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TheRoleofCrowdfundinginPromotingEntrepreneurship

PauloSilvaPereira

01/21/2012

TheLisbonMBAInternational(Catolica|Nova|MIT)

Contacts:+351933803759;paulo@ppl.com.pt

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Contents1. Introduction ..........................................................................................................................4

2. ResearchMethodology .........................................................................................................7

3. OntheImpactofCrowdfundingonEntrepreneurship .........................................................8

3.1. Earlymodelvalidationfromsmallscaleoperationonwards ........................................8

3.2. Pre‐salesandPre‐order ..............................................................................................11

3.3. Incrementalroundsoffundingandequityandcontroldilution.................................12

3.4. Theevolutionoftheuserroleanditsimpactintheentrepreneurialvaluechain .....17

3.5. InnovationandEntrepreneurshippromotioninCrowdfunding .................................20

3.6. PromotionandMarketinginStart‐ups .......................................................................27

3.7. Onpricing,entrepreneurshipandcrowdfunding .......................................................31

4. DiscussionandConcludingRemarks...................................................................................36

4.1. ImplicationsandtheFutureofCrowdfunding ............................................................37

4.2. Limitsofthisstudyandrelatedsuggestionsforfurtherresearch ..............................38

5. Acknowledgements.............................................................................................................41

6. References ..........................................................................................................................42

ListofFigures

Figure1:TheLiquidityGapinFinancialInvestmentsforEntrepreneurs ......................................4

Figure2:ContributionstoSciFundChallengeCrowdfundingExperiment..................................26Figure3:TypicalPathofaConsumerInvestmentviaaCrowdfundingPlatform .......................30

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TheRoleofCrowdfundinginPromotingEntrepreneurship

ABSTRACT

Crowdfunding is a collaborative initiative, usually via internet, where people network to

collectivelyraisefundsinordertoinvestinandsupportprojectsdeliveredbyotherpeopleororganizations.

Tools such as crowdfunding are born and thrive in a grassroots environment,with a strongpotentialtopositivelydisrupttheentrepreneurialgenerationsettingandgrowtoapositionof

significant relevance in society, namely at a time when alternatives to traditional forms offinancearewelcomeandthetechnologytodeliverthemisabundant.

Entrepreneurship is the act of transforming ideas and projects into economic products orservices. Entrepreneurship related to starting new businesses is better known as start‐up

ventures. Entrepreneurs facea seriesof challenges, from idea conceptionandbusinessplandesign, toobtaining finance,promotingnewproductsandservices,generatingrevenuesandprofitsandgenerallygrowingandsustainingabusinessforthelong‐run.Thesechallengescan

be overwhelming, namely in the start‐up phase of a new venture, leaving several ideas onpaperwithoutthemhavingachanceto“growlegsandwalk”.

Thispaperanditsanalysisofferimportantinsightsaboutthecontributionofcrowdfundingtofacilitatetheattainmentofcriticalfactorsforsuccessfulentrepreneurship.Withextensiveuse

of real practical examples, leveraging previous analytical studies of other crowdfundingimplications and reviewing expert literature, by interviewing entrepreneurs, crowdfundingplatform owners and by benefitting from hands on experience of working in such an

organization,weintendtoclarifythe impactofcrowdfunding inwhatweconsideredtobe7keyentrepreneurialrequirementsdetailedfurtherintheintroductionsectionandlaterinthebodyofthepaper.

The findings have implications for entrepreneurs, naturally, and for business generation

theory,extendingcurrententrepreneurialguidelineswithinnovativetoolsandmethodologiescapableofsustainingsuccessfulventuresinanewlyhighlightedcooperativeworld.Weliveininnovativetimeswherethechannelsforthetransferoffundsandresourcessufferdisruptive

changeswith thepotential tosignificantly improve theability togeneratenew initiatives forthewell‐beingofentrepreneursandallrelatedcommunities.

KEYWORDS:Crowdfunding,Entrepreneurship,Innovation,ConsumerRoles

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1. Introduction

“Accesstofinance isessential toenhancethecompetitivenessandgrowthpotentialofsmalland medium enterprises,” said European Commission Vice President Antonio Tajani,responsible for industry and entrepreneurship, in December 2011. “In the context of the

currentcrisis,markedbyafallinlendingtotherealeconomy,itisincreasinglydifficultforsuchcompaniestoaccessloans.”

Entrepreneurstodayfindaliquiditygaptoobtaintheirmuchneededfinance.Bankloanshavesignificantlydecreasedinnumberandvolumeandhadtheiracceptancecriteriaandcollateral

requirements have considerably increased. Venture capital and business angels typicallyfinance larger amounts and require sound proof of significant multiplication of investmentwithhighreturnsevidencedinthefirst3yearsofaventure.Alternatively,seedandpre‐seed

entrepreneurs, at the launch of their companies, look for financial support from family andfriends who believe in the entrepreneurs without having to witness clear evidence of apotential exponential revenue growth in the first years. However, plenty of business

opportunitiesfailtoobtainthenecessaryfundsduetotheirinabilitytoshowenoughvaluetotheinvestorsbutalsoagreatmajorityduetotheinabilitytofindinvestorsandbringthemonboardtheirinitiative.

Figure1:TheLiquidityGapinFinancialInvestmentsforEntrepreneurs

source:PPLCrowdfundingPortugal

At a time when alternatives to traditional forms of finance are inexistent and economies

aroundtheworldstall,entrepreneursrequiretofindsolutionstoobtainfunding.Conversely,many investors still hold plenty of liquidity, but struggle to find innovative projects andinvestment opportunities to apply their finances into. In this scenario, crowdfunding has a

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strong potential to positively disrupt the entrepreneurial generation setting and grow to a

positionofsignificantrelevanceinsociety.

Crowfunding consists in resorting to the crowd to find many small investors to becomeinvolved financiallywithaproject, rather than trying to finda few large investors. It usuallyinvolves financial investments executedonline, through theuseof social networking,where

sponsors, investors or donators fund initiatives or entities (with or without profit seekingobjectives). There are currently three models of crowdfunding, all of them based on thesolicitation of financial investments online with the goal of funding a project, idea or an

entrepreneurial venture. This solicitation is made to the maximum number of potentialinvestors possible, through extensive use of online collaboration and communication tools,applyingoneofthreemodels.

The first and most common method today is reward‐based crowdfunding. These are

philanthropic donations and sponsorshipswith no financial return on investmentwhere theinvestorsorcontributorsarerewardedwithcreativeprizes(usuallyrelatedtotheoutcomeofthe project) and have the opportunity to get involved with the project and support the

entrepreneurs.

Asecondmethodisthepeer‐to‐peerloan.Theseareloansfromseveralindividualstoanotherortoanentrepreneurialteamlookingtofundaprojectorventure.Theseloanscaninvolveafinancialreturnoninvestmentwithapre‐agreedinterestrateamongstthepartiesinvolvedor

simplyconsiderthereturnofthemoneylent,withnointerestratecharged.Theopportunitylieswithentrepreneursthatcanfinditdifficulttoobtainattractivepricesforsuchaloanfromafinancialinstitution,iftheymanagetoobtainoneatall,andinvestorsthatalsofinditdifficult

toobtainadecentreturnonasavingsorinvestmentaccountifalltheyhavearelowvolumesavings to apply. The repayment of the loan can take several shapes, from a direct banktransfertoroyaltyfeesorratesontherevenuesofanenterpriseuntilsolongastheloanand

interesthavebeenpaidoff.

Lastly there is the equity based crowdfunding model where the project owners areentrepreneurswhoarewillingtoofferaparticipationintheequityoftheirfirminexchangeforthefundsinvestedbythecrowd.

Inallthreemethods,wewitnessademocratizationoffinancethroughthedisintermediationof

the financial institution that either charged an unreasonably high price for finance or didn’tconcedealoanunless itdealtwithanexceptionallyqualifiedcandidate(thatwouldprobablynot require a loan in the first place). This consists of the utilization of communication and

collaboration channels that enable (remove barriers to) the transfer of capital, wealth,resourcesandpromotionandconsequentlyofferdisruptivechangestothewayentrepreneursareabletoobtainfundsfortheirventures.

InHolland,theequitybasedcrowdfundingcompanySymbid1hasjustrecentlybeenawarded

theShellLiveWireAward20112forthestrongestpotentialcontributiontoentrepreneurship.

1http://www.symbid.com/2http://symbid.com/press/20‐symbid‐wins‐audience‐award‐shell‐livewire‐award‐2011

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Theanalysisforthisstudy,theresearchinvolvedandtheresultsobtainedanddescribedinthis

paperintendtoconsiderandanswerthefollowingresearchquestions:

KeyResearchQuestion:whatrolecancrowdfundingplayinfosteringentrepreneurship?

Key related research questions: what impact and in what context does this role affectentrepreneurship?Howsignificantisthatimpact?

Crowdfundingisavehiclethatmaybeespeciallyapttopromoteandboostentrepreneurshipandinnovation.Itcanplayacriticalrole,asaresourceintegratorandanetworkorchestrator,

tofilltheliquiditygapandprovideaneconomywithfueltoitsentrepreneurialengine.

In this paper we first introduce the concept of crowdfunding and its potential relation toentrepreneurship as well as the structure of the paper and its content. On section 2 wedescribe the research methodology utilized to reach the relevant conclusions. The main

analysis of the critical factors that affect entrepreneurship and where crowdfunding has asignificantroleareexplored insection3.Namely, insection3.1,weconsidercrowdfunding’simpactontheearlyvalidationofabusinessmodelandongraduallyscalingoftheoperation.In

section 3.2we document a reflection over the relevance of pre‐sales and pre‐ordering andhowthesebenefitscanbeharnessedwiththismethodology.Anotherrelevantconsiderationiselaboratedonregardingtherelevanceof incrementalroundsoffundingandtheimplications

regardingequitydilutionandcontrolovertheenterpriseinsection3.3.Theuserrolewithinanentrepreneurialventureandtheacademicperspectivesoverithasevolvedthroughtime.Withsuch models of finance, a new role is developed, that of the consumer / financier and it

appears earlier in the “supply chain” of launching an enterprise. This study also delves intotheseimplicationsinsection3.4.Anotherveryrelevantfactorofentrepreneurialsuccessistheabilitytoinnovateandconvertinnovationintorevenues.Crowdfundingenablesthisnewrole

and this paper analyses how andwhat potential it has in section 3.5. Start‐ups also requireinvestment in marketing and promotion, but typically this is an area that is frequently de‐prioritized due to financial constraints. Again, this tool offers newopportunities in this field

thatthispaperexploresandgivesevidenceof insection3.6.Finally,thepricingstrategyandtheabilitytodetermine,assoonintotheventureaspossible,theshapeofthedemandcurvefacing the entrepreneur can be a differentiating factor of success that is enabled and

promoted through crowdfunding. In the last factor analysis, thispaper investigateshow thisrelation can be significant and how such relevant information can be obtained during acrowdfundingcampaign,reportedinsection3.7.

Inchapter4aconcludingdiscussionwithfinalremarksisdocumentedwithdetailsonseveral

implications of the findings and insights into the possibilities that can be exploredwith thefuture of crowdfunding in section 4.1. In section 4.2 the limitations of this study are statedwithrecommendationsforfurtherresearch.

Inconclusion,theacknowledgementsandalistofallthereferencesutilizedaredocumented.

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2. ResearchMethodology

Inthisthesisweempiricallyanalyseasetofcrowdfundingplatforms, includingreward‐basedcrowdfunding,equity‐basedcrowdfundingandpeer‐to‐peerlending.Thedataforouranalysis

wascollectedviabothanextensivereviewof theacademic literatureandseveral interviewswithCEO’sofequity‐basedcrowdfundingplatformsandstart‐ups,namely:

CEO’sofequity‐basedcrowdfundingplatforms

• DarrenWestlake–Crowdcube3• KorstiaanZandvliet–Symbid4

Interviewsandconversationswithstart‐upsandentrepreneurs:

• PauloSilvaPereira,YoannNesme,PedroDomingosandPedroOliveira–PPL

CrowdfundingPortugal(OrangeBirdLDA)• LimorShweitzer–Brandmymail• MarianoKostelec–Uniplaces

• MiguelSantoAmaro–Travelabunch• PedroColaço–Guestcentric• DanielSullivan–Appswell

• JoãoPedroMalheiros–Masterblock• FilipeSantos–ProfessorofEntrepreneurshipatTheLisbonMBAandINSEAD• PauloRosado–ProfessorofEntrepreneurshipatTheLisbonMBAandCEOof

Outystems

Anotherrelevantinputtotheanalysisandresearchdonehasbeenthehandsonexperienceofmanaging a reward‐based crowdfunding platform since August 2011, PPL CrowdfundingPortugal. PPL is unique for the regional flavour it brings, for the qualities and values of the

team behind it and for the differentiating marketplace innovation it is working on anddeveloping. It potentiates a truly engaged community looking to exchange funds and skills,resultingininnovativeandcreativeprojects.Thisisaccomplishedwithlocalactionbutglobal

thinking, where PPL networks with the strongest references in the field and works withpartnersandotherEuropeanandNorthAmericanplatformstocollectivelypushtheenvelopeinthisnewareaandpromoteastronglypositiveandimpactfuldemocratizationoffinance.

3www.crowdcube.com4www.symbid.com

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3. OntheImpactofCrowdfundingonEntrepreneurship

3.1. Earlymodelvalidationfromsmallscaleoperationonwards

Failearly,failoften,failcheaplyhasbecomecommonwisdomandgeneralknowledgeamongst

entrepreneurs.Thisconcept iscritical inpromotingstart‐upsuccessandistaughtextensivelyin thebestmanagement schoolsworldwide. Failure is thebest recipe for success, iswhat itsays.

