ESADE Lecturer, Department of Financial Management and Control

Transcription

1 To obtain the degree awarded by ESADE in MASTER IN INTERNATIONAL MANAGEMENT Research Project/ MSc in International Management, Research Project Format: Master Thesis Business Creation Project In-Company Business Project 13th October, 2013 Student Miquel Santos Domènech Director or Personal Faculty Advisor José María Álvarez de Lara Morel ESADE Lecturer, Department of Financial Management and Control Juan Álvarez de Lara Cabrera Academic Assitant, ESADE Barcelona, 13th October 2013

2 This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. To view a copy of this license, visit -ncsa/3.0/ or send a letter to Creative Commons, 444 Castro Street, Suite 900, Mountain View, California, 94041, USA. 2

3 Acknowledgements I want to thank my tutors José María Álvarez de Lara Morel and Juan Álvarez de Lara Cabrera for guiding me through this Thesis, providing wise advice and offering me their knowledge and networks. I would also like to extend my thanks to my friend Joan Prim Bernal, Board Member of the Spanish Crowdfunding Assotiation, for sharing his knowledge and experience on crowdfunding with me. Finally, I also want to express my gratitude to my family, for always being supportive through this journey. 3

4 Table of Contents 0. Abstract Introduction to crowdfunding and variants Definition How does it work? History First documented crowdfunding initiatives Post-Internet growth Variants of crowdfunding The JOBS Act Advantages and disadvantages of crowdfunding Analysis of the growth of crowdfunding Growth of the level of funds raised by region Growth of the level of funds raised by variant Research question: What makes a crowdfunding project achieve success? Research question 1: What are the success rates across geographical location? Research question 2: What are the success rates across the nature of the project? Research question 3: What are the success rates across the number of rewards? Research question 4: What are the success rates across the minimum amounts needed to finance the project? Research question 5: What are the success rates platforms? Results What are the success rates across geographical location? What are the success rates across nature of the project? What are the success rates across number of reward levels?

5 4.4 What are the success rates across minimum amounts needed to finance the project? What are the success rates across platforms? Discussion Success rates across geographical location Success rates across nature of the project Success rates across number of reward levels Success rates across project goal Success rates across platforms Conclusions Limitations and suggestions for further research Bibliography Annexes

6 0. Abstract Entrepreneurs, artists and companies who aim to develop a project and bring it to the market often face difficulties when it comes to financing it. Launching costs tend to be rather high and, consequently, hard to afford by individuals and some companies in an internal way. As a response, some ways to overcome the lack of available owned capital have been developed. Entrepreneurs, artists and companies have looked at banks, sponsorships, public subsidies, venture capital or business angels as a way to raise money to launch their projects. These sources tend to come from either one or few institutions. This fact boosts their bargaining power when negotiating aspects of the deal. Crowdfunding aims to open the range of investors or donors for cultural, entrepreneurial or scientific projects to virtually anyone. The aim of this research is to provide information about the phenomenon and the relevance it is acquiring in the last few years, and test which are the factors with influence over a crowdfunding project s success or failure, both with a quantitative and qualitative approach to the object of study. 6

7 1. Introduction to crowdfunding and variants. 1.1 Definition According to the European Crowdfunding Association, crowdfunding allows organizations and individuals to raise money through many small commitments rather than a few larger ones (European Crowdfunding Association). In the dictionary, the definition is written as follows the practice of funding a project or venture by raising many small amounts of money from a large number of people. (Forbes) Whatever the small differences between definitions may be, it can be agreed that crowdfunding is a system which pivots around the idea of expanding the base of funders of a project, instead of narrowing it to a small quantity. 1.2 How does it work? One of the success factors of crowdfunding lies in its simplicity. Online platforms and secure online paying methods make it easy for anyone to fund a project which they may find appealing. The owner of the idea, project or company simply explains the project in the online platforms which he/she chooses; in whatever format they prefer (text, audio, video ). Besides the description of the project, the amount of money which they need to pledge to successfully is posted, together with the time limit (i.e $ in 40 7

