4000302260center01 August 2018
330009500001 August 2018
420003175000880009408795 Ilham Ajam – Student No. 213141183
450000 Ilham Ajam – Student No. 213141183
TOC o “1-3” h z u Introduction PAGEREF _Toc520877246 h 2Crowdfunding contributing Factors and the role it plays for businesses PAGEREF _Toc520877247 h 3Create and share your story PAGEREF _Toc520877248 h 3Offer great rewards PAGEREF _Toc520877249 h 3Set Funding Goal PAGEREF _Toc520877250 h 3Promote business crowdfunding campaign PAGEREF _Toc520877251 h 4Update business crowdfunding campaign Progresses PAGEREF _Toc520877252 h 4Fulfil business crowdfunding campaign Promise PAGEREF _Toc520877253 h 4Find a viable means to monetize business crowdfunding campaign pain point PAGEREF _Toc520877254 h 4Find a manufacturer the business can work with PAGEREF _Toc520877255 h 4Make business changes based on feedback PAGEREF _Toc520877256 h 5Main Pros and Cons of business crowdfunding campaign PAGEREF _Toc520877257 h 6Crowdfunding platforms PAGEREF _Toc520877258 h 6Crowdfunding Fees PAGEREF _Toc520877259 h 6Findings PAGEREF _Toc520877260 h 7Solutions PAGEREF _Toc520877261 h 7Rewards Based PAGEREF _Toc520877262 h 7Equity Based PAGEREF _Toc520877263 h 7The role it plays in South Africa PAGEREF _Toc520877264 h 8Suggestions and Rectifying Plans PAGEREF _Toc520877265 h 8The Effect of Crowdfunding on Local and International Economies PAGEREF _Toc520877266 h 9Reference list PAGEREF _Toc520877267 h 10
IntroductionCrowdfunding takes place for numerous reasons such as medical expenses, entrepreneurial ventures or community-orientated social projects. Crowdfunding is a term for alternative funding, according to Hossain and Oparaocha, (2017) Crowdfunding is the exercise of funding a project; venture; medical expense by donating or raising small amounts of money from a large amount of people.
Hossain and Oparaocha, (2017) mentions that Crowdfunding started when authors would advertise books or subscription schemes, whereby if enough subscribers signalled their willingness to buy the book once it was published, the book would be written and published. However, this is not exactly Crowdfunding but the list of subscribers has the necessary power to influence investors to take the risk of publication. Fast forward to 2003 with the launch of ArtistShare crowdfunding started to gain mainstream power. As the website matured, more crowdfunding sites started to appear such as Kiva (2005), GoFundMe (2010) and YouCaring (2011).
The spectacle of crowdfunding is older than the term “crowdfunding”. According to Freedman and Nutting, (2015) the earlies recorded use of the word was in August 2006.
Crowdfunding contributing Factors and the role it plays for businessesIf a business is looking to gain attention and funding for their business idea, crowdfunding might give the business the initial push the business requires to make their dreams a reality. According to Sanfilippo, (2016); Mollick, (2014); Löher, (2017); Drover et al. (2017); Kuppuswamy, and Bayus, (2018); Wang et al. (2016); Paschen, (2017) and Dey, and Marti, (2016) there are nine fundamental steps to hosting a successful crowdfunding campaign.
Create and share your storyAllow your potential investors to get to know your business. For example, a business would share what the business is about, the mission and vision of the business, where the idea originated from, business values, goals and objectives but most importantly what businesses budget is. Sanfilippo, (2016); Mollick, (2014) mention that disclosing this information is vital as it compels investors to invest in your business idea. Furthermore, disclosing this information about your business idea displays legitimacy and credibility for your business project and shows that the business has put thought into the idea. According to Sanfilippo, (2016) the business message has to connect with investors on an emotional level in a way that it relates to the investor. Finally, the business has to speak about the uniqueness of the product what problem it is you will be solving with the product, this in turn creates a bigger appeal to investors. A solution theory that could assist many businesses with discovering and capturing how unique their idea is by using the VRIO theory. According to Knott, (2015) theory focuses on evaluating if ideas (resource) is valuable, rare, inimitable, and organised.
Offer great rewardsAccording to Drover et al. (2017) and Dey, and Marti, (2016) it is vital to plan the business equity and rewards correct as this is the highest reason why businesses fail when using crowdfunding.