FilipeSantos5onceanalogisedwiththeimageofatennisplayer.Earlystageentrepreneursare

liketennisplayers,theyseetheballbeinghitandpositionthemselvesonthecourttakinglargestridestoreachatargetarea.Asthey interprettheball’sspeedandspineffect, theywill re‐adjust their position, taking small steps and shuffling their feet to find the optimal hitting

stance.Astheballhitsthegroundinfrontofthem,thetennisplayerwilldoafinalbodyandarmadjustmenttoensurehewillhittheballstrategically,atstrengthandwithaccuracy.Ifthehitisnotperfect,hewillhaveachancetoreplyontheopponent’snextstrike.Ifhelosesthe

point, hewill have the next point to battle, provided he hasn’t lost thematch. Such is the“game”oftheentrepreneur.Hewillneedtotakelargestridesandpositionhisideatotakehisproductorservicetothemarket.Ashemovessteadilytodesign,pitch,financeandlaunchhis

project,theentrepreneurwillthenneedre‐adjustments,frequentandcheap,alongtheway,tofine‐tunehisofferandensurehewillplaceitandpromoteitinthemoststrategicmannerpossible.Theseadjustmentsarecritical to thesurvivalof theentrepreneurshipand theyare

required tobeunderstoodandexecutedasearlyon in theprocessandwithas littlecostaspossible.Theyarealsorequiredtooccurasoftenaspossibleuntilthefinalsetisplayed.Then,if the entrepreneur fails in his endeavour, he will have gathered valuable experience

nevertheless and he will be in a favourable position to launch his next venture, moreconfident,withaddedskillsandknowledgeandwithenoughenergy,willandcashto launchhisnext“offensive”.

This analogy is in linewith the recent conceptsof Lean Start‐upmodels that look toenable

entrepreneurs to do the most with the least possible and to delay significant investmentrounds and founder dilution to as late in the process as possible. This way they intend toenable frequent iterationsof their businessmodel, productdesignandoverall strategywith

low‐costtechniquesandearlyonintheenterpriselifetime.

Agrawaletal.(2011)arguedthatfriendsandfamilyarecriticaltogenerateearlyinvestmenttolaunch an initiative and that this early investment is an important signal of entrepreneurialcommitment. This signal can and should be used by entrepreneurs, along with other

5FilipeSantosisprofessorofentrepreneurshipatTheLisbonMBAInternational(Catolica|Nova|MIT)andINSEAD

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milestonesofsuccessachievedtosolicitfurtherfundsatalaterstage,byaccessingsourcesof

capitalatanydistance.

Theseauthorsanalyseinparticularthemusicindustrywheretheyrevealimportantchangesinthefieldoverthepastdecades.Revenueshavesignificantlybeenreducedduetonewformsofmusic consumption and sharing such as online sharing, streaming and piracy. Costs, they

argue,havealsobeenreduced.Productionanddistributionareconsiderablylowerincostduetothedevelopmentofsophisticatedyetcheapsoftwareanddigitaldistribution.Buthoweverlow they may be, costs still exist and financing challenges are the most common amongst

artists inthemusic industry.Furthermore,theyrelyonthesubjectivewilloftheproduceroreditor to appreciate their work, who may then value it and opt for investing in it tocommercializeand,ifsuccessful,reapmostofthevaluegeneratedwiththesaleshimself.“In

theverticallyintegratedindustryset‐up,largerecordcompaniesprovidedbothfinancingandafull suiteof services (e.g.,producer, studio, coverdesign,distribution,auxiliarymusicians) inexchangeforownershipoforequityintheartists'intellectualproperty”(Agrawaletal.2011).

Crowdfunding has opened up a new playing field in the music industry. Music lovers and

consumersnowplay an important roleof notonly purchasing themusic theydesire and soproviderevenuestotheartist,buttheyarealsoinvolvedmuchearlierintheprocessandhelpdeterminewhatmusicisliked,whatstyle,whatartistshouldbepromotedandwhenallthisis

determined, they help finance the publication of that work so later they and others canconsumetheartisticproduct.WithcrowdfundingplatformssuchasSellaband6(thisexampleisanalysedfurtherinthispaper)artistsareabletotestveryearlythemarketappetitefortheir

style,whichmusic inanalbumgathersthemostfans,whichmusictypeandwhichapproach(image,promotion,concertorgarageplay,etc)bestfitstheiraudience.Theycandothisearlyintheprocessandareabletoadjusttomaximizesuccess, findingtherightbalancebetween

expressing their genuineartistic soul and the commercially valuedoutcome thatwill sustaintheircareerandallowthemtocontinueworkingontheirpassion.“Asthemajorlabelsdeclineinimportance,artistshavefeweroptionstorelievecashconstraintsbyborrowingagainst,or

sellingequity in, their intellectualproperty.Crowdfundinghelpsovercomethatconstraintbycreating a market for the most salient asset available to aspiring new artists ‐ their ideas,vision,and future intellectualproperty ‐ thereby facilitating financing fromdistantstrangers.

Thus,crowdfundingmayhelpreduceanimportantmarketfailure”(Agrawaletal.2011).

Themusicindustryisaprovenexampleofcrowdfundingappliedsuccessfullytoenableearly,cheapandfrequentfailure,thusleadingmanymoreartiststosuccess,whowouldhavebeenunknowntodayhaditnotbeenforthelikesofSellaband.

ThebandNearfield, fromPortugal,was successful in raising$50000 in Sellaband, from742

“believers”,beingthemostvisitedartistonSellabandwith235639profileviews(actually235640now)7.ThisbandwasunknowninPortugalandunsuccessfulinlaunchingitsworkonthe

market(winningtheinterestofarecordlabel).Withtheircrowdfundingexperience,theywereable to directly test the market for the appetite for their work, to incorporate their fan’sfeedbackintotheirmusicandproducetracksthatgainedimmediatesuccessaswastheirpre‐6https://www.sellaband.com/7https://world.sellaband.com/en/projects/nearfield

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tested expectation. Their track “Dance of War”8 in a vocal dub version was one of the

successfullaterreleases.

Thesebandsarenowabletowalkbackintoarecordlabelhouseandnegotiatealarger,long‐termagreement, so scalingup their entrepreneurial initiative through theargument that, inthe case of Nearfield, close to 1000 supporters have influenced their style, have supported

theminproducingtheirworkandhavefinancedtheir initiativeuntil thatmoment.Thebandapproachesthelabelwithaproventrack‐recordandanexistingandconsistentgenerationofrevenues, thus showcasing a relevant opportunity for investmentmore to the liking of the

biasedproducer“taste”formusic.

“Itisthisconvergence–ofnewplayers,onanewplayingfield,developingnewprocessesforhorizontalcollaboration–thatIbelieveisthemostimportantforceshapingglobaleconomicsandpoliticsintheearly21stcentury”ThomasL.Friedman

Whenlaunchinganewproduct,crowdfundingprovidesareliablemethodoftestingconcepts

andideasbeforecommittingrelevantfundsupfront,thusreducingthefinancialandultimatelytheoperationalriskassociatedwithanewventure,allowingformoreconfidententrepreneursandahighersuccessrateofnewbusinessesraisedwiththesetools.Inturn,thismethodalso

increasesthelikelihoodofsuccessinthelong‐run.

Withthismethod,entrepreneurscanunderstandtheabilitytoscaleanditsgrowthratewhenlaunchinganewproduct.Windowfarms9isasocialbusinessaimingtosupportamateururbanfarmersthatgrowtheirownfood.Theyexecutedasuccessfulcrowdfundingcampaigninthe

famousKickstartercrowdfundingplatform10.

In this campaign, the entrepreneurs innovated even within an innovative method offundraisingandsetatargetfinancingamountof$50000toproduceanewhydroponicsystem(method to grow plants with no use of soil, only resorting to water and nutrient rich

concoctions)made in China. The financial and fundraising innovation came in the formof aconcurrentsecondaryfinancingtarget,moreambitious,of$200000.ThistargetwouldenablethesystemtobeproducedintheUSwithouthavingtooutsourcetoacheaperlabournation

the production whilst keeping the assembly within borders. Shivany Ganguly, the ChiefOperationsOfficerofWindowfarmsrevealstheywantedtomanufactureintheUnitedStatesallthetime,butreducingcostoftheoperationhadahigherpriority.Theonlywaytheycould

bringtheproductionintothecountrywouldbeiftheendconsumersowishedandwaswilling,orbetteryet,committedupfronttoahighervolumeofsalesinordertocoverthehighercosttohave thesameproductproduced in their country.Shivany furtherargued that thiswould

help them reduce the environmental impact with a leaner supply chain whilst promotinglabourlocallyandinvestmentintheregion.

8https://world.sellaband.com/en/projects/nearfield/songs/66658‐d‐o‐w‐vocal‐dub‐cd‐edit‐popface9http://www.windowfarms.org/10http://www.kickstarter.com/projects/windowfarms/learn‐to‐grow‐and‐share‐with‐new‐windowfarms

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On the 7th of December of 2011, Windowfarms closed their crowdfunding campaign in

Kickstarter.Theyhadgatheredinvestmentfrom1577backerstothetotalof$257307,thuskeeping in the United States the manufacturing process of their product, promoting locallabour and having partneredwith their consumers/investors to shape the supply chain and

entire operational model of their entrepreneurship. This model test, design and strategicdecisionwith theparticipationof the investorswasdoneprior to any sunk costof effectiveinvestmentexecuted.

3.2. Pre­salesandPre­order

LiandFuqiang(2010)intheirpaperonpre‐orderstrategyconcludethat“ahighlysought‐after

productduringthepre‐orderseasonprovidesapositivesignalabouttheproductvalue”.

Further to that conclusion, the “crowd” suggests that “Consumers could potentially benefitfromthepre‐ordereconomybecause theirpreferencescouldbemetmuchmoreaccuratelyandtheycouldgaindirectinputintotheinventionanddesignoftheproductstheybuy.Since

manufacturerswouldnolongerneedtotrytopersuadepeopletobuywhathadalreadybeenmade,advertisingwouldsupposedlydeclineinapreordersystem.Thismightmeanconsumerswouldbesatisfiedwithalowerleveloftotalconsumption,whichisgoodfortheenvironment.

Finally,companiescouldbenefitfromadramaticreductionintheriskofdoingbusiness,sincetheywouldknowtheirproductlineswouldalwayssellout.”inWikipedia11

Thecrowdfundingmechanism,throughitscommitmentoffundspriortoanyprojectlaunchorproduction, is a provenmethod of executing pre‐sales and pre‐ordering with a guaranteed

commitment from the investor/consumer. In section 3.5, innovation and entrepreneurshippromotionincrowdfunding,anexampleisgiveninwhichaPortugueseentrepreneurplanstoutilize this pre‐sales capability to test his product and enable him to achieve a minimum

efficient scale of operation, prior to launching or committing any funds to the cause. Thisinvestor had only imagined he would one day pursue the execution of such a project andconsideredtherisktoohighandthecommitmenttooexpensivetoeventuallysethisplan in

motion.Consequently,withouttheappearanceofcrowdfunding,hewouldnotplantobeginanewentrepreneurialventureashenowdoes.

YangChuandZhang(2010)concludethat“Whenthemarginislarge,thesellershouldadoptamasspre‐orderstrategybywithholding informationandorderinga largepre‐orderdiscount;

when themargin is small, the seller should adopt a niche pre‐order strategy by releasing agreatdealofinformationandorderingasmallpre‐orderdiscount;andwhenthemarginis inbetween, the optimal strategy depends on the amount of information consumers initially

possess”.

In 2010, Jean‐MarcGiacalone, an entrepreneur fromMilton Keynes in theUnited Kingdom,thoughttheircompanyneededanentrepreneurialboostas itwas innovativeandnewinthe

11http://en.wikipedia.org/wiki/Preorder_economy

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marketbutdevelopingandpromoting3Dprintersandprinterkitswasanexpensiveendeavor

that requiredsomecertaintyofsuccessbeforecommittingall theirenergyand funds into it.The producers of eMakerHuxley 3Dprinter stated theirmission to be: “We are a relativelynewcompany specialising in thedevelopmentofopen source3Dprinters.Ourmission is to

maketheserevolutionarymachinesavailabletothemassmarket,atarealisticpriceandwithaguaranteeofprintingsuccess.”Theydecided to launchacrowdfundingprojecton Indiegogoplatform12inordertoensureaminimumscaleofoperationspriortoinvestingincapacityand

expensive modern technology. The minimum pre‐sales they would consider satisfactory toconcludetheirproductwouldbewellreceivedinthemarketandhadanimportantroletoplayweresales tothevolumeof$30000. With investment from302customers, Jean‐Marcsold

$158 685 worth of several variations of their 3D printer. Their company now goes on toenlargetheoperationandfurtherdevelopanewandgrowingniche,securethattheyhaveanassureddemandtofulfil.

Similarly, JohnVDNandVitorSantaMariadesignedaHiddenRadioandBlueToothSpeaker

and estimated an investment of $62 000 for injection moulding tools, $30 000 for globalbluetoothcertificationsand$33000forthefirstproductionrun,totallinganinitialminimuminvestmentof$125000.Fortwoentrepreneurswithnomajorsourceofsavingsorfamilyand

friends to invest to thatamount, itbecamecritical tounderstandwhetheran investmentofthat sortwould generate the required sales and revenues to at the very least not lose anymoneyfromthecommitment.Onthe18thofJanuaryof2012,JohnandVitorraised$938771

incustomerordersfortheirproduct,fromatotalof5358clients.TheseclientshavealreadyhandedtheirpaymentstoJohnandVitorandtheyarenowsettoestablishthenewcompanyand produce the promised device. Their crowdfunding campaign in Kickstarter13 was a

successful exercise of critical pre‐sales to ensure the safe launching of a new enterprise,avertinganyfinancialriskandstartingwithapre‐setbaseofcustomerswhoareinvolvedandfeelapartoftheentireproductionvalue‐chain.

3.3. Incrementalroundsoffundingandequityandcontroldilution

“The entrepreneur and the venture capitalist “live together” for 3 to 5 years, toward the

mutualgoalofapublicofferingorsaleof theentrepreneur’sbusinessatahigherpricethanmanagementortheventurecapitalistpaid.Occasionally,theprocessworkssmoothly.”(Silver1985)

Ownershipofacompanybyfoundersfacesdilutionwhenothersinvestinthatcompany.First

timeentrepreneursseldomrealisetheextentofthisimplicationanditsconsequencestotheirreturns on the personal investment (financial, physical and emotional) and subsequent

motivationtoexceedexpectationsofallstakeholdersinvolved,includingthem.

