g. 20- 25% of the profits on AngelList), but eliminates the management fee so returns still may be higher than typical funds

what has led to the rise of crowdfunding?

• Jumpstart Our Business Startups (JOBS) Act in 2012 • Reforming only of equity fundraising (~ 7% of total funds to date, mostly outside of the U.S. anyway) -General familiarity of the public with online transactions

Key crowdfunding statistics

• Smaller Goals are More Attainable • Average successful crowdfunding campaign is around $7,000 • Average campaign lasts around 9 weeks • Campaigns that can gain 30% of their goal within the first week are more likely to succeed • There is a direct correlation between the number of outside links to a crowdfund and the success of the fundraise. • Social Media is a critical factor in crowdfunding success: for every order of magnitude increase in Facebook friends (10, 100, 1000), the probability of success increases drastically (from 9%-, 20%, to 40%)