More investors would be willing to invest in your business project if they believe it is worthwhile, businesses could persuade potential investors by offering them certain perks/rewards. However, businesses would desire to be fair in terms of price points and how these rewards are distributed. Sanfilippo, (2016); Mollick, (2014); Löher, (2017); Drover et al. (2017) Kuppuswamy, and Bayus, (2018); Wang et al. (2016) and Dey, and Marti, (2016) says that rewards could be anything from, shares, free products, free prototypes, complimentary products and other forms of gifts such as free tickets to preview a movie. Businesses have to be couscous when being generous with rewards as it is one of the main reasons why businesses fail when they use crowdfunding platforms (Drover et al. 2017 and Dey, and Marti, 2016). Therefore, when a business’s give away great returns it attracts a large amount of investors but when done incorrectly it could lead to poor cash flow or bankruptcy.
Set Funding GoalDifferent funding websites have different funding agreements. However, it is extremely important to think about what the total cost of funding your business project or business venture will be. The cost would include how many investors are willing to invest, inflation, production cost and future costs of products that your business project or business venture will and might need. Löher, (2017); Drover et al. (2017) Kuppuswamy, and Bayus, (2018) and Wang et al. (2016) if goals are not set realistically a proposal could lose popularity and never gain the attention of the desired audience. Finally, it is important to make sure that the promises the business makes to investors are specific, measurable, attainable, relevant and time bound.
Promote business crowdfunding campaignThere are many different ways to promote your business’s campaign such as social media, bloggers and hosting events to get more coverage for your crowdfunding. According to Sanfilippo, (2016); Mollick, (2014); Löher, (2017); Drover et al. (2017); Kuppuswamy, and Bayus, (2018); Wang et al. (2016); Paschen, (2017) and Dey, and Marti, (2016) most business crowdfunding campaigns make use of a video published on social media platforms to promote their business crowdfunding campaigns. However, your campaign is unlikely to succeed without 100 percent commitment on your behalf. The business needs to channel every relationship and marketing channel available. If the incorrect platform is selected to promote the idea the business stands a higher chance of being unsuccessful mentioned by (Paschen, 2017). Therefore, it is vital to develop a criteria, analyse the viability of the existing platforms and what is being posted on these platforms.
Update business crowdfunding campaign ProgressesYou need to keep project investors in the loop as you move forward with your business campaign, if you refuse to share regular updates with investors, the business crowdfunding campaign could lose investors interest and not be able to gain as much investors as the business would like to. Crowdfunding platforms also make features available to businesses that allows businesses to personally message investors; these are tools that businesses need to take advantage of. According to Sanfilippo, (2016); Mollick, (2014); Löher, (2017); Drover et al. (2017); Kuppuswamy, and Bayus, (2018); Wang et al. (2016); Paschen, (2017) and Dey, and Marti, (2016) successful crowdfunding campaigns share progress at least twice a month. However, it is important to be honest at all times, even if things are not going exactly going to according to plan created by business. Sanfilippo, (2016); Mollick, (2014); Löher, (2017); Drover et al. (2017); Kuppuswamy, and Bayus, (2018); Wang et al. (2016); Paschen, (2017) and Dey, and Marti, (2016) mentions that constant sharing creates a high level of transparency and further assists to attract future investors and reassures current investors. Therefore, Investors want to know that the business can actually deliver on the project and rewards that the business have promised investors.
Fulfil business crowdfunding campaign PromiseSanfilippo, (2016); Mollick, (2014); Löher, (2017); Drover et al. (2017); Kuppuswamy, and Bayus, (2018); Wang et al. (2016); Paschen, (2017) and Dey, and Marti, (2016) mentions that business crowdfunding campaign is only successful once the business ticks off the three following boxes: (i) Delivered on promised perks and rewards, (ii) Completed business projects and (iii) communicated the progress to investors every step of the way. By tick off these boxes the business essentially fulfils their promises to investors and the general public depending on the business crowdfunding campaign.
Find a viable means to monetize business crowdfunding campaign pain pointIn order for business crowdfunding campaign to be successful the general public and investors must believe that the business crowdfunding campaign can alleviate one of their pain points. Thus, it is essential for the business crowdfunding campaign to relate to investors. Sanfilippo, (2016) mentions that appealing to investors emotions is one of the best way to gain popularity and investors.
Find a manufacturer the business can work withAny business is required to be able to entail the entire manufacturing process from the start to finish and that is only possible with finding the correct manufacturer. Löher, (2017) and Drover et al. (2017) mentions that business often use existing suppliers and manufacturers. When the business begins their campaign investors always want to know when they will receive their perks, rewards or products and the only way this is possible would be by having the correct manufacturer ready to produce the business’s designs. However, businesses are required to be aware that it will not always be smooth sailing, there are several external factors that will contribute to the length of time it will take to produce the business’s products as well as finding the right manufacturer. Löher, (2017) and Drover et al. (2017) mentions that going with a new supplier is often the best route. Furthermore, it is important for the business to disclose whether the business will produce locally or overseas, the exchange rate, shipping costs and finding the right company whose goals match those of the crowdfunding project. Löher, (2017) and Drover et al. (2017) mentions that investors prefer when businesses use local supplier and workforce even though it may be cheaper to enter the foreign market.