12http://www.indiegogo.com/eMAKER‐Huxley‐3D‐printer‐kits13http://www.kickstarter.com/projects/2107726947/hidden‐radio‐and‐bluetooth‐speaker?ref=live

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Forexample,ifafounderowns25%ofacompanyandaninvestorprovidesfundsinexchange

for25%ownershipof the company, the founderdoesnot keep25%of theentire company.Ratherhis sharewill bediluteddown to25%of 75% that is left after the investor takeshisstake,or18.75%.Thiseffectoccursrepetitively,everytimeanew investorprovides funds in

exchangeforequity.Whenfurtherfundingoccurs,inlargeramounts,theeffectisexacerbatedas typically Venture Capital (VC) will demand higher shares for the subsequent rounds offunding.ThefirstinvestorwillalsosuffersomedilutionandwhateverisleftaftertheVCand

thefirstinvestorretaintheirshareiswhatthefounderwillhavea25%shareof.

Furthermore, VC’s will typically also demand a share of options before investing in thecompany.TheseoptionswillalsobeexpectedtocomeoutofthesharetheVCdoesnotown,furtherdilutingthefounder’sequity.Anentrepreneurmustalsobewaryofthefirst investor

lookingtoprotecthimselfwithcontractualanti‐dilutionclausesasthiswillfurtherincreasethedilutionof the founder’sequity.Also, anti‐dilution clausesprevent shares tobe sold tonewinvestors at higher prices (thus less equity) to raise capital, as thesewill typically shy away

fromcontractswherepreviousinvestorshavesuchanti‐dilutionclauses.

Intimesoffinancingscarcityormoredemandingcriteriatoobtainfunding,thepriceoffinancealso increases and funds are provided at higher prices (higher equity requirements). Thesecosts depend on several factors (availability of funds, risk, culture, etc). In 2011, in smaller

countries as Portugal, a start‐up promising revenues of over 1million euros in the 3rd year,looking toobtain fundingof350 thousandeuros in year zero, canbeoffered the funding intranchesassociatedwithbusinessgrowthmilestones inexchangefor70%ofequitywith the

potentialtobuybackoptionsatnominalvalue,accordingtotheinterviewsconductedtothestart‐upslistedintheresearchmethodologysection.

In 1999 Julia Smith concluded, after evidence gathered through face‐to‐face interviewswiththeowners‐managersofover150smallfirms:“Thosefirmswithaccesstoagreatervarietyof

sourcesoffundingmayperformbetterthanthosewhohavefewersourcesuponwhichtheymaydraw.”(Smith1999).

Evidenceshowedsomecorrelations,althoughJuliaSmithadmitsithardtoestablishareliablepredictionofperformance.However,more relevantly, thewillingnessof theowner‐manager

todilutehisequitystakebytakingonfurtheroutsideinvestmentwasnotprovedtoimproveperformance.Indeed,amajorityoffirmsinterviewed,thatconsideredequitydilutionrevealedaneedtoretainover50%controlandequityonthefinancedventure.Thefirmsthatdidnot

consider any equity dilution were also the majority of those interviewed, revealing howrelevantitwasforthefounderstoretaincontrolandequityovertheirconceivedideas.

“The evidence on willingness to dilute equity suggests that 40% of high performers wouldconsidersacrificingaproportionoftheirstakeinthebusiness,ortheirequityholding,inorder

topromotegrowth. Slightlymoreof themediumand lowperformers (49%each)wouldactsimilarly.Thisfigureisprobablyhigherbecausethelatteraremorelikelytobeinneedofextra

fundingthanthehighperformers.Thepercentageofequitythateachgroupwantstoretainisbetween 49% and 53%, on average, with most nominating a desire to retain a controllingshare”(Smith1999).

14

Acurrentdebateinalternativeformsoffinanceisaroundcrowdfunding,namelyequity‐based

crowdfunding (wherereturnson investmentare in the formofequityshares inacompany).Although this form of funding is already permissible in the UK, France, Holland, India andChina,itisnotyetsointheUSA.ItishoweverintheUSAthatsomeofthemostsuccessfuland

better known crowdfunding platforms exist (reward based, rather than equity based). It isexpected that the Entrepreneur Access to Capital Act H.R. 2930 will soon pass throughCongress on its way to being approved by its most famous advocate, President Barack

Obama14.ThesamebillhasalreadybeenapprovedbytheHouseofRepresentativesbyalargemajority(407‐17)ofrarebi‐partisansupport.ThisisanActaimingtoamendsection4aoftheSecurities Act of 1933 thus contemplating limited exemptions to registration with the

SecuritiesandExchangeCommission(SEC). In it,crowdfundingcampaignsofupto$2millionper year in funding from individuals are allowed without them requiring registering asaccreditedinvestors.Entrepreneurswillbeabletoraiseupto$2millionwiththismethodof

finance, provided they showaudited financial statements. Failing to do so, caps the limit offundspermissibleviacrowdfundingto$1million.ThecampaignitselfwouldrequireregisteringwiththeSEC,butnottheinvestors,whoseindividualinvestmentwouldnotexceed$10000or

10%oftheirannualincome(forinvestorprotection).Shareswouldalsonotbeabletobesoldfortheperiodofoneyeariftheinvestorisnotaregisteredoraccreditedinvestor.

This form of funding is seen as the “future of seed and growth financing for start‐ups andentrepreneurs” (instartupexemption.com).Theuseof technology, InternetandSocialMedia

enables fundraising of limited amounts of capital from friends, family and community.Startupexemption advocates that “it is local vesting and community vettingwhere only thewinning ideas receive not only funding but shared knowledge, experience and marketing

power…underaframeworkthatprovidesforinvestorprotection”.

Very relevantly, this form of capital raising, typically enables the kick start of new ventureswithout resorting to more expensive and equity dilution solutions of traditional financing.Thereareseveralreasonswhythis formof financing ischeaper. Crowdfundingreliesonthe

small investments of many within a community rather than the large investment of a fewinvestors.Oneofthedownsidesofcrowdfundingcurrentlyistheentrepreneurwillnotbenefitfromtheexpertiseofawisebusinessangelorventurecapitalistnetwork.Thiscanchange in

thefutureastheexpertiseandknowledgefromthecrowdcanandshouldbemadeavailable.However, currently, the absence of this expertise contributes to letting this formof financeremaincheaper.Thefactthattheinvestorsconsistofalargenumberofindividualsorgroups

with smaller invested amounts, reduces the personal risk for each of those investors, giventhat they behave in an optimal portfolio diversification and risk minimization manner. Thisdecreased individual risk also contributes to lower the price of the financing conveyed. The

motivations of these investors are also different from traditional investormotivations. Theywilllookatareturnoninvestmentbuttherewillalsobeareturnintheformofarewardand

potentialpsychologicalrewardsfromapersonalconnectiontotheentrepreneurs (previouslyexistingordeveloped in themeantime)or fromapersonal connection to theprojector theimpactgeneratedbytheproject.Again,theseotherformsofreturnoninvestmentcontribute

tolowerthefinancialcostofthefundsmadeavailable.

14http://www.startupexemption.com/archives/149#axzz1hwWt0nUa

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These lower costs of finance through crowdfunding allow for a seed and pre‐seed stage

entrepreneurtogothroughseveralroundsofcrowdfundingwithoutsignificantequitydilutionand loss of control over his venture, prior to setting up a series B round of funding withtraditionalVC(venturecapital)orAngelinvestors.Whenfinallyapplyingforatraditionalround

offunding,theentrepreneurmaybeinamorecomfortableequityholdingpositionbutalsohisenterprise may be further developed along the required economies of scale and revenuegenerationline,allowinghimtohaveastrongernegotiatingpositionwithtraditionalinvestors

(sodemandingcheaperpricesforthatsubsequentroundoffunding).

Theseroundsofcrowdfundingenableagradualraiseoffinanceinstages.

Whyitisbesttoraisefinancegradually,instages?

Entrepreneurs of start‐ups do not have the luxury of obtaining an entire funding for thelifetime of a venture, in multiples of tens of millions of euros, for a new project, frominception.Suchentrepreneursmaynothavesolidbusinessrepertoiresandareconsideredtoo

riskyformostinvestors.Suchanentrepreneurmustfirstshowevidenceofsuccess,achievingkeymilestonesinnumbers(revenues,profits,customers,employees,etc.)beforeproceedingto further rounds of finance. These will be enabled through increased valuations of his

business. Each round of finance will require the valuation of the company at that stage,consideringfuturegrowthpotential.Thesharepriceofthestockofacompanyincreaseswiththevalueofthesevaluations.Existinginvestorsaremostlywillingtopaytheoriginalpriceof

theirinitial investment.Therefore,it is inanentrepreneur’sinteresttoseekinvestmentfromdifferentinvestors,willingtovalueandpaythenewshareprice.Suchastrategywillenabletheentrepreneur to sell fewer sharesbut still raise relevant amounts,whilst also increasing the

value of the shares owned by the founders (through an increased valuation, although thepercentageofshareswillbereduced).Suchhighvaluationsallowfortheentrepreneurtoraisefinancinginmorefavourableterms.

Brewdog15 is a brewery from the United Kingdom and a good example of equity based

crowdfunding with incremental rounds. It was the first European company to pursue thestrategy of an online IPO. In 2009, theymade strong use of social media to leverage theirexisting brand asset value and propose an equity offering. However, it wasn’t entirely

successfulasitwasanexpensiveprocedure,eachsharewassoldexpensivelyandthefundingtargetoriginallysetwasnotfullyreached.Nevertheless,afundingof£750,000wasachievedinaslittleas5months.Subsequently,theylaunchedasecondcrowdfundingprojectinJuly2011,

capitalizingontheexperienceaccumulated,namingit“EquityforPunks”.Brewdogwereabletoraise£500,000injust2daysand£1millionin1month.

Another good example is Trampoline16 that in 2009 also launched an equity crowdfundingcampaign. The project aims to raise £1 million in 4 rounds, of which 2 have successfully

completed. In thiscase,duetotheusageofasystemtotransact that isnotproprietaryandrequiring complying with the Financial Services Authority in the UK (FSA), the campaign is

directedatcertifiedhighnetworthindividualsorcurrentshareholders.

15www.brewdog.com16www.crowdfunding.trampolinesystems.com

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Otherveryrelevantexamplesofrestrainedequityandcontroldilution,albeitwithsignificant

fundingacquiredthroughcrowdfunding,thusstronglypromotingentrepreneurshipinvariousindustries, includeprojects in severalEuropeanequitybasedcrowdfundingplatforms. In theEnglishCrowdcubeplatform17theprojectBubble&Balmfromtheconsumerproductsindustry

achieved£75000givingup15%equity to82 investors. In the foodanddrinkssector, in thesame platform, Kammerling’s raised £180 000 through 85 investors in exchange for 23%equity.Crowdcuberegisteredonthe21stofOctoberof2011aworldrecordfundingthrough

thismethodbyfinancingTheRushmoreGroupLtd,intheleisureandtourismindustry,with£1millionfinancedthrough143investorsandforonly10%ofequity.Interestingly,crowdfundingbusinesses also utilize their own tool to finance themselves and, this way, Crowdcube

managedtoraise£300000through162investors,for9%equityforitselfandalsoforanotherplatform, CivilisedMoney, for £100 000 through 121 investors and 10% equity. All of thesehappenedinthesecondhalfof2011.ThePersonalDevelopmentBureau(phase1)raised£25

000for15%equitythrough68investors,alsoinCrowdcube.

Brand Expedition just concluded on the 27th of December 2011 a successful crowdfundingcampaignraising£20000with171 investors inanotherequitybasedcrowdfundingplatformfromtheNetherlands,Symbid18Morerecently,onthe6thofJanuary2012,Enviu,asustainable

businessdeveloper fromtheNetherlands,more famous for its “SustainableDanceClub”–afloorwhichgeneratesenergybydancingonit–raised100000€from372investors,offeringinreturn1%oftheirequity.Astheseeventsfolloweachotheratfasterrates,weareforcedto

updatethisdocumentonadailybasis.Assuch,andbeforesubmitting,weareabletoreportyetanothersuccessfulprojectwithSellAnAppthatraised150000€offering53%oftheirequityto261investorsonthe18thofJanuary2012.

InFrance,Wiseedcrowdfundingplatform19hassuccessfullyfunded11projectssofar,ranging

from€50000for5%equityforproject“LeCoeurdeBalma”intherealestateindustryto€1.2millionforproject“Intuilab”,ahightechventure.Inthismethod,however,Wiseedcombinescrowdfunding with co‐financing by Business Angels, Venture Capital societies, Investment

FundsandotherAngelInvestors.

Inalloftheseexamples,thefundedcompanies,frompre‐seedstageentrepreneurshipbutalsofullyformedenterpriseswereabletoobtainfinancingthroughcrowdfundingandlaunchnewprojects,productsorservicesthatwouldotherwisenotbe launcheddueto lackofaccessto

inexpensive finance orwould be launchedwith considerable effort from the entrepreneurs.Sucha strain in finding funds canpotentiallyputat stake theability to furtherdevelopnewconceptsandprojectsinthefutureandremovefocusfrominnovatingtosustainingdebtand

remuneratinginvestors.

17www.crowdcube.com18www.symbid.com19www.wiseed.com

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3.4. Theevolutionoftheuserroleanditsimpactintheentrepreneurialvaluechain

Theuserorconsumerofanendproductorservicehasplayedakeyroleinthemarketabilityof

anygoodor service. Indeed theuser’s interventionandourunderstandingof it hasevolvedthrough time and become significantly more relevant with direct impact on output of theentrepreneur supplying the product. Understanding this development and harnessing its

potentialhas,consequently,alsobecomeakeydifferentiating factorenablingentrepreneurstoinnovateandacquirethebenefitsofcommercializingthatinnovation.