8 days). From this point on, anyone can pledge money on it through the website. If the goal is reached in due time, the money is allocated in the project, whereas if the goal is not reached, platforms differ in the action plans. Some of them give it back to the contributors directly, while others allow the creators to keep it with a higher fee. Typically, online platforms will charge a commission on every project as a source of revenues, which tends to move around 5%. 1.3 History First documented crowdfunding initiatives Crowdfunding has exploded in the past decade thanks to the raise of the Internet (see section 2 for more details), as the network enables to reach an unlimited number of donors who can easily select those projects they want to fund everywhere, at any time. It could seem that crowdfunding exists thanks to the Internet, but it is undeniable that, much before the Internet existed, people already crowdfunded projects. One of the first documented proofs of crowdfunding dates back from John Taylor, when publishing his book The Penniless Pilgrimage (John Taylor, 1618) persuaded 1650 subscribers to pledge money on the project in advance in order to collect money to publish it, in exchange for a copy of the book, once it was printed. Despite the absence of the Internet and the fact that he had to chase some of his subscribers to pay their debts, this was the first micro patronage venture. 8

9 This system rapidly expanded and other books, magazines and newspapers used the micro patronage model to overcome financing difficulties. Another documented crowdfunding initiative helped placing the Statue of Liberty in New York (BBC). As known, the statue was a diplomatic gift from the French government. Nevertheless, a pedestal was needed in order to hold it. The cost of such infrastructure could not be afforded by the US Federal Government, neither the New York Council, so a group aimed at raising money for this venture was set up, with the name of American Committee of the Statue of Liberty. Joseph Pulitzer launched a micro funding campaign using as a channel the newspaper The New York World, through which $ were raised. The citizens of New York massively responded to the call, many of them not lending more than a dollar, and the objective was achieved. In this case, the channel through which the campaign collected funds was the newspaper itself Post-Internet growth Although crowdfunding existed much before the Internet, it is undeniable that it has been the primary reason which explains its current rapid growth. However, even before the main crowdfunding platforms were set up, there was a first approach done by the British progressive-rock band Marillion. In 1997, they announced that they would not tour the United States because they lacked financial support. Their North- American fans, disappointed as they were not to be able to see they play live, jointly decided to raise funds via the Internet to finance it. The campaign was successful 9

10 and USD were raised, allowing the band to perform a tour through the US, an initiative which was widely repeated after this first initial success (Peter Spellman). Shortly after Marillion successfully implemented these campaigns, ArtistShare was launched as the first platform which connected artists seeking funds for their projects, and fans willing to invest on them. Social ventures also saw enormous opportunities in digital crowdfunding. JustGiving was launched in 2001 as the first online platforms which enabled social organizations and charities to ask for donations to the general public. In October 2005, Kiva emerged as the first micro-lending online platform, where entrepreneurs in developing countries could contact with small investors from around the world, who may be able to fund their projects. By being user friendly and allowing investors to know how they donations were being used, Kiva grew rapidly and consolidated a premium position in the emerging digital micro lending industry. The crowdfunding industry was, thus, consolidating and taking advantage of the Internet consolidation and expansion. It was not until the beginning of the crisis, in 2008, when the creation of online platforms exploded, giving birth, among others, to Indiegogo (2008) and Kickstarter (2009). Both platforms lead the development of the industry, mainly in the US; although nowadays they are expanding their scope (see section 2 for a current detailed analysis on the crowdfunding industry). 10