Make business changes based on feedbackIt is no secret that crowdfunding campaigns can be a lot of work but with the correct structure in place, a business can meet and even exceed their funding goals mentioned by (Kuppuswamy, and Bayus, 2018; Wang et al. 2016; Paschen, 2017 and Dey, and Marti, 2016). Feedback is the most important aspect of the business’s product, before starting a business crowdfunding campaign the business should ensure that the product has been tested and reviewed. This is essential regardless if the business has already an amazing product, with feedback from potential investors the product could be even greater and the business crowdfunding could exceed its initial funding goal.
Main Pros and Cons of business crowdfunding campaignPros/Advantages Cons/Risks/Disadvantages
Fast way to raise finance without upfront fees Not all projects that apply to crowdfunding platforms get onto them
Sharing business ideas gets the business feedback and expert guidance on how to improve their product Heavily based on popularity
It is a good way to “test the waters” It is easier for other businesses to steal your business idea if the business has not patient the business idea
Investors can track business progress The business’s brand reputation can be greatly tarnished
Investors can become your business’s most loyal customers Entrepreneurs could sign away too much equity
It is an alternative finance option if your business is struggling with bank loans and other types of funding (Hazam, Karimova, and Olsson, 2017; Blace, and Grubisic, 2017; Manchanda, and Muralidharan, 2014; Macht, and Weatherston, 2014; Rantala, 2016 and Scholz, 2015)
Crowdfunding platformsThere are many crowdfunding platforms in the world, these platforms assists businesses to start up their businesses just as large enterprises would. Furthermore, many of these platforms assist with transforming communities and raising the standard of living in poverty stricken communities. Examples of these platforms in South Africa would be Uprise.Africa, Thunderfund and Jumpstarter and internationally Kickstarter, Indigogo and Razoo. These platforms and more enable businesses to gain funding and not be turned away.
Crowdfunding FeesCrowdfunding enables businesses to gain the attention of the public but this does not come without a cost. Below are some of the platforms and the fees they charge individuals to run their campaigns.
GoFundMe KickStarterSignup Fee R0 R0
Fundraiser Fee 5% 5%
Donar Fee 0% 0%
Discounts Available 2.9% + R 4.14 per gift 3% + R 2.76 per gift
None Under R138 pledges
Total 7.9% + R 4.14 per gift 8% + R 2.76 per gift
FindingsIn South Africa crowdfunding can be seen as an underutilized platform despite the great benefits it presents to businesses. From the research conducted the main reasons why crowdfunding is an underutilized platform is because of the low level of infrastructure, limited available resources, low standard of education and finally, user resistance. According to Gallo?Cajiao et al. (2018) South Africa is define as a developing country. Furthermore, most developing countries struggle to adopt new ICT solution mainly because of the lack of awareness, exposure and availability of resources.
Due to lack of lack of awareness, exposure and availability of resources and South Africa’s high unemployment and poverty rate, businesses struggle to reach their project goals. However, it is not only business’s that struggle, there is a general lack of awareness within South Africa regarding crowdfunding. Furthermore, many individuals and businesses resist the idea of crowdfunding due to being afraid of their idea being stolen or the brand being damaged. However, most likely due to poverty stricken areas makes it difficult to manage a crowdfunding campaign without proper internet connectivity. Despite the low utilization of the available crowdfunding websites some businesses and individuals become highly successful. For example, #### give SA example. In summary, the role that crowdfunding plays for business are to enable businesses to gain funding, assisting businesses to gain access to their target audience, empower businesses and communities, speed up business and community expansion, charity fund raising and generate pre-order sales. Most importantly crowdfunding supplies businesses with a financial alternative to gain funding from friends or family and financial banks.
SolutionsAccording to Frydrych et al. there are two main types of crowdfunding, these include: rewards-based and Equity- based crowdfunding.
Rewards BasedThis type of crowdfunding does not rely on location. The distance between creators and investors on Sellaband was about 3,000 miles when the platform presented royalty sharing. The funding for these projects is circulated unevenly, with a few projects accounting for the majority of overall funding. Additionally, funding increases as a project nears its goal, inspiring what is called “herding behaviour”. Research also shows that friends and family account for a large, or even majority, percentage of early fundraising. This capital may encourage subsequent funders to invest in the project. While funding does not depend on location, observation shows that funding is mainly tied to the locations of outdated financing options. In reward-based crowdfunding, funders are often too optimistic about project returns and must review opportunities when returns are not met.