Ordaninin et al (2010) carefully lay out the role assigned to the consumer in themarketingliterature and how it has evolved over time, concurrentwith the evolution ofmarkets. The

“FunctionalSchool”of the1970’s (BarksdaleandDarden,1971)consideredconsumers tobecriticalsourcesofinformationtobeanalysedandutilizedinstrategydefinition.Inthe“ServiceMarketing” school of thought (Fisk et al., 1993), users were co‐producers. Eric von Hippel,

starting in 1986 brought us the understanding of users as partners in innovation, with his“LeadUser”theory,wheretheburningneedsofauserandhisresourcefulnesswouldbecomeone of the prime sources of innovation with the added benefit that it is pre‐approved as

valuable to the its ultimate beneficiary – the same user. More recently, in the “ServiceDominantLogic”theoryofVargoandLusch,2004,endusers’rolehasbeenperceivedasakeyresource in co‐creationof value. The role consumers representhasevolved through time to

carrysignificantlymorerelevance,influenceandpowerinthevaluechainofanycorporation.

Withtheadventofcrowdsourcing20andcrowdfundinginparticular,theuser’srolehasshiftedupstream in thevaluechain.Usersmaynownotonly showwillingness topay fora finishedproduct,butactuallycommitthepaymentupfrontasadecisiontoproduceandpromotethat

same product, rather than acquiring it. In this commitment, the user shares part of theoperational and financial risk with the producer and entrepreneur. This involvement andparticipation in the production process butmore relevantly in the strategic decisionmaking

anddesignprocess,representsanevolutionoftheconsumerroletoamoresophisticatedandblurryblendbetweenconsumerandproducer(insomemediareferredtoasthe“prosumer”).

Throughextensiveresearchbasedonqualitativecaseanalysisandquantitativedatacollectionand analysis (both primary data through detailed interviews to leaders of different

crowdfunding businesses and secondary data obtained from the company records, officialcompany sources and general publically available information), Ordanini et al (2010)

contributed to themarketing literaturebyunveilingandprovidinganunderstanding for thisnew“upgraded”roleoftheuser.Withinthisnewrole,“themoneyisinvestedbyconsumerstoobtain a return, mostly financial, but sometimes intangible (e.g., status, social esteem,

identification,etc.)…Crowdfundingmodelsincludeelementsofcrowdsourcingframeworksinwhich themembers of a community share ideas to solve a problemor pool their efforts tocreate favourable exchange conditions for the community’s benefit. However, in

20Usingthecrowdtogatherinput,ideas,feedback,participation,solvechallengesandworkontasksasameanstoexecutecorporateactions

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crowdfunding, it is not idea generationor bargaining power that emerges from the crowd’s

collectiveefforts;instead,whatthecrowdgeneratesisfinancialsupportforalreadyproposedinitiatives.”Throughsocialnetworking,thisinvolvementmuchearlierintheprocessandalongthedifferent stagesof theentrepreneurial activity lets theuser assume responsibility in the

designphase,thecampaignsetupphase,theproductionphaseandtheservicedeliveryphase.Theusers,throughtheirdecisionmaking, influenceandfinancialsupportbecomekeyfactorsin the successful delivery of the final offering. Adding to this intricacy and richness of

involvement, when previously in marketing theory the consumer had an active role ofengagement with the entrepreneur to provide the service but also assumed the role ofconsumer of that service,with crowdfunding the user participates, designs, develops, funds

andcanultimatelyleaveconsumptiontootherconsumersgettinginvolvedfurtherafield.

In the project “Livros deOntem” in the PPL Crowdfunding Portugal platform21 this blend ofroles from consumer to producer passing through financier has enabled the planning anddesign of an innovative new service that if successfully funded with give way to a new

enterprisethatwillestablishadifferentmarketconcept.Agroupofuniversitystudents,facedwiththechallengeofrequiringexpensivenewbooksfortheirsubjectsalbeit lackingfundstoobtainthem,lookedforalternativesolutions.Theyrealizedtheycouldfindsomeofthebooks

atoldbookstoresknownas“alfarrabistas”.Amongsttheircolleagues,theyalsorealizedsomeolder studentswerewilling to sell used copies in acceptable state. Through someelaboratecoordinationtheystartedtofacilitatetheacquisitionofusedbooksforthemselvesandsome

oftheircolleagues.Butdemandforsuchasolutionbegantoincreaseandthestudentsrealizedtheywerespendingfartoomuchtimewiththecoordinationandnotmakinganyprofitfromthisservice.Asusers inneedthemselves,theygatheredaroundadrawingpadandbeganto

design an online second hand bookstore for technical books used in some specificundergraduatecoursesinuniversity.Understandingwhatitwouldtaketoproduceaplatformtomanageamarketplace for thesedesiredgoods, they launcheda crowdfundingproject to

financethedevelopmentofthisplatformandacquireenoughofastockofselectedbooksthatwouldenablethemtogeneraterevenuesfromdayone.

This project in PPL is still underway and we can only hope it is successful. The experiencegatheredwithit,however,isenoughtounderstandthisdevelopmentoftheuserrole,theblur

fromconsumertoproducerandtherelevancetoinnovationandentrepreneurshipenabledbythe crowdfunding tool. Firstly the owners of the project began with a pain to address anddevelopedontheirownthesolutionrequired.Beingusersthemselves,theyutilizedoneofthe

mostpowerfulsourcesofinnovation,userbased.ThisisconsistentwiththeresearchdonebyOliveiraandvonHippelwhofoundthatthevastmajorityofthenewservices(the functionalinnovation)offeredbyserviceproviderswerefirstprovidedbyuserstothemselves(i.e.output

of identical similarity for the user). They confirmed these resultswhen analysing data fromresearch conducted on banking services and in which both banks and users had gains to

achievewiththe innovativenewserviceandnobarriersexisted in the formofregulation. Intheir research, 87% of new function was first developed by users. Lead User theory (vonHippel,1986)indeedsuggeststhatsomeusersareabletoanticipaterequirementsandneeds

longbeforetheybecomemainstream.VonHippelgoesontorecommendtocompaniesthat

21http://www.ppl.com.pt/investment/livros‐de‐ontem‐a‐cultura‐para‐todos‐1045

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theyengageandmonetizethisleaduserinnovationandcapabilitytodevelopnewservicesand

products. Leaduser theoryenablesa very relevantunderstandingof somecharacteristicsofcrowdfunding investors and users, like the validation of ideas, the support in designing orredesigningthemandthevotingrightthroughwillingnessandcommitmenttopayforthefinal

product.ButLeadUsersasinvonHippel’stheoryarenotabundantandtheyaredifficulttomanage and coordinate. This brings us to a secondpoint on entrepreneurial and innovativecontributions by the users at large. The involvement of the project supporters in the

crowdfunding campaign for the “Livros de Ontem” project was determinant in generatingothersourcesofinnovation.Investorsintheproject,arenotLeadUsersbuttheyalsohaveasayinthedesignoftheplatform.Theyhaveopinionsthatrequiretobeconsidered,inorderto

obtain their financial support. These opinions regard functionality such as peer reviews andratingsofbooksuppliers, theabilitytopostrequestsoreventhedemandforspecificbooks.The latter isespecially relevant for theconsumer financierason the launchof theplatform,

someinvestorswilldemandtohaveimmediatelyavailablethebooksonthespecificsubjectstheyneed.

Onfunding,thiscrowdfundingprojectwillhavehadinvolvementofuserstoinitiallyinnovatethesolutionandservicetoprovide,todesignthefunctionalitytobeavailablewiththisservice,

to determine the actual products delivered once operational and above all, they will havefundedanewcompanytoprovideaservicetothemselvesandthewiderpublic.

Voting rightsof consumers canbeextremelypowerful as an innovationandentrepreneurialvehicle, especially if the voting community is representative of the overall population of

consumersandhasfinancingpowerovertheentrepreneurs.Ordaninietal.soconcludethat“Consumers become integrators of talent (of others), financial resources (their own), andpromotional efforts (through social networks) in their role as crowdfunding participants”

generatingnewentrepreneurialventuresintheprocess.

Furthermore,Ordaninietal.concludeintheirextensiveinterviewsthat“consumersparticipatein crowdfunding websites because they like engaging in innovative behavior.” They will beinvolved with the project, the entrepreneurs and the entire initiative, but they are also

motivated by the novel method and the technological and social advance implicit in thisnetworkingenvironmentanditspromisingpotential.

Another important example of this new evolved role of the user and also the role of thecrowdfunding platform involved is the case of Sellaband22. This innovative platform allows

users to invest in an artist and when an investment target is reached the user receives arewardnormallyassociatedwith theartist (CD, t‐shirts, tickets toa concert,backstagepass,etc)andalsoashareofthesalesandrevenuestheartistwillachieve.Theconceptwasinitially

setup for newcomer artists to support them in their otherwise unpublishedwork but todaySellabandhasbecomeanimportantmarketsolutionforalsorenownedartiststopromotenot

onlytheirworksbutalsotheirtoursandconcerts.BeforeSellaband,musicianshadtofollowtraditionalchannelsandbereliantonthedecisionbyaneliteandbiasedgroupofpeoplethatcontrolledtheindustrytodecidewhichindividualshadthe“talent”tobepermittedtorecord

and publish their work. As the number of artists without a means to deliver their work to22https://www.sellaband.com/

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customers interested in consuming their product grew, solutions like Sellaband appeared to

enableconsumertochoosethemusictheywishtohearandsohaveartistsfinancedbecausetheyhaveanaudienceandnotbecausetheyhaveaconnectiontoaproducer.Inthisexamplethe crowdfunding platform plays a key role of intermediary of supply and demand,

disintermediating the industry at least for a good number of artists and correcting a failurethatwould otherwise persist. The result is visible, plenty of new artists are able to becomemusic entrepreneurswhereas before theywould not have that opportunity, consumers are

abletodeterminewhichmusictheyliketoseeproducedandtheyareabletoinvestandmakea profit in revenue sharing by doing so. Public Enemy’s album “Thank You!!!”23 wassuccessfullyfundedtothevalueof$75000withthebackingof1178fans.

It becomes easier to understand that these new channels of collaboration and engagement

thatmergeconsumerswithproducersbringaboutexcitingopportunities. It isthisconvictionthatleadsLey,A.andWeaven,S.,(2011)torestatethat“businessesthatsuccessfullyharnesssocial media in the context of commercial transactions may have significant leverage

opportunitiesthroughgreateraccessandinformationsharingwithconsumers”andtheywerereferencingHagelandArmstrongasfarbackas1997.

3.5. InnovationandEntrepreneurshippromotioninCrowdfunding

Economicgrowthrevealsagreatdependencyonthehealthyenvironmentforpromotingsmallfirms,astheyguaranteeaverysignificantfractionofoverallemploymentandGrossDomestic

Product(e.g.,LeyandWeaven2011).

This is confirmed for example in the Portuguese economic reality and data from PORDATA,wherein2009over95%ofnon‐financialcompanieshadlessthan10employees.

It followsthatthefinancingofstart‐upcompanies,theprovisionof fundstocapitalizethem,theabilityto launchsuccessfullyat lowcostsandtheircorrespondingchancesofsurvivalare

paramounttoaneconomyanditshealth.

“Low‐costInnovation”

“Thepriceofstartingacompanyhasneverbeenlower,andscienceisunpackingthecommoncharacteristicsofentrepreneurs”(Scott2011).

Today we witness a “Lean Start‐up”movement24 that teach us to domore with less. Theyprofessthatresourceusagecanbeoptimizedandthattechnologicaladvanceshaveenabledus

to test and validate almost any businessmodel, at very low cost and financial risk, prior tocommitting substantial resources to a project. Customer segmentation validation, product

demandtest,pricingstrategydefinitionandevenaproduct’soverallviabilitytobemarketed23https://www.sellaband.com/en/projects/publicenemy24http://theleanstartup.com/

21

canallbeaccomplishedatsignificantlylowerrisksthaneverbefore.Innovationitself,amain

source and driver of entrepreneurship, can today be validated and iteratively developed atverycheapcosts.

AccordingtoScottAnthony,inthemid‐1980’sRobinWolanerhadtheideatoproduceandsellahighqualitymagazineaimedatparenthood.Herplanestimatedacostofapproximately$5

million to conceive this project and launch the magazine. Such an investment obviouslyneededathoroughmarketacceptancetestpriortolaunchingintoacostlyventuretoproducesomething that might ultimately be rejected and be of no interest to the market. Robin

innovatedbysendingasampleissueofthemagazinetoselectedtargets,tovalidatedemandforherproduct.Eachsamplesentouthadareplycard,postagepaid,toprovidefeedbacktoRobin on their wish to subscribe to the magazine. She invested $150 000 to execute this

“market research”exercise.The resultswereverypositiveandRobinmovedaheadwithherproject, later findingasuccessfulexit strategywhenshesold themagazinetoTimeLife, Inc.The initial investment in the innovative market testing strategy ended up being a good

investment,albeitnotcheap,whenherfinalreturnsummedupto$10million.

In contrast, in 2010, a would‐be entrepreneur discussed his project proposal withcrowdfundingsitePPL.HewantedtobringtoPortugalaspecialtymagazineofafieldthatwasquite specific and professional. He was sure there would be plenty of interest in it as he

worked in this field andoftenhad conversationswith colleagues about themagazine. EverytimeoneofthemgotaholdoftheoriginalEnglishversionofthemagazine,itwouldcirculateuntil the edges were soft and crimped. He had contacted the original publisher and had a

spokenagreementtobethesoleimporterandtranslatorofthemagazine.Tohissurprise,thepublisher also agreed to give him exclusivity of the magazine to any Portuguese speakingcountry,which includesBrazil,Angola,Mozambique,etc,addinguptoasignificantpotential

market size. Rui quickly opened his excel and put together a cost calculation to understandthatto fulfil theminimumorderquantityof300magazinespermonth, tocoverthecostsoftranslationandtopickupthetabsonmarketing, legalservices,companyregistrationandall

hewouldrequirearound€15000forthefirstyear,assuminghewouldnotreceivehissalaryfromthisfirmandthatsomeassistantworkcouldbesharedfromhisotheremployer.Acostof€5 per issue seemed a reasonable promotion price to launch it on the market, being that

specialtymagazineconsumerswouldbewilling topaymore than thatonce they realized itsvalue.Andforthispricehewouldcovertheannualcostofbringingatleast300magazinespermonthandifhehadatleast300investorsat€5hewouldachieve€18000whichwouldwell

coverforpromotioncostsandanyotherrewardcosttosupporthiscrowdfundingcampaign.

