Crowdfunding has been much talked about as an innovative way of funding entrepreneurial businesses, allowing them to source financial backing from a growing plethora of online platforms. But in reality crowdfunding may not be suitable for a particular business idea or sector – and some crowdfunding platforms may not be viable at all. As the research’s author, Gary Dushnitsky, puts it, “It’s great that crowdfunding is the solution, but to what question and, specifically, in what industry?”
Crowdfunding brings together the individuals or organizations that propose ideas with a ‘crowd’ of people who pool their money to support the projects. An online crowdfunding ‘platform’ links the project initiator and the crowd. In a business context, crowdfunding means the funding of a company through small amounts of debt or equity from many investors.
“Imagine an eBay for ideas and that is basically what crowdfunding is,” says London Business School’s Dushnitsky. But whereas eBay has achieved a dominant position in its market, there are now scores of crowdfunding platforms – CrowdCube, Seedrs, LendingClub, Prosper, Zopa Funding Circle to name but a few – that give companies the chance to attract investment online. A 2013 report by Nesta – a UK charity that helps get new ideas off the starting block – found that the number of crowdfunding platforms grew by 60% in 2012. It estimated that €1.5bn was raised through crowdfunding in 2011, and that this will grow to €12bn in 10 years’ time.
With all the hype around crowdfunding, Dushnitsky sought to make sense of this complex and dynamic environment. Working with IESE’s Thomas Klueter, with funding from the Deloitte Institute of Innovation and Entrepreneurship, his research identified the pool of crowdfunding platforms that are viable and credible.
Says Dushnitsky, “When people talk about crowdfunding today, what they are often interested in is what’s happening within a platform – how does it operate, who brings what to the table, how much do you disclose about the idea, where and how do investors bid for the money?”
But, Dushnitsky argues, many people rush to explain the inner workings of a particular crowdfunding platform without asking what the purpose of that platform is. “Generating funding to develop video games is different from generating funding to do research into new drugs. So, it is interesting to look at why a crowdfunding platform exists and whether that structure is fit for purpose in another setting,” he says. “Also, why is it that we see these platforms in some settings but not others?”
In the future, Dushnitsky expects three distinct categories of crowdfunding to emerge: donation-based, debt-based and equity-based crowdfunding.
When entrepreneurs are in the process of developing their ideas, they need an accurate map of what funding providers are available to them. They should not simply go to a business angel or a venture capitalist without being clear about the other options available.
But entrepreneurs don’t have time and resources to waste. They need to be aware of whether or not their industry is likely to be suited to particular types of funding – and that includes crowdfunding. The structure and organization of the crowdfunding model or platform will define the economics, time horizons and interests of investors. If business leaders understand this, they can make informed judgments.
Dushnitsky’s research indicates that that in some circumstances and industries crowdfunding is unlikely to operate efficiently. Entrepreneurs in these situations and sectors should not waste their time and money by blindly following fashion and attempting to go down the crowdfunding route. For a budding entrepreneur crowdfunding can be “alluring and confusing,” says Dushnitsky. “It might not be the way to go.”
If crowdfunding does look like a viable option, however, entrepreneurs should further ask themselves what they should consider before committing to the concept or to a particular platform. They need to have at least spent some time thinking about the pros and cons.
The crowdfunding story is still unfolding and the field of funding innovation is constantly being innovated itself, so business leaders should strive to stay abreast of developments that could offer them new solutions.
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