IS3321 Information Systems Solutions for the Digital Enterprise Lecture 10: Crowdfunding Rob Gleasure robgleasure.com Crowdfunding Last session Open Innovation, Lead Users and Contests From the Wisdom of Crowds to the Wisdom in Crowds The case of InnoCentive Todays session Crowdfunding Rewards-based Crowdfunding Peer-to-Peer Lending Charitable Crowdfunding Equity-based Crowdfunding Consider the Following Problem Some goods can be created with little or no cost, e.g. pure digital goods such as software, 3D designs, or images Other goods require some financial outlay to make them happen, typically for Physical inputs and materials Salaries for full-time employees Legal counsel Physical infrastructure (e.g. office space) Travel and promotion Generating finance is a massive burden which often requires time, concessions, and frequent failure Jumping Off Point Up to now, we have leveraged the knowledge and action of the crowd en masse, including coding, writing, classifying, voting, labelling, etc. But now we need real financial resources to make things happen, effort alone isnt enough anymore We dont want small amounts of peoples time, we want lots of people to chip in small amounts of hard cash Put differently, we arent looking at wisdom, were looking at the wealth of crowds Crowdsourcing Crowdfunding Images fromand Different types of crowdfunding Peer-to-Peer Lending Loan applicants ask for money in return for repayment plus interest (as per standard unsecured loans from banks) Lenders may choose to invest, then receive regular lodgement as money is repaid Massive industry, e.g. US-based Lending Club facilitated loans totalling over $2.2 billion last quarter, and over $13 billion to date Sites vary in the level of background checks, as well as how interest rates are set (some are done automatically, others are auction- based, e.g. prosper) Examples Zopa, Prosper, Lending Club Mostly focused on personal loans club/introduction/ Kabbage, Funding Circle, LinkedFinance Focus on business loans https://beta.linkedfinance.com/ Kiva 0% interest loans to entrepreneurs and small business owners in developing countries The interesting questions How many people are defaulting? About 5% Why arent more people defaulting? Credit score concerns Social contract (arguably) What sort of returns are people getting? 8-9% (ish) Open question: whats new about this and where is it going? Charitable Crowdfunding Fundseekers ask for donations with no material reward offered, only the satisfaction of helping a needy cause Projects include anything with a strong prosocial or philanthropic element, e.g. Projects in developing worlds Medical bills Animal rescue Religious projects Examples Razoo, Crowdrise, Pledgie, Firstgiving, iCrowdfund*, Fundrazr General call to prosocial donations https://pledgie.com/ https://www.razoo.com/us/home/ Experiment.com, DonorsChoose, LoveAnimals Cater to specific types of causes https://experiment.com/discover Generosity Spinoff from Indiegogo https://www.generosity.com/ The interesting questions Why are people donating? Rationalistic altruism vs normative giving Who is donating? Lots of one-off donations (friends and family) Lots of anonymous donations Rewards-Based Crowdfunding Rewards are offered, mostly in exchange for material goods Rewards tend to be tiered so that larger donations get larger rewards Had success in a range of areas (mostly B2C focused), e.g. Creative industries Software Hardware Games/Toys Educational materials Basically anything that can capture the publics attention Examples Kickstarter Creative focus https://www.kickstarter.com/ Indiegogo* Cause focus https://www.indiegogo.com/ Pozible, Sellaband, Unbound Specific areas https://unbound.co.uk/ * Blurs the line between charity and rewards The interesting questions What if people dont do the thing they said they would? Very small number deliver nothing (though most projects are late) How do backers react when things dont go as planned? Differently Open question: why is this only about start-ups and small independent businesses? Equity-Based Crowdfunding Businesses (often startups) ask for donations in return for equity in the business itself Basically takes the standard venture capital/angel investor model and applies it to an online community Slowest growing form of crowdfunding (along with charity) due to massive legal complexities Need to protect investors from shady businesses Need to protect businesses from undesirable assocations 2012 JOBS Act in the US is probably the most high-profile attempt at legislating for this Examples CrowdCube, Seedrs Early movers in Europe https://www.crowdcube.com/ Fundable, EquityNet, Crowdfunder, EarlyShares, AngelList Grown in the US post JOBS Act https://www.crowdfunder.com/ https://angel.co/ https://www.equitynet.com/how-it-works.aspx Some hint of royalties-based examples but most of these vanished pretty quickly The interesting questions How does this thing work legally? Technically unregulated in Ireland JOBS Act in the US made far-reaching legislative changes, rather than focusing on crowdfunding, per se How big is this thing going to get? To date, not as big as people thought Open question: why would this appeal to investors more than regular stocks and shares? Why would it appeal to entrepreneurs more than VCs or angel funding? Advantages Fast money, often within days A chance to test ideas before theyre ready for full launch Huge branding and marketing potential Many backers feel a sense of ownership for the company/project that makes them want to drive things forward Means giving up little (or no) creative and strategic control compared with traditional financiers Disadvantages Very public forum means there may be concerns over Disclosure The consequences of failure Perceptions of desperation Lacks support ecosystem that comes with traditional investors Serious sense of ownership when people have put money in may present issues later Hard to come back for more money if things turn out to be more complex than first thought Amanda Palmer and her weird music https://www.kickstarter.com/projects/amandapalmer/amanda- palmer-the-new-record-art-book-and-tour/description Ted talk at https://www.youtube.com/watch?v=xMj_P_6H69g The Oculus Rift https://www.kickstarter.com/projects/ /oculus-rift-step- into-the-game?ref=nav_search Star Citizen https://www.kickstarter.com/projects/cig/star-citizen?ref=nav_search Readings More lending choice as peer-to-peer financer launches in market financer-launches-in-market html Will JOBS Act Equity Crowdfunding Ever Happen? equity-crowdfunding-ever-happen/ African Entrepreneurs turn to crowdfunding entrepreneurs-turn-to-crowdfunding/ html How To Build An Enterprise Investment Scheme With Equity Crowdfunding build-an-enterprise-investment-scheme-investment-portfolio-using- equity-crowdfunding/ Amanda Palmers TED Talk about crowdfunding https://www.youtube.com/watch?v=xMj_P_6H69g