Mostrelevantofall,Ruihadnotrequiredextensivecalculationstounderstandhisfinancialriskwith launching this project. That risk was minimal. The cost of launching a crowdfundingcampaignwas zero. The cost of promotionwasminimized through the strong utilization of

socialnetworkingandotherlowcosttools.Thecostofnotachievinghisfinancial investmentrequestwasonlythathewouldsufferadisappointmentandwouldhaveseenhis latenights

andweekendhoureffortsdisappearintowellwishesfromaninsufficientnumberofinvestors.Additionally,thecrowdfundingplatformwouldchargenothingifhedidn’tachievehisfundingtargetandhisopportunitycostwouldnotsurpassthetime,effortandpromotioninvestment

hewouldhavemade.Ontheotherhand,hisonlycostofasuccessfulfundingwouldbethe5%

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commissionthisplatformwouldcharge.This,inanycase,hadbeenaccountedforinthecost

structureofhiscrowdfundingproject.

HowdoesRui’sandRobin’scosttoinnovatecompare?InthecaseofRui,hiscostswerelessthan0.1%oftheinvestmentofRobinWolanerforaverysimilarexerciseinthe1980’s(withnocrowdfunding).Itwouldbeinnovative,namelyaswearespeakingofaspecialtymagazine

inexistent in the Portuguese language, that would help push the boundaries of the field incountrieswherethislanguageisspoken.Thefinancialriskislowerastheinvestmentislowerbut also through the commitmentmechanism, whereas Robin relied on intention revealing

cardsshehopedwouldholdtrueonceshemadetheinvestmenttoproducethemagazine,Ruicould countonhard cashpre‐sales (if successfully funded) toensurehis first yearminimumorderwasfulfilled.Anythingelsehesoldduringthatyearwouldbeataprofitandwouldserve

thepurposeof reinvestment to grow thebusiness or pay himself of the assistant themuchdeservedcompensation.

Through crowdfunding, Rui is able to replicate the exercise of innovating in the market tolaunch a new enterprise, at a fraction of the cost required decades earlier in a very similar

exercisedonebyRobinwithoutaccesstosocialnetworks.

In thewords of Scott (2011) “The low cost of innovation affects all of us by giving usmoreoptions.Thinkaboutweight loss. Insteadof just relyingonwillpowerorgoing toaspecialistweight‐loss clinic, innovators have given us an incredible variety of dieting applications in

Apple'sAppStore…Further,scientistsincreasinglythrowoutnewmechanismstoloseweight,withideastransmittedinablinkofaneyeonFacebook,Twitter,andothernetworkingtools.”

Nevertheless, it isnotenoughthatRuiandnowRobincaninnovateatavery lowcost inthe21stcentury.Theymustpossessqualitiesandbehaviourpatternsthatenablethemtothinkup

thesenewideasandbuildonother’s ideastobringaboutpositivedisruption(Scott2011).Inessence they’ve discovered what they believe is a critical associational thinking whereinnovatorsconnectseveral ideasthatmaynotbeobviousto link.More importantly,wefind

that social networking tools and namely new tendencies in work, like crowdsourcing, orfunding, like crowdfundingprovideameans toexplore theapproaches thatgather the rightstimulitoenabletheseconnections.

The researchers, Scott (2011), identified four approaches that enable these stimuli to be

conveyedtoinnovators.

• Questioning: posing critical questions that strengthen or do away with significantchallenges (e.g. what if I had 300 pre‐sold subscriptions tomymagazine?What if Iwere able to test the Portuguese market for this specialty product prior to any

financialcommitmenttodoso?)• Networking:thepossibilityofengagingwithpeoplewithdiverseculturesandrationale

that provide different parameters to evaluate ideas. In the example of the project

“FormigaJuju”25successfullyfundedinthePPLplatform,networkingenabledinvestorstohaveanopinionandcontributetothedevelopmentofthechildren’sstory.Indeed,

25http://www.ppl.com.pt/investment/a‐formiga‐juju‐na‐cidade‐das‐papaias‐1017

23

uponconfirmationwiththeauthor,thelastthirdofthestorywasfullycrowdsourced

andwasnotatallwhatshehadoriginallythoughtof.TheseinvestorsnetworkedwiththepromoteroftheprojectallthewayfromtheUnitedStates,Brazil,theMiddleEast,AsiaandAfricatoherbaselocationinMozambique)

• Observing: this stimulus is apparently obvious, but current access to information isparamount in enabling the availability of the required information as well astechnological advance is required to sift through the overload that this very same

information can be. Although these tools don’t offer any particular mechanism toenable a developed observation method, the sheer volume and proliferation ofcrowdfundingprojectstodayprovideaveryrichhuntinggroundforreferences, ideas

andincredibleinnovationsinalmostanyfield• Experimenting: aligned with the fail early, fail often and fail cheaply concept,

successful innovators require plenty opportunities to fail and try again. Tools that

allow for iterative experiments with full collaboration and interaction with thepotential target customers will enable rapid development of idea and evolution ofthesetomeetundiscoveredorasyetun‐communicateduserneeds.

People that engage with a project, originally to buy a reward or support an entrepreneur,

becomemuchmoreinvolvedandcometo“own”theproject.Thecrowdhascontributedwithcontent,skills,resourcesandfundstoseveralprojects.Forsomeprojects,thecrowditselfhasbecome the main promoter, voicing their support in a viral networking effect. These

individuals or groups, that participate in the process of funding via this method have atendency already to be innovative themselves, trying new ways of interacting with projectpromoters, companies and other investors or consumers. Naturally they are alsomoved by

theiridentificationwiththesocialnatureoftheexercise,withthecauseoftheprojectortheentrepreneurs behind it and this creates incentives for them to become involved with theinitiative. A relevant segment will also be the consumer or investor that plans to receive a

returnonhisinvestmentandthatisamajormotivationthatwillalwaysbedrivenby,amongstother factors, how innovative a project is and what expectations of a future profit it maygenerate.Thisinturnpromotesanenvironmentthatpromotesandpushesforinnovation,by

rating andpreferringprojects and ideas thatbringdisruptive anduseful functionalitywith apromiseofapositiveimpactinsociety,usersandinvestors.

Velocityofinnovation

Inthefieldofeconomics,thevelocityofmoneyisacriticalfactorusedbyeconomiststohelpunderstandhowrobustaneconomicsystemis.Itmeasurestherateofcirculationofmoneyto

maketransactionsandpurchasegoodsandservices.This isnotthesupplyofmoney,astaticviewoftheamountsofcurrencyavailableinasystem,butamorerelevantindicatorofhealthy

economicactivity,wheremoneyisputtoregeneratinguseratherthanbeing“hiddenunderamattress”.InTheCrowdfundingRevolution,KevinLawtonandDanMaromarguethatthesamelogic applies to the velocity of innovation “it… paints a very clear picture of the stifling

characteristicofourintellectualpropertysystemwithrespecttotoday’sinnovationandrateof

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change”.Theycreatea furtheranalogy toourplanet’snatural resources, inwhich theseare

extracted, processed and converted into products thus generating economic and socialbenefits to all. Thesebenefits enableotherdevelopments and the conceptionofnew ideas.Themoreefficient is theprocessof “extraction”andprocessingofnew ideas and themore

iterative and faster it occurs, sowill the velocity of innovation likewise increase, generatingincreasingbenefitstothedevelopmentofnewenterprisesandeconomicactivitythattransacton innovative products and services. Social networking applied to finance (a.k.a.

crowdfunding) enables a steady supply of idea flow with collective improvement andscalabilityof impactthrough increasedconnectednessandabsenceofbarrierstotheflowofresources,fundsandcapabilities.Crowdfundingthuspromotesthisvelocityofinnovationwith

relevant impacts to the frequency and quality of the ideas generated for newentrepreneurship.

Overcomingbarrierstoinnovationandentrepreneurship

Freire(2000)liststhemainobstaclestothecreationofnewenterprisestobetheperceptionofrisk by the entrepreneur, the perception of capital scarcity for finance, the perception of

personal inadequacy to execute a project, the perception of competition or a highlycompetitiveenvironment,theperceptionofthestatusquothatisnottobechanged,thefearof failure and of loss (over indebtedness) and myths such as racism or chauvinism. In a

potentialviciouscycle,thesefearsmayimpedethedrivetocreatenewentrepreneurshipandconsequently innovate. The lack of innovation due to these fears in turn stranglesentrepreneurshipasnonewideasaregeneratedtobecommercialized.

Crowdfundingisatoolthatenablesasignificantloweringofthefinancialriskinvolvedinanew

venture. With its ability to execute pre‐sales and to gather a minimum efficient scale ofdemand and support prior to any commitment of funds or resources, it allows for anentrepreneur to investminimally (as per several of the examples listed in this thesis) in the

promotionandcommunicationofthecrowdfundingproject,priortoanymajorinvestmentintheactualexecutionof theventure.Other risksare then involvedwith thiskindofexercise,buttheyarearguablyconsideredlessseveretotheentrepreneurthantheriskoffinancialloss

and bankruptcy, such as social risk (of not being able to prove his point and sell his idea),intellectual property risk (if not done right, an entrepreneur may reveal too much whensoliciting investment and enable imitators to replicate his idea, ultimately faster than the

entrepreneurwouldhaveexpected)andreputationalrisk,differentfromsocial, inthattherewouldeventuallybeonlysomanyfailedcrowdfundingattemptsbyanentrepreneurbeforehewouldbegenerallydismissedbythecrowdforfutureinvestmentopportunities.

Capitalscarcityandthegeneralliquidityfreezeforseedandpre‐seedstageentrepreneursisa

seriouscurrentchallenge.Toolsthattapintoalargecrowdofinvestors,wheretheequationisinverted from a few investors times a large contribution to many investors times smaller

contributions open new doors and possibilities to obtain the much needed funds.Crowdfundingcanachievefundingsuccessratestotheorderof50%ofall thereward‐basedplatformsthatpubliclyreporttheirresultsandalsoofPPL,andslightlylowerforequity‐based

crowdfundingplatforms,asperthesharingdiscussionswithDarrenWestlake(Crowdcube)and

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KorstiaanZandvliet(Symbid),totheorderof30to40%.Thissuccessrate,althoughapparently

low,isrelevantineliminatingtheperceptionoflackoffundsthatmaypreventanattemptatproposinganewandinnovativeentrepreneurialventure.Entrepreneursseethissuccessrateas an almost 1 in 2 chance of success with a much more significant benefit which is the

transparencyoftheprocessandthelogicforsucceedingornotinfinancingone’sproject.Thistransparencyalsoallows for themoresavvyentrepreneurs to study themajor successcasesand quickly pick up on the critical success factors (such as the idea itself, its interest to a

community, the supporters, the communication and promotion of the idea and thecrowdfundingplatform(itsquality,seriousnessandprofessionalism)theprojectssucceededinobtainingtheirrequiredfunds.

Theremainingbarriers,Freirementions,astheperceptionofpersonalinadequacytoexecute

aproject,theperceptionofcompetitionorahighlycompetitiveenvironment,theperceptionofthestatusquothatisnottobechanged,thefearoffailureandofloss(overindebtedness)andmyths suchas racismor chauvinism find strongmitigation forces in collaborativeonline

toolsduetothecollectiveandcooperativeexperiencetheyprovide.Thewisdomofthecrowdandthesharingofthatwisdomempowertheentrepreneurandprovidehimwiththeaccesstoknowledge,skillsandresourcesenablinghimtoventureintoaprojectlackingsomeofthose,

as longashe’sclearabout themandsolicits thisparticipation.Ultimately,crowdfundingwillevolve to the ability for an investor to reap the benefits of the return to his investment,whether his contribution comes in the form of capital, resources, skills and knowledge or

simply promotion (networking access and diffusion). Thesemarketplaces for projects, ideas,funds,resources,labour,equityandpromotionhavethepotentialtomitigateifnoteradicateany entrepreneurial perception of risk of inadequacy, too competitive an environment, an

inalterable status quo and fears of failure or unfoundedmyths. Pre‐testing, pre‐selling, pre‐validatinganideaandgatheringstrongsupportfromfutureconsumersandinvestorssolidifiesaprojectandminimizesmanyofthebarriersto innovationandentrepreneurshipgeneration

existenttoday.

ScientificResearchandinnovation

In a more direct impact on innovation, crowdfunding has been proved to contribute toscientific research by enabling the funding of science based projects that bring about newdevelopments.

In just over the period of one month, a test was executed to validate this capability of

crowdfunding.TheSciFund initiativewassetup26 forscientist to raisemoney fromthe largeranonymous crowd to fund their research. In all 49 scientists from5 countries agreed to theexperimenttotryandcrowdfundtheirresearch.ThechallengeoccurredbetweenNovember

1standDecember15thof2011inthecrowdfundingplatformRockethub.27Inthisshortperiodoftime,theexperimentprovedsuccessfulbyraising$76230from1440contributors.Someof

theprojectssuccessfullyfundedwere“SendJohntotheJungle”wheretheexpensesof$1000

26http://scifund.wordpress.com/27http://rockethub.com/

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for doing research in Yucatan by anthropology student JohnG.were fully covered, another

was “Ancient Roman DNA Project” where a pilot study of ancient DNA was funded to theamountof$10171,also“Cancer?Yeasthasanswers”wassuccessfullyfinancedwhere$2835were invested incancer research.Otherprojects included“SupportZombie research”where

$5000willfinancetheunderstandingofbraininfectingparasitesand“ArtificialPhotosynthesisatNCSU”whichwill enable the learningof how to capture and store the energyof the sunusingchemistry.Thesearesomeof themanyprojects fundedwith thisexperimentandthat

standachanceof turning intosuccessfulentrepreneurshipsthat lookatcommercializingthefindings of any of them. Table 2 below depicts the evolution of funds coming in to thiscrowdfundingexperimentinsuchashortperiodoftime.