11 1.4 Variants of crowdfunding Although every crowdfunding project shares some common principles, there are different types of crowdfunding, depending on which type of relationship is established between the funder and the receiver. Donation based crowdfunding takes place when the funder takes no compensation in return for what he funded. Reward-based crowdfunding takes place when the responsible of the project establishes a scale of rewards according to the level of contribution of the funders, so that the higher the amount of money they lend, the better reward they obtain. Reward-based crowdfunding is the most widely spread form of crowdfunding, and the one used by the main platforms worldwide. It will also be the focus of the present research. Lending-based crowdfunding implies the crowd lending money to the individual or company who manages the project, expecting a repay of the loan with an interest. Equity-based crowdfunding is typically used by small entrepreneurs who offer shares in return for the crowd s investment in their businesses, so that they become shareholders and, consequently, will participate in the future gains (or losses) of the project. Equity-based crowdfunding is the most recent one, and its growing rate is higher than in the other variants. In 2012, the JOBS (Jumpstart our Businesses Startups) Act was signed by president Obama, allowing companies to publically seek investors, even if non-accredited. The Act is still under regulation by the SEC and some details still on hold, but there is a clear willingness to make things easier for 11

12 startups in this sense, even more when bank credits are not flowing as they used to do The JOBS Act The JOBS Act aims to ease the access to capital for small business (startups). The catalyst for this initiative was the perception that the access to initial capital was the main motive behind the difficulties which small businesses faced in an early stage. Consequently, easing the access to capital markets was seen as a priority in order to boost new business initiatives, which in turn would result in a higher job creation. (John K. Paglia, 2012) Crowdfunding in his equity variant is highly impacted by this Act. Through the JOBS Act, equity crowdfunding is regarded as a feasible solution to overcome the limited access to capital which startups have to face in an early stage. Traditionally, small businesses relied basically on a limited network of business angels and venture capitals to gain access to funding. Another traditional option was to go public through an Initial Public Offering (IPO). However, the financial requirements to fill in were many times too demanding for an initial stage. This new approach will allow them to enlarge the scope of the potential investors. As an example, a company which may need $ to start operations could target 100 investors which were willing to invest $ each, instead of going through a smaller network of venture capitalists which would need to be willing to invest $ each. 12

13 This is a great advance in the way companies grow. However, there are also pitfalls to opening the range of potential investors for new companies. According to Jeffrey Stibel, CEO of Dun and Bradstreet Credibility Corp, the shortening of regulatory structures may cause uninformed individuals willing to be investors to agree on certain deals which may be prejudicial for them or. With the lack of regulation, some argue that, most likely, this will leave room open for incurring in fraud. 1.5 Advantages and disadvantages of crowdfunding The rapid growth of crowdfunding is due to many factors, but probably the most important and influential one is the fact that, through Internet, crowdfunding gives entrepreneurs the ability to reach immense masses of people and not rely only on their personal and professional networks. These small investors may help with the word of mouth process. If they are interested in the project, they may tell their friends and relatives, creating a snowball effect. Additionally, and linked to this fact, the amount of money which they need from these individuals is less, as they are more in quantity. Consequently, their power is lower than if the projects were funded by one single investor, in which case the bargaining power would be immense. Besides being a powerful financing tool, crowdfunding is also an easy way to advertise a project without any added cost. Publishing a project in a crowdfunding site does not have any cost, so in any case (may the project be successful or not), it is an easy way to raise awareness at a reduced cost. 13

14 On the other hand, there are also downsides on this way of financing projects. Firstly, in order to get financial support from funders or investors and build trust, the entrepreneur must fully explain the project and its specifications. By doing that, they are giving away confidential information which could be used by others to imitate the idea. On the Internet there is no confidentiality agreement which has to be signed, so anyone can access the contents of the projects. Another important issue deals with the long-term viability of crowdfunding as a primary source of business. Whereas it is an appropriate source of financing for punctual projects, it may be too risky to rely only on crowdfunding for long-term ventures. Finally, accessing a crowd in demand for financing can also turn around in difficulties, as investors involved crowdfunding could be less experienced than the traditional investors, and thus they may not be able to be critic and provide the feedback that the project would need. 14