Equity BasedEquity crowdfunding is the shared effort of individuals to support efforts started by other people or establishments through the donation of finance in the form of equity. In the United States, laws that is mentioned in the 2012 JOBS Act will permit for a wider group of small financiers with fewer limitations following the execution of the act. Unlike reward-based crowdfunding, equity crowdfunding contains sensitive “information asymmetries”. The creator must not only create the product for which they’re raising money, but also produce equity through the building of a company. Equity crowdfunding, unlike contribution and rewards-based crowdfunding, includes the proposal of securities which embrace the potential for a return on investment. Organisations, which involve many investors succeeding the approach of a single lead financier, can be effective in dropping information asymmetry and in eluding the result of market failure related with equity crowdfunding.
The role it plays in South AfricaThe leading platform in crowdfunding in South Africa is ThunderFund which is Equity Based, launched in 2017 which allows individuals to invest in early staged businesses in exchange for equity. Any business can register for funding. However, according to ## they are looking closely at businesses in the food and drinks sector. To be able to register the organisation needs to have FICA documentation, whether they are South African or not does not affect the application. The platform allows users/creators to set their own goals however R 50 million is the maximum amount. In addition creators are to make themselves available every day to answers questions from investors, they can do this by using the platform to communicate with investors as well as receive feedback and tips from investors to help them reach their goals.
Thunderfund has seen incredible growth since its launch in 2017, to date they have funded 403 projects/business ventures, an astounding 19 286 supports and raised R 21 981 533 in total. These projects/business ventures includes a book containing images of rescue dogs, helping a young man from the Western Cape go to Columbia University and Owls in the Wild. The project was for Mandela Day which included making and placing 67 owl sculptures and placing them in the yellowwood forest.
Suggestions and Rectifying PlansThere are a few issues that have been raised regarding crowdfunding, this includes, trust. Trust is something that is has to be there in order to gain interest in your campaign and fail to meet your targets. However there have been scams that have raised over $1 million in investments and in order for platforms to gain investors/attract new investors to platforms they should be able to provide these potential investors with a form of security, such as doing background checks on creators and their projects and display credibility checks along with the project to give potential investors more security and build a bridge towards more trust which will also attract more traffic to the platform.
Another issue with crowdfunding is setting unrealistic goals for projects/business ventures. If the setting is not correct then you dissuade investors or not gather enough attention to meet campaign goals. Creators could use the SMART method to improve their business ventures/projects or platforms could make this a requirement for projects/business ventures when registering on their platforms. According to Haughey, (2015) and Worden, (2014) SMART refers to Specific, Measurable, Attainable, Realistic and Time bound. However it is not within the rights of the platform to tell creators to change their projects/business ventures to suit their standards but they can advise them on how to improve it.
Lastly building interest and marketing the project or business ventures has not been very successful within certain parts of the world. Crowdfunding has seen significant growth over the years according to Collins and Pierrakis, (2012) in 2012 crowdfunding CPI growth rate was 38% which grew to 60% in 2012. There has been a rise in marketing amongst social media for crowdfunding but as at 2018 the term crowdfunding is not well known in South Africa and is not receiving enough attention in order for it gain the right attention that it needs.
The Effect of Crowdfunding on Local and International Economies
Crowdfunding is an alternative to bank loans or funding and giving SME’s and businesses a second chance. New entrepreneurs are perceived as a high risk investment and often get turned away from banks. High risk investment businesses therefor move to crowdfunding to seek out help and support from the public by asking them for donations to raise capital for their projects or business ventures.
This however has a negative effect on banks as they now loose out on income generated from loans. Furthermore, banks are now unable to charge interest, allowing SME’s and other businesses to gain more capital at a cheaper cost. The low cost of capital allows SME’s to use their resources to expand and grow their business rapidly.
The rapid growth assists with decreasing the unemployment rate and raising the standard of living depending on the business venture.
Furthermore, crowdfunding also enables idealist to gain access to a larger pool of investors. These investors are differentiated according to their income and savings. All investors are allowed to invest freely and are given equal opportunity to invest as much as they like in early stages of the business. The equal opportunity to invest gives even small investors who have access to less money a chance to invest. For example a teacher at your local school has the same chance to invest as the corporate investor working at Old Mutual.
Therefore, crowdfunding places the investor power in the people by allowing everyone an equal opportunity to grow their money and invest in new and existing businesses without giving all the power of your money to a complete stranger, you now get to be the boss of how you want your money to grow. Furthermore if communities are investing and gain positive returns this could facilitate and increase spending. The increase in spending may lead to an increase in GDP and economic productivity. When the economy is affected by aspects such as GDP and the public increases their spending, the rand currency could favourably influence and increase the rand value.
Finally crowdfunding enables existing businesses to also post their cause on the platform and gain funding. In some cases they become really profitable. Therefore, crowdfunding enables the country of South Africa and all over the world to grow and develop their economies through investments, public spending, job creation and community outreach projects.
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