Figure2:ContributionstoSciFundChallengeCrowdfundingExperiment

source:http://scifund.wordpress.com/

In another example of direct relation to scientific research, a scientist from InstitutoGulbenkiandaCiência,arenownedscientificresearchfoundationinPortugal,iscrowdfundingher research of the Lemur primate in the island of Madagascar. Some of the rewards for

investing in this valuable research come in the form of a copy of the final report of theresearch,apersonaldiscussionwiththeteamofscientistsbehindthisandotherinvestigationsandother relatedmerchandising goods. For €2 000 anyone can become a part of the team

thatsupportedandenabledtheresearchofthisspeciesexistentonlyinMadagascar28.

28http://www.ppl.com.pt/investment/conserva‐1041

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3.6. PromotionandMarketinginStart­ups

“Thegroundswellisasocialtrendinwhichpeopleusetechnologiestogetthethingstheyneed

fromeachotherinsteadoffromcompanies.

Thegroundswellphenomenonisnotaflashinthepan.Thetechnologiesthatmakeitworkareevolvingatanever‐increasingpace,butthephenomenon itself isbasedonpeopleactingontheireternaldesire toconnect. Ithas createdapermanent, long‐lasting shift in theway the

worldworks.Howtodealwiththistrend,regardlessofhowtheindividualtechnologypieceschange…wecallgroundswellthinking”(LiandBernoff2011)

Powertothepeople is themottoandthedrivebehindthisgroundswell. It isarevolution indisintermediationthatenablespeopletoconnectanddemandorprotesttheirrightsandmore

relevantly, channel the resources amongst themselves to attain the desired objectives of acommunity,grouporindividual.Thesearethe“protesters”thatmadeTimeMagazine’sPersonof the Year 2011, connected by technology and information and resource sharing. The free

transferofsuchresourcesallowedforatremendouspowerstancethatoverthrewdictatorshipin Tunisia and Egypt. Generations of secular tradition were broken when women in SaudiArabiagatheredtodemandtherighttodrive(notthatdrivingwassecular,butwoman’splace

in society in that culturewould never contemplate such publicmanifestation). OccupyWallStreet gave visibility to the “99% ‐ thebudget office report tell us that essentially all of theupwardredistributionof incomeawayfromthebottom80%hasgonetothehighest‐income

1%ofAmericans.Thatis,theprotesterswhoportraythemselvesasrepresentingtheinterestsofthe99%haveitbasicallyright,andthepunditssolemnlyassuringthemthatit’sreallyabouteducation,notthegainsofasmallélite,haveitcompletelywrong”,PaulKrugmanintheNew

YorkTimes.

Today,theabilitytobroadcastamessage,gathersupportforamovementorbringinvestorstoacausehasconsiderablychangedforthebetter.Peopleareabletocommunicateanddiffusemessageseffortlesslyandwithverylowcosts.Toentrepreneurs,thisisafundamentalchange

thatopensthedoortonewandexcitingopportunities.

Start‐upsandsmallandmediumenterprises,faceaparadoxofakeysuccessfactor.Marketingspending is critical to obtain a much needed visibility, namely when commercializing aninnovativeproductorservice,howevertight financialconstraints leavevery little investment

to service this strategy. Also, with inexperience frequently come minor miscalculations inexpenses or revenues which can prove determinant in cutting costs in apparently non‐prioritizedactivities asmarketing. This can lead to a vicious cycle inwhich smaller revenues

provoke cuts in promoting sales, which in turn lead to decreased revenues. Small businessowners and start‐up entrepreneurs look for low‐cost marketing tools to promote their

productsandservicesincreativeways.

Of all the interviews conducted with the start‐ups for this research, no single definition ofaffordablepromotionstrategiesappearedconsistently,rangingfromstrategiesthatareoverallinexpensive in cost, to marketing investments that represent a small percentage of total

spendingorstrategiesthatarecosteffectiveandboostsalesmorethanproportionatelytothe

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spending.Thesecompaniesaretypicallybootstrapping(companiesthataretryingtosurvivea

launchatminimumoperationalcostsandmaximumrevenuesandprofits)andwillsearchformarketingoptionsthatareeffectiveandlow‐cost.

These entrepreneurs also state that on launch of a company, it is quite relevant tocommunicatebroadlyandannouncethenewproductorservice,butthattheemphasismust

quickly switch to relationship marketing and converting informed potential customers tobuyers. Again the focus is on early revenues and profits to ensure minimum scale andultimately survival. They see marketing as a multi‐faceted social engagement in a strategic

continuumbeginningfromtheveryfirststeps,evenpriortofunding.Naturallytheconnectionto traditional marketing media is a requirement, but the bootstrapping strategy frequentlyleavesthisoutforafurther,sounderrevenuestate,developmentstageofthebusiness.

Crowdfunding provides the entrepreneur with a listening audience of sophisticated

investor/consumersthatwishtobeapartofthenewproductorservice.Thistoolhasprovento not only be an effective fundraiser, but also a highly efficientmarketing and promotiondeliverychannel.Itwasborninthegroundswellanditservesthepurposeofcreatingchannels

fortheeasytransferofresources,fundsandprojects.Entrepreneursareabletoengagewiththis audience without having to invest in any initial advertising. Several crowdfundingplatformssuchasPPLonlychargea feeuponsuccessful funding,withnoupfrontcosts.The

main buzz around a project in crowdfunding comes from that groundswell exercise,mostlythroughwordofmouthor“wordofmouse”(socialnetworking).Veryoftenthisresultsinfreecoveragebytraditionalmedia.

Windowfarms29 is a good example of project a successfully funded in the crowdfunding

platformKickstarter.Referredtoearlierashavinginitiallysetatargetof$50000forproducingtheproductinChina,theysuggestedafurthergoalof$200000forproducingitintheUS,sohelping “to keep the environmental footprint of our product low, reduces supply chain

complexity, and supports local economic growth,” according to Shivani Ganguly, the ChiefOperationsOfficerofWindowfarms.Inordertoachievethissecondtarget,theywouldrequireamuchhigher salesvolumeandcorrespondinglyenoughcoverageandpromotion toattract

such a crowd of investors. On the 7th of December of 2011,Windowfarms concluded theircrowdfundingproject,havingraised$257307from1577investors.Acriticalcontributionwasthe strong support from other media forms that were attracted by their participation in

Kickstarterandsoprovidedgoodcoverageoftheironlinepetition.Thiscoverageintraditionalmediawouldotherwisenotexistoratleasthappenataverycostlyinvestment.WindowfarmswascoveredinGizmodo30,FastCompany31,Treehugger32,Inhabitat33andForbes34.Thismedia

29http://www.kickstarter.com/projects/windowfarms/learn‐to‐grow‐and‐share‐with‐new‐windowfarms30http://gizmodo.com/5860545/this‐gorgeous‐mini‐hydroponic‐farm‐turns‐your‐home‐into‐pot‐and‐produce‐heaven31http://www.fastcodesign.com/1665498/wanted‐the‐first‐windowfarm‐kit‐from‐a‐pioneer‐in‐micro‐gardening32http://www.treehugger.com/green‐food/windowfarms‐now‐available‐clumsy‐people‐short‐attention‐spans.html

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coverage was determinant in attracting many potential investors to their project, having

resulted in a strong supportive community from as far away as Austria and Australia. Thisgroundswelltappingstrategygeneratedenoughevangelistsfortheproject,atzerocost,thusenabling a very strong upfront marketing strategy, which was critical in ensuring this

entrepreneur was enormously successful and able to launch a full‐fledged enterprise withupfront customers, revenues and profits guaranteed, including all the necessary viralmarketinginvestment.

Similarly,atPPL,projectslikeBubblenet,PatagoniaLuso‐Expedition,FormigaJujuandMyTea

Breakbenefittedfromtheopportunityoflargescaleexposurethroughtheparticipationinthefirst InternationalCrowdfundingEvent inPortugal35with thepresenceof the two topequitybased crowdfunding platforms globally (Crowdcube and Symbid) aswell as PPL themselves.

Theeventattractedanaudienceofover450attendeesandwasalsowebcastedtotheworld.Theseprojectsontheirownwouldstruggleandrequiresignificantinvestmenttoachievesuchalevelofexposure.Subsequenttotheevent,alltheprojectsattractedfurthermediaattention

in the form of television interviews and traditional media (newspapers and magazines)involvement.Althoughmostprojectswerequitelocalizedanddidnotmanagetoexplorefullythe internationalvisibility, theyalsobenefitted toexposureat reference internationalmedia

aggregatorssuchaCrowdsourcing.org36.

All this project promotion and marketing actions provided very critical exposure andmessaginginabroadscale,criticaltothesuccessoftheprojectsbutstillresultinginzerocostinvestmentfromeachoftheprojects.

Other than the overall marketing effect of participating in a crowdfunding campaign, the

process of fundraising via this tool itself has powerful educationalmarketing and consumerbehaviourinsightsthatforceanentrepreneurtoquicklyprogressthroughthislearningcurve.

IntheresearchconductedbyOrdaninietal.(2010),whereseveralinterviewswereconductedand data analyzed regarding representative crowdfunding platforms globally, a trend was

verified in a project’s funding lifecycle through this method. At PPL through the successfulfinanceof6projects(asofJanuary2012)andseveralothersinthelifecyclecurrently,thesametrendisalreadyconfirmed.Figure2illustratesthistrendandtherationalefollows.

33http://inhabitat.com/window‐farms‐lets‐green‐thumbs‐grow‐fresh‐veggies‐indoors/34http://www.forbes.com/sites/daniellegould/2011/12/07/windowfarms‐raises‐230k‐on‐kickstarter‐to‐manufacture‐new‐system‐locally/35http://www.ppl.com.pt/pg/evento‐2836http://www.crowdsourcing.org/editorial/lisbon‐hosts‐first‐portuguese‐crowdfunding‐event/6919

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Figure3:TypicalPathofaConsumerInvestmentviaaCrowdfundingPlatform

Source:Ordaninietal(2010)

In this lifecycle, the first phase reveals an important flow of support and investment up toapproximately half of the project’s target finance request. This accumulation is rapid and

occursmostlythroughthesupportofindividualsororganizationsthatarecloselyconnectedtotheprojectorthenetworkofthepromoteroftheproject.

This is the “Friend Funding” phase and requires some but not extensive investment inpromotion,communicationandmarketing,asthenaturalexcitementofthenewprojectand

the social networking capability of the founders generally suffice to attract the quick andrelevantsupport.

Achieving the target is a muchmore challenging task and the second stage represents themajor hurdle that determines success of the finance operation. In this stage, although the

increment in contribution is not significant, it is determinant in reaching the “EngagementMoment”afterwhich,oncemore,throughverylittleeffortcontributioncomessteadily.Atthissecondstage it iswherethepromoterappealstothe“crowd”andrequiresgatheringcritical

support from investors that are not in his close network and are unrelated to the project.Typically these investors seek to purchase a reward orwish to contribute to a cause that’sinherenttotheproject(canbesocialornot,withlocalimpactorevenjustsomehowrelatedto

anareaofinterest).Investorsthatareattractedinthisphasecancontributewithanyamountand if the rewards are appealing enough and strategically set, accompanied by a relevantmessage,theycancontributewithsignificantamounts.

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Theprimaryreasonoffailureofacrowdfundingprojectistheinabilitytotriggerthecrowdbuy

inprocess.A fewprojects (<50%) reach the“EngagementMoment”.Once reached,a chainreactionistriggeredwhereinvestorsthenwishtobecomeapartoftheendeavourandseeitas a last chance toparticipate. In this final stage, just a few strategicmessages conveyed in

appropriate channels to the investor target suffice to reap the investment required for fullfinance success. Again in this phase, investors are mostly individuals with no originalconnection to theproject thathavebeen followingorgotwordof thepotentially successful

project that is close to its end. A “race to be in” ensues where people speed up theirinvestmentunderstandingthatitisalastchancetogainaccesstoaprojectthatwillnolongerbeavailableintheshortterm.Closelyrelatedinvestorsmayalsoparticipate,particularlyifthe

projectrequiresafinalpush.

Due to its criticalityandaugmentedchallenge,phase2 investorsare thepreferred targetofbothprojectownersandaplatformasPPL.Investorsthatarenotnecessarilyconnectedtotheproject,thatarewillingtocontributetoacauseorinvest/purchasearewardandthatareable

tosupportwithsignificantamountsareastrategictargetthatwillcontributetothesuccessofaproject.Communicationandpromotionofone’sprojecttotheseinvestorsisdeterminanttoensuresuccessfulfunding.

Someofthetypicalgroundswelltoolstolistentoyourcrowd,talktoitandfinallyenergizeitto

joinandinvestinanentrepreneur’sprojectincludelow‐costmarketingtoolsasSearchEngineOptimization, email marketing, comment marketing, community building, blogging, videoposting, forum active participation and general viral promotion of word of mouth.

Crowdfunding platforms such as PPL offer the connections to all thesemarketing tools as astandardserviceatnocost,thusenablingacriticalstrategictoolofmarketingandpromotiontoearlystageentrepreneursandhelpingthemsucceedattheirendeavourtolaunchandgrow

newventures. Furthermore, themediaexposure theseplatforms themselvesbenefit from isextensible to the projects that participate in them, at no cost, thus providing an addedpromotioncapabilitywhichprovestobeofcriticalvalueaddfortheentrepreneursinvolved.

3.7. Onpricing,entrepreneurshipandcrowdfunding

A most challenging but relevant issue an entrepreneur must tackle is how to price for his

productorservice.Thisbecomesevermorechallengingasthebusinessisnew(start‐ups)andastheproductorserviceis innovativeandwithoutanyhistoricalconsumptiondata(demandandsupply)tobeleveragedon.Thereisn’tasingleformulaforapricingstrategy,butthereare

relevant guidelines. One of the key success factors for an entrepreneur to launch a newventure in a sustainable long term fashion is the ability to correctly determine and set the

pricingstrategy.Experimentationwithpricingona fully launchedoperationcanbe fatalandthereseldomisasecondchancetoestablishapositioningbasedonpricing.