15 2. Analysis of the growth of crowdfunding It is a common opinion that Kickstarter s impact in the crowdfunding industry has been vital. As seen before, crowdfunding already existed, but Kickstarer gave it momentum, as well as Indiegogo (2008), which are the most successful online platforms today. The advent of the economic crisis in 2008 in the US, which quickly spread around the developed economies causing credit crunch, also fostered the growth of crowdfunding. The access to a wider, less concentrated and easy to reach funders have given it an advantage and allowed it to grow. 2.1 Growth of the level of funds raised by region According to the 2013 Crowdfunding Industry Report (Massolution), crowdfunding platforms worldwide were able to raise 2.7bn $ in The same report indicated a total of 1.5bn $ in 2011, a year which represented a 64% increase from All in all, it was an 80% of global growth in 2012 for an industry which did not exist as such before North America and Europe continued to be the regions where most crowdfunding activity takes place. This is the disaggregation of the volume of funds raised by the industry in 2012: US and Canada raised 1.6bn $, with an yearly growth of 105% 15

16 In Europe, the total volume of funds raised was 945m $, with a growth rate of 65% Other developing economies grew close to 125% FIGURE 1: Yearly growth by region 140% Yearly growth by region 120% 100% 80% 60% 40% 20% 0% North America Europe Developing economies *source: Massolution It seems clear, in aggregate absolute volumes, that the US remains the largest crowdfunding market, although Europe is also growing at high levels. Other regions, especially Asia with the advent of crowdfunding platforms in China and India, among others, are starting to grow. Brazil and South Africa are also pushing. Nevertheless, it is difficult to consider them a single group because of differences in growth rates and local regulations. 16

17 All in all, the US and Europe are clearly the main actors in the current crowdfunding industry. As of April 2012 (Massolution) this was the number of crowdfunding platforms per country: TABLE 1: Number of Crowdfunding Platforms per country, April 2012 Country Number of Platforms United States 191 United Kindgdom 44 Netherlands 29 France 28 Brazil 21 Germany 20 Spain 18 Canada 17 Australia 12 Italy 6 Portugal 6 Belgium 6 New Zealand 6 India 6 Switzerland 5 China 4 Poland 4 Japan 3 South Africa 3 Sweden 3 Ireland 3 Denmark 3 Finland 3 Russia 2 Argentina 2 Mexico 2 Czech Republic 2 Austria 1 Estonia 1 Latvia 1 17

18 Norway 1 Romania 1 Hungary 1 Phillipines 1 Hong Kong 1 Haiti 1 Israel 1 Chile 1 Zambia 1 *source: Massolution TABLE 2: Number of Crowdfunding Platforms per region, April 2012 Region Number of Platforms % of total North America % Europe % Oceania 18 4% Latin America 27 6% Asia 18 4% Africa 4 1% *source: ow n figure, data from Massolution Finally, according to the same source, in 2011, campaigns were successfully ended and were able to raise the necessary funds. This was the relative distribution of the origins of the campaigns: originated in Europe originated in North America originated in other regions of the world In sum, the number of current digital crowdfunding platforms is another indicator of the inequality in the distribution of the investments in the industry, were the United States and Europe practically monopolize the data. 18

19 Many factors can lead to this situation. One of them is that crowdfunding was actually originated in the United States and was transferred because of cultural affinity to Europe. Both regions have been and still are hardly hit by the financial crisis, which leads entrepreneurs and artists to seek other ways of funding their ventures. Furthermore, in the developing countries literacy levels are lower than in the United States and Europe. Intrinsically, crowdfunding demands both people who are able to judge and understand projects, whichever they may be (projects related to art, a new gadget, a new company ) and invest in it and people who have the initiative to create those projects and ask for funds to finance them. These people can be more easily found in the United States and Europe, where the literacy levels are almost 100%. Additionally, the limited access to the Internet in many of the developing countries is also another important factor to be taken into account when an analyzing the data. As stated before, crowdfunding as it is understood today needs the Internet to be operative. Without a proper access to the Internet, it is not possible to establish a connection between the entrepreneur and the potential funders. This is also a reason to be taken into account. 2.2 Growth of the level of funds raised by variant Besides the absolute numbers of funds raised worldwide and its evolution, the report also provides information in the growth of funded projects by variants of crowdfunding. This was the evolution in 2012: 19