Before understanding what role crowdfunding can play in this important strategydetermination, there is first an acknowledgement of some relevant factors that affect this

strategy such as knowledge of the demand curve and a customer’s willingness to pay,

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positioning and pricing role, cost of goods/services produced, critical environmental factors

andthekeyobjectivesofanentrepreneur’spricingstrategy.

Akeyfactorindeterminingtherightpricingstrategyliesinunderstandinghowthispricingwillaffect demand. Entrepreneurs need to do, at the very least, somebasicmarket research tounderstandthisandbeabletoconcludeatacertainpricewhatpercentageofconsumerswill

buytheproductorserviceandatdifferentpriceslevels,whatpercentageswillpurchase.

Likewise, the positioning of a product or service is strongly influenced by its price strategy.Commongoodsarepriceddifferentlytoexclusiveluxuriousgoodsforexample.Consumersdotendtobelievestronglythatonegetswhatonepaysfor.Also,marketcompetitivepositioning

ishighlydependentonhowonedeterminespricerelativetopotentialcompetition.

Thecostofgoodstoproduceisdeterminantinthatanentrepreneurmustturnagrossprofit(priceminus cost of goods sold) to sufficiently cover his fixed overheads in order to turn aprofit. The calculation of fixed and variable costs associated with the product or service

requiresbeingaccurateasdoesthecostofgoodssold(thecostallocatedtoeachproductorservicedelivered)andthe fixedoverhead (which isassociatedwith theoverall companysizeandoperationandwillremainstableunlessthecompanychangesdramaticallyindimension).

Toomanyentrepreneurs,specificallyintheearlystagesoftheirventures,underestimatethesecostsandfindthemselvesstrugglingtogetpastthesurvivalthreshold.

Otherkeyenvironmental factors include legalrequirementsaffectingpriceorotherexternalfactors such as competitor reaction to an entrepreneur’s price setting (will a price war be

triggered?).

Equallyrelevantarethepricingobjectivessetbytheentrepreneur.Whetherthereisashort‐term maximization of profit objective or revenue maximization, or whether reachingeconomies of scale in the minimum time possible is fundamental, the pricing strategy will

directlyhaveanimpactontheseobjectives.Otherobjectivescouldbeadifferentiationtacticorjustmaximizingtheoverallprofitmargin.

Allofthesefactorsandtheobjectivessetwillthenallowtheentrepreneurstodeterminewhattypeofpricingstrategytofollow.Thesecouldvaryascost‐plusamarginstrategy,targetROI

(return on investment) pricing, value‐based pricing (where the price is based on the valuecreatedforandperceivedbythecustomer)orevenalignedtoaperceptionoffairpricing.

Crowdfundingisarelevanttooltoextractkeyinformationfromthemarketregardingsomeofthe critical factors affecting a pricing strategy. It can also play a key role in the objective

accomplishment of the strategy, namely for enterprises that seek to prove their marketrelevance prior to further, complementary, rounds of traditional funding (business angels,venturecapital,etc.).

The selection of rewards associated with a given price in a crowdfunding campaign is

paramount to obtain some of this critical information. Carefully thought crowdfundingcampaignsallowforthedeterminationofmanyofthefactorslistedaboveandthetestingof

theobjectivessetwiththepricingstrategy.

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The setting of different level prices for different quantities of the product or service or for

different features or quality details helps the entrepreneur determine part of the demandcurve he is facing. In the “Curly Cable for iPad and iPhone”37 project in the Kickstartercrowdfundingplatformtheentrepreneursareabletosetpricesfordifferentquantities,where

unitpricedecreaseswithhigherquantitiesordered.Theyarealsoabletosetdifferentpricesfor different types of consumers as in the case of high quantity orders typical for onlineresellers.Wheninsuchacase,theyhavemorethan500investorsinterestedintheirproduct

(andconsequentlyhavefarovercometheir initial fundingtarget), theyareabletoprovethegeneral public demand for such a product and to plot a relevant demand curve for theproduct, given thedifferentpriceoptionsanddifferent typesof consumers (salesmodelsof

businesstoconsumerandbusinesstobusiness).

Slightvariationsinproductqualityorfeaturesalsoallowtestingforrelativedemand.Bypricingdifferently the PDF version of a children’s book with no illustrations from the physical fullversion, the author of “Formiga Juju”38 project in PPL was able to ascertain consumer

preferenceforelectroniccheaperversionsatagivenprice,relativetothefullphysicalversionof thebook.Equally relevant,bypricing the same for2 copiesof thephysicalbookor for1copy of a high quality limited edition version, she was able to determine the comparative

demandforthe2typesofeditionsandalsotoextractconsiderablevalueofthosecustomersthat value access to the limitededition concept and adifferentiatedproduct (availableonlythrough this crowdfunding campaign). This is also a good example of howamore luxurious

goodwascorrectlypositionedassuchbyusingnotonlytheappealingdescriptionbutthepricereferencethatindicateditwasworth2oftheregularqualityversionbooks.

Theauthorof “Formiga Juju” inPPLCrowdfundingplatform fromPortugal is anauthorwhoaspirestobecomeanentrepreneurofherownworks.However,someinexperienceinthefield

ofmanagementledtominormiscalculationsofpricingstrategies,namelythecostingstructureassociatedwiththeproductionofthebook.Asisherintentiontofurthertheexperienceandproduce other stories and books, the crowdfunding experience was critical in helping her

determineaccurately this cost structureandunderstandingwhatwereexactlyheroverheadcosts and fixed and variable costs. Prior to mass scale production of the books and pricepositioning in themarket, thecrowdfundingprojectallowed fordeterminationof thesecost

structureswithminimalfinancialrisk.Sheisnowreadytoventureintonewprojectswithdeepunderstandingofallvariablesthatgointotheproductioncosts.

Crowdfundingalsoplaysacriticalroleinachievinganearlyentrepreneur’spricingobjectives.When theneed is for short‐term revenuemaximization, rapidachievementof economiesof

scaleisbolsteredbypre‐salesenabledthroughcrowdfunding,priortoanysignificantfinancialcommitment to theproject. Indeedaminimumefficientscale forpre‐project launchmaybedefined and set as the crowdfunding target to be reached, by setting price accordingly and

testing forquantity sellingoutcome.Asasimpleexample, ifanentrepreneurdecided toselluniquely designedwatches, hemay calculate that of a certain design, nothing short of 300

watches sold at unit cost plus a 5%margin will suffice to venture into such an endeavour.

37http://www.kickstarter.com/projects/1117194589/curly‐cable‐for‐ipad‐and‐iphone38http://www.ppl.com.pt/investment/a‐formiga‐juju‐na‐cidade‐das‐papaias‐1017

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Crowdfundingallowshimtolaunchsuchaprojectwherethatdesignisofferedatthatvalue.If

he obtains the 300 investors or more, he is ensured the minimum efficient scale for hisproduction. This maximization of short‐term revenue, even prior to project launch may becritical in establishing an important market share and showing higher revenues, at a small

profit or even a loss, proving that the company will likely reach profitability. For example,amazon.comdelivered veryhigh revenues for several years until finally showing a profit. Itsmarket capitalization was a sign of the investor confidence in the generation of relevant

revenues and determinant in obtaining subsequent rounds of more traditional funding.Crowdfunding is typically not an end in itself, regarding funding, but may be the key tolaunching a credible operation that is attractive to other investors further down the line of

financingneeds.

Short‐termprofitmaximizationgoalsmaynotbetheidealpricingstrategyforachievinglong‐termprofits. However, bootstrapping entrepreneurs (companies that are trying to survive alaunch at minimum operational costs and maximum profits) often have cash flow as the

primary concern. Smaller companies, in start‐up mode, typically resort to this strategy, toenable self‐sustainability as early as possible and alsobecause it attracts venture funding inachieving profitability as early on as viable. A critical factor to allow for short‐term profit

maximization is the ability for a firm to extract the maximum value of consumer surpluspossible.Thistranslatestotheabilitytopriceascloseaspossibletoaconsumer’swillingnesstopaywhichmayvaryintimeandsodiscriminatepricingtothesedifferentconsumervalues.

InBelleflameetal(2011),“comparedtotraditionalfunding,crowdfundinghastheadvantage

of ordering an enhanced experience to some consumers and, thereby, of allowing theentrepreneurtopracticesecond‐degreepricediscriminationandextractalargershareoftheconsumersurplus.Sincetheconsumerswhopre‐orderarethosewithahighwillingnesstopay

for the product, these will generally constitute the bulk of the “crowd". However, anentrepreneurisgenerallyunabletoidentifytheseconsumers.Theentrepreneurmustthenusesome self‐selecting device so as to inducehigh‐paying consumers to reveal themselves. The

sortof‘communityexperience’thatweb‐basedcrowdfundingoffersmaybeameansbywhichtheentrepreneurenhancestheperceivedqualityoftheproductfortheconsumerswhoagreetopre‐orderit.Inthissense,crowdfundingappearsasaformofmenupricing(i.e.,ofsecond‐

degree price discrimination). The disadvantage is that the entrepreneur is constrained inhis/her choiceofpricesby theamountof capital thathe/sheneeds to raise initially to fundproduction:thelargerthisamount,themorepriceshavetobetwistedsoastoattractalarge

number of crowdfunders, and the less profitable the menu pricing scheme. The modelhighlights the importance of community‐based experience for crowdfunding to be a viablealternative to traditional funding. If theentrepreneur isnot able to create suchbenefits, no

consumerwillfinditworthwhiletopre‐orderthegood,unlessadiscountisoffered.However,crowdfundingthenbecomeslessprofitablecomparedtotraditionalfunding.Also,theanalysis

showsthatcrowdfundingisthemostprofitableoptiononlyforlowerlevelsoffinance.Indeed,crowdfundingyieldshigherprofitsonlyforsmallamountswheretheentrepreneurfacesno(orlimited) constraints in his/her price setting between the two types of consumers while still

securingenoughup‐frontfinancing.Astheamountrequiredbecomeslarger,theentrepreneurisforcedtodistortmorethepricessothatmoreconsumersarewillingtopre‐orderandthus

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theentrepreneurcancollectup‐frontmoremoney.This inturnreducesthegainsfromprice

discrimination.”

Initially seen as merely an alternative financing tool, crowdfunding can in fact play asubstantial role in the pricing strategy of an entrepreneur, supporting with demanddetermination, positioning setup, cost structure validation and achieving critical pricing

objectives.Aspricingisoneofthemostcriticalsuccessfactorsfornewventuresandsuccessfulentrepreneurship ingeneral, crowdfundingmay thusplaya significant role inenablingquickandcostefficientlearningandsettingofadequatepricingstrategies.

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4. DiscussionandConcludingRemarks

Throughoutthispaperandnowintheconcludingremarks,wehavenotaddresseddirectly,but

itisourconvictionthataclearanswerhasbeenachievedforourkeyresearchquestion.

KeyResearchQuestion:whatrolecancrowdfundingplayinfosteringentrepreneurship?

Key related research questions: what impact and in what context does this role affectentrepreneurship?Howsignificantisthatimpact?

Theanswer iscomplexbutunequivocallypositive.Crowdfundinghasacritical roletoplay inthepromotionofentrepreneurshipandthetoolissettochangethewayweseefinanceand

theinvolvementofconsumersandinvestorstoday.TheimpactisverysignificantwhichiswhyitleadsnotablesaspresidentBarackObamatodefendequityCrowdfundingasakeysolutiontocreatingmuchneedednewenterprisesandjobs.

A problem faced by entrepreneurs at the beginning of their entrepreneurial initiative is to

attract outside capital. Crowdfunding has the potential to become an important alternativemethodof raising funds forstart‐ups (e.g.,SchwienbacherandLarralde2010). Indeed, ithasthe potential of becoming a mainstream method for such purpose. Entrepreneurs require

accesstotoolsandresourcesthatallowthemtocompetitivelypushnewideasandventuresinto themarketplace. Aswe have seen, crowdfunding can have a positive impact in criticalsuccessfactorsforentrepreneurssuchasinearlymodelvalidation,pre‐salesandpre‐ordering,

in reducing equity dilution whilst obtaining the required funds in incremental rounds, inharnessingthecontributionoftheenduser,partneringwithhimtoinnovate,design,promote,financeandlaunchthenewventure.Itcanalsosupportinalowcostpromotionstrategywith

sophisticated marketing online tools and can have a fundamental role of support in thedetermination of the demand curve for the product or service to be delivered, allowing forupfrontoptimizationofthepricingstrategytoextractmaximumvaluefromconsumersurplus.

The satisfaction derived from all involved and the sense of accomplishment with a visible

impact has been extremely rewarding to the owners of crowdfunding platforms such asCrowdcube,SymbidandPPL.Mostoftheprojectsfundedthusfarwouldnothavefoundtheirwayoutfromthedrawingsketches,sothemostrelevantlessonhasbeenthattheabilityfor

the crowd to validate, curate, support and then own, promote and finance an initiative issomething not to underestimate. It is also a great responsibility for a platform to interveneenoughtoensuretrust,efficiency,securityandgrowthofsuchamechanism,butunderstand

thatsuchmovementsaredesiredanddrivenbythecrowdandultimatelybelongtoit.

This model, however, is not yet a substitute for traditional methods of funding such asbusinessangelinvestment,venturecapital,privateequity,loansandstock‐marketinitialpublicofferings.Themoretraditionalformsofraisingcapitalwillcontinuetobethemostadequate

solution for the majority of financing requirements. Collective finance through socialnetworking has an important role in our current society already, and crowdfunding can

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become the privileged solution for seed, pre‐seed and even mid‐stage entrepreneurial

endeavours.

Asanewtrendinglobalfinance,thisconcepthasyettobefullyunderstoodandexplored.Itshows promising positive potential impact, which is why it already proliferates so stronglyacrosstheworldandwhyEuropeanshaveadoptedhigherimpactmodelssuchasequity‐based

crowdfundingandAmericanscurrentlyseektolegislateandopenthedoorforthismodeltoo.However, crowdfunding is as yet fully researched and understood, it presents relevant risksandrequiresatbestsomestandardizationandcriteriaforevaluatingaplatform’sperformance

andideallysomeformofregulation,commonacrossnations,toguaranteeinvestorprotection,intellectual property rights, prevent online piracy and other illegalities such as moneylaundering.

4.1. ImplicationsandtheFutureofCrowdfunding

Ordanini et al. take a step further in researching the role of crowdfunding platforms in the

market. Crowdfunding firms are “network orchestrators”, they create the requiredenvironment,organizationandenablerstoallowforresourceexchangeandintegrationamongallintervenients.Theauthorsgofurtherandextendtherationaletospecifythatcrowdfunding

companies orchestrate a certain type of network, where the customer/financier plays thecentralroleandnottheactualfirm.Suchfirmshaveoptionalorchestrationmodes,wheretheyareabletointermediatewherepreviouslytherewasnointermediation.Thistypical inaloan

based crowdfundingmodel with peer‐to‐peer loans. Alternatively these firms can replace astandardintermediary,asinthecaseofthemusicindustrywherethecrowdfundingplatformreplaced the biased label producer or they can desintermediate the entire medium by

cancelling the participation of a previous service provider. Trampoline39 is a closed circuitcrowdfunding platform where only accredited investors may participate. In their words,“Instead of raisingmoney from venture capital firms Trampoline is using a technique called

“crowdfunding”, raising smaller stakes from a community of smart private investors.”TrampolinehassucceededindesintermediatingtheVentureCapitalfirmintheirownfinanceprocess.

As per Ordanini et al., “crowdfunding is thus a phenomenon that has the potential to

significantlyaltertherolesofserviceorganizationsinvaluenetworks.”

President BarackObama is known to defend the approval of a new bill exempting financialoperations, under certain rules, from the standard IPO (Initial PublicOffering) requirementsdue to the estimated potential of this method of finance to generate considerable

employmentoverthenextfiveyearsthroughthecreationofnewfirms.

These online collaboration tools are set to change the spectrum of entrepreneurialdevelopment and start‐up firm generation. Exactly how remains to be understood and

39http://crowdfunding.trampolinesystems.com/

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researchedinordertonotonlymanagebutalsopromoteitandextractthestrongestbenefit

andpotentialfromit.Lawton(2010)goessofarassuggestinga“perpetualmotionmachineofinnovation” canbe explored through crowdfunding. Rather than criticizing how realistic thisvision is it’s relevant to understand that we are in a position to push the boundaries of

entrepreneurship creation and armed with an exploring spirit complemented with therequired safeguard for the intervenients in the model, rather than a sceptical one, we areready to jump to the next level of financial democratization globally. Lawton (2010)

acknowledgesthatsucha“machine”inthethermodynamicsscientificfieldisnotpossible.Butin financial terms, he provokes the reader by imagining an investment fund created to beutilized only through crowdfunding and in new, innovative technologies and firms. By

assumingthisfundsperformswellandisabletogeneratereturnswhicharethenchannelledback into the same type of investments. Lawton (2010) call this “Venture Capital meetsCrowdfunding”andhepicturesanation(hisbookisdedicatedtothefirstnationtofullygrasp

andexplorethepotentialofcrowdfunding)wherethismethodwouldbeutilizedtomanageanation’s Research and Development budget. This fund, being profitable, requires no newfundingthroughothermeansastaxation.Inhiswords“this istheperpetualmotionmachine

of nationally focused innovation. Fully transparent, accountable, and expressive of thecollectivewillofthepeopleitrepresents.”

Intheinterviewsconducted,wehavealsofoundabeliefthatcrowdfundingisnotonlyatooltochannel fundstoEntrepreneursbuthasthepotential tobecomeamarketplacefor funds,

resourcesandprojects. Forexample, if anentrepreneurwas seeking50000€ funding, theyknowthatapartisforanaccountant’sworkandanotherpartisforadesignertodeveloptheirimage.Alsofromexperience,theyknowsuchprofessionalswhoarewillingtocontributewith

thiswork, insteadof funds,and still areentitled toearna shareofentrepreneur’sequity.Acrowdfundingplatformcanthusbecomeamarketplacethatprovidesafinancingsolutionanda return on investment in the form of equity and / or revenue sharing. It could also allow

investorstopledgenotjustcash,butresources(skillsandlabour)andpromotiondrive(ifonepromotes a project in a significant network and from that effect the project gains otherinvestors, one should be remunerated for this promotion effort). This functionality can be

enabled in a marketplace offering full engagement possibilities like virtual meeting rooms,ratingsandreviews,referrals,forum,onlinehelpassistanceandothersocialnetworkingviraltools.

4.2. Limitsofthisstudyandrelatedsuggestionsforfurtherresearch

Thethemeunderstudy,thetechnologyinvolvedandthesociologicalimplicationsareallveryrecent in history and have very little research and study applied. This in itself is the mostrelevant limitation. Although this thesis reports plenty of facts and practical examples of

applications of crowdfunding exercises in a series of industries and firms, the fact is theavailablestatisticsarestillinsufficienttoestablishfullcausalrelationswithenoughreasonablecertainty and from there formulate hypothesis that are applicable in a more generalized

fashion.Mentionedbelow,theriskofdefault(aprojectthatiscrowdfundedandthendoesnot

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deliveraccordingtopromise)inallplatformsacrosstheworldislessthan1%.Althoughthese

areextremelypositiveresults,inthecaseofthePPLplatform,forinstance,thatstatisticis0%itwould take only a fewprojects going sour to raise the statistic to an exceptional level soearlyinthehistoryofcollectivefinanceonline.Oneofthemainreasonsalotofplatformsgo

to extra efforts to execute some due diligence and ensure such cases areminimal to non‐existent, at no extra cost to its investors or project promoters, is precisely to ensure thesestatisticsremainatimpressivelowscoresandsotheprovethepotentialandbenefitsofsucha

mechanism.

Thisalternativemethodoffinancealsoposessomerelevantrisksthatrequireaddressing.Thisstudycanandshouldbeexpandedbyresearchingtheserisksandexploringpossiblemitigationactions, consequences and other risk management options. When we look at the risk of

default from a project, the existing statistics since 2005 (when crowdfunding in its currentformappeared– collective financehasexisted fora considerable time,albeitnot ina socialnetworkingenvironment)arerevealing.It’scommonunderstandingthatthetransparencyand

collaborativeeffectof thismechanismaswellas thenatural follow‐upontheprojectby thecrowdcreatestrongincentivesthatkeepdefaultratesatextraordinaryminimums.AresearchbyDeutscheBank in200740 reveals this tendencywheredefault ratesare significantly lower

thanthoseexistent inthecaseofbank loans.Thepersonalrelationshipestablishedbetweeninvestor and project promoter, the common interest in the final outcome and the fact thatthereexistsnofinancialintermediaryintheprocessaresomeofthereasonsthatexplainthis

phenomenon.Acomparativeamongsomeplatformsrevealsdefaultratesaslowas6%41.

Anotherlimitation,amongallthevirtuesofacollaborativesystemissimultaneouslyoneofthelongstandingreasonsforgovernmentstorequireprovidingpublicservices.Suchasystemwillselectinterestingandinnovativeideasthatmightotherwisenotcomeoffthepapertheywere

thought of in and turn them into implemented projects with palpable outcomes. However,manyrequired innovationsor impactfulprojectsmaynot receiveenoughattention fromthegeneralpublictobefundedandlaunchedintonewenterprises.Thisisoneofthedownsidesof

all things communal.Only the ideas generally approvedby a community aredeveloped andturnedintofullfledgeofferings.Thislimitationbecomesevidentandeasiertounderstandwiththeexamplesgivenoncrowdfundingforscientificresearch.Severalrelevantandmuchneeded

projectshavebeenfinancedandarenowinthestageofbeingdeveloped.Butthereisatleastan equal number of projects, apparently less relevant or understood to the untrained eye,thereforelesssupportedandeventuallynotfinanced,thathavejustasmuchrelevance,ifnot

more,tohumankindandanycommunitytherein.Onemayarguethatbettercommunicationand promotion is required in such cases, but how much communication and promotion isenough to convey to the general public that investing in some exquisite biotechnology

research, with a low probability of success and possibly very relevant benefits but only adecadefromnow,isagoodinvestmentopportunity?

Similarly,inthe“velocityofinnovation”conceptthatLawton(2010)details,theresultsmaybe

quite incongruous. “With the increasing connectednesswe enjoy, the idea supply will keep

40http://www.dbresearch.de/PROD/DBR_INTERNET_DE‐PROD/PROD0000000000213372.pdf41http://investmentinstartups.wordpress.com/crowdfunding‐2/

40

growing, although the economically stimulating “velocity of innovation” may be very

incongruousacrossvariouscountries.Ifthenationswhichenrichedthemselveswiththespoilsof leadingprevious industrialization,arenotquick toadapt to thenewrevolutionary forces,thanhistorymaywellrecordaprovocativeirony;newerdevelopingnationsmayeffectivelybe

“mining”orotherwiseexploitingthe“ideasupply”resourcesofpreviouslydevelopednations.”

Whenweanalysedthepotentialofpre‐orderingincrowdfundingwealsounderstoodfromtheworks referenced that there exist limitations to this potential. Yang Chu and Zhang (2010)reveal“Wealsofindthatwhilepre‐orderbenefitstheselleracrosstheboard,therelativegain

ismostpronouncedwhenamasspre‐orderstrategyisviable(thenormalizedmarginisnottoolow)andretailalone is inadequate to realize theprofitpotential (themargin isnot toohigheither).” Similarly, Li and Fuqiang (2010) alerted to the fact that “contrary to conventional

wisdom,wehavedemonstratedthatadvancedemandinformationcanbedetrimentaltofirmswhen facing forward‐looking consumers: (1) It may hurt the seller's profit in the pre‐orderseason through its negative effect on the pre‐order price. (2) In the presence of price

guarantees, it can also hurt the seller's profit in the regular season through its negative eect on the regular‐season demand. Due to such negative effects of advance demandinformation,thesellerneedstocarefullydecidewhethertoacceptpre‐orders,andwhetherto

provide price guaranteeswith pre‐orders.We find that the seller's strategy choice dependscriticallyontherelativemarketsizesofthetwotypesofconsumers.”

Naturally any of these pose relevant opportunities for further research, in pre‐order thedifferentauthorspointtothepossibilityofintroducingmoresophisticatedconsumervaluation

models and in thedefault rates risk a thorough research into the specific cases, causes andmotivationswouldsurelyrevealimportantfactstosupporttheextensionourunderstandingofthese. This applies to pre‐orders and to all of the 7 factor of entrepreneurial promotion

throughcrowdfunding,furtherresearchwill improveourunderstandingofthesephenomenaandenablebetterextractionofvaluefromthemwhilstmitigatingandminimizingtheinherentrisks.

This study did not explore further other risks like intellectual property rights, investor

protectionand interoperabilityacrossplatforms.Further research isadvisable in this field todetermineallthepossibleconsequencesofnegativeresultsderivedfromtheserisksaswellasimportantmitigatingactionstoputinplacetoavoidtherisksbecomingissues.

Oneof the critical success factors in suchmethodsofobtaining finance forentrepreneurs is

alsooneofitsrisksifmanagedinappropriately.Themoreaprojectownerexposeshimselfandhis idea, thebetter chancehehasofattracting investors tohis cause.Disclosureofdetailedinformationandpotentialofhisventurewillresultinraisingtheattractivenessofthesameto

potentialinvestors.Unfortunately,thatsamedisclosureandtransparencymaymakehimliableto intellectual property rights infringement.We live in an open sourceworld and there is a

currentdebatewhethersuchprotectionmakessense.However,whilethedebatecontinues,anentrepreneurmust,nevertheless, takeprecautionaryactionstoavoidbeingeasilycopied.Thecrowdfundingplatformownersweinterviewedallconfirmedthattheyperformsomesort

of offline advisory role to project candidates where they advise them to reveal enough toenticehispotential investorsandshowthetruepotentialofhis idea,butheshouldn’treveal

41

toomuch that would allow the idea to be copied and implemented prior to his launching.

Therewillbeashadyzonebetweenthesetwoareas,andthechallengethereremainswiththeentrepreneur. Another relevant fact raised in the interviews is that a natural riskmitigationsetupexists regarding intellectualproperty rights.Anentrepreneur standsa good chance to

implement anewventure successfully if hepossesses the skills and knowledge todo it, themotivation and energy to execute it, the actual idea concept clearly thought out and thefinancial means to do so. When launching a campaign through collective finance, the

entrepreneur is typicallymissingonly the last part, the funds todo so. In this scenario, it isextremelydifficulttocopyoranticipatetheentrepreneur’sideaandlaunchaventurethroughintellectual property infringement over that individual or group. To copy an idea is not too

difficult,toreplicatetheconjunctionofcriticalsuccessfactorsalltogetheratacertainperiodintimeismuchmorecomplex.

With the development of crowdunding the interoperability across different platforms gainsrelevance.Projectsshouldbeabletoeasilymigratefromoneplatformtoanotherorintegrate

sub‐projects across different platforms. A part of a project can raise funds via oneplatformwhile another part of a project (be it complementary or independent) through anotherplatform. For the purpose it becomes very important to have standards, both technical and

processrelated,acrossplatforms,toensureseamlessintegrationacross.Thisstudycanalsobeextendedandimprovedbyexploringthisimplicationandunderstandingtherisksinvolvedwiththelackofinteroperabilityandthepotentialofhavingitbroadlyavailableandimplemented.

5. Acknowledgements

Theauthors aregrateful to theCEO’sof theCrowdfundingplatforms interviewed (Korstiaan

ZandvlietandDarrenWestlake), toall thestart‐upsandtheir foundersthatcontributedwithinsights and knowledge to this work and indirectly to all researchers who havemade theirworkavailabletolearnandbuildon,asisourwishthatthisonemayservethesamepurpose.

TheauthorsareparticularlythankfulfortheguidanceandoverviewofProfessorPedroOliveira

fromUniversidadeCatólicaPortuguesa.

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