20 Donations-based and reward-based crowdfunding grew up to 1.4 bn $, which represents 84% more than the previous year. Lending-based crowdfunding grew to 1.2 bn $, a level which represents 111% more than the previous year. Equity-based crowdfunding grew up to 116 m $, 30% more than the previous year. Meanwhile, and according to the same study, reward-based crowdfunding is the most extended one, in terms of number of platforms. However, equity-based experienced the highest growth, also in terms of available online platforms. Out of a sample of 143 crowdfunding platforms analyzed, this was the distribution and the annual growth rates: 62 reward-based platforms, with a 79% of annual growth 40 donation-based platforms, with a 41% of annual growth 20 lending-based platforms, with a 50% of annual growth 21 equity-based platforms, with a 114% of annual growth 20

21 FIGURE 2: Yearly growth by variants 120% Yearly growth by variants 100% 80% 60% 40% 20% 0% Donation-based and rewardbased Lending-based Equity-based *source: Massolution In order to contextualize the data related to the equity-based crowdfunding, it is important to acknowledge the fact that the JOBS Act in the US, which enables entrepreneurs to seek investment from unaccredited investors for their startups, is still developing in the US, as the Securities Exchange Commission is revising some of its titles. Equity-based crowdfunding is generally expected to reach an important growth in the next few years as a way to finance new small businesses, although there are some disagreements on this last assumption (Forbes). Another interesting finding in the report relates to the average value of the funds raised per project. In this sense, equity-based projects are the ones with a largest amount of funds, with 21% of the analyzed projects raising more than $. 21

22 On the other side, donation-based and reward-based projects raise, on average, the lowest amount of funds per project, with 63% of the analyzed projects raising less than 5.000$. This finding can be explained by the fact that equity-based projects relate to start-ups or small businesses, which typically need much more funding (starting capital) because those funds will be used to set up companies, whereas those funds collected in reward-based or donation-based platforms are typically used to finance isolated ventures, which do not need as much level of funding, such as art projects or social causes. The study also analyzes the launch to completion time across projects in the four different variants, being launch to completion time the time it takes for a project to reach the minimum amount of funds needed since its launch, measured in weeks. In this sense, lending-based projects take, on average, less time compared to all other project types. These were the results in this particular point: Lending-based projects took 4.8 weeks on average to reach the funding goal Equity-based projects took 8.2 weeks on average to reach the funding goal Reward-based projects took 10 weeks on average to reach the funding goal Donation-based projects took 10.2 weeks on average to reach the funding goal With an average of 9.1 weeks of launch to completion time across all analyzed projects, lending based projects are proven to be the ones to need less time to be funded, according to this report. 22

23 Finally, the study contradicts the general belief that the first 25% milestone takes longer to reach than the last one. This call effect stated that projects accelerated after a certain point, because funders tended to prefer to invest in projects which had already been backed by a number of other funders, thus being closer to the final funding goal. According to the provided data, the aggregate across all variants of projects states that the first 25% milestone takes 2 weeks to be achieved, whereas the last 25% milestone needs 3.3 weeks. Within the disaggregation, only donation-based projects reach the last 25% milestone before the first 25% milestone. 3. Research question: What makes a crowdfunding project achieve success? According to the industry numbers, around 40% of the crowdfunding projects worldwide are successful, whereas the remaining 60% are not able to raise the necessary funds. The number of factors which may have an impact over a crowdfunding project s success or failure is enormous. As cited before, the industry is evolving and expanding; consequently, the number of factors which may influence any project is growing. Taking into account that it would be impossible to determine success probabilities in a precise way, the object of this study is to set success rates across a list of pre-defined factors. 23

24 The crowdfunding industry is globalizing. Therefore, this study would lack scope if it only focused on a single platform rather than in a group. The final purpose is to generalize the results, for this reason, live projects were randomly picked from a sample of 15 online platforms and divided into groups according to the purpose of each research question. All projects were running when the sample was set, in order to ensure trustworthiness of the data. Each project was classified according to the goal of the research question, and the following information was listed for each of them: The name of the project The online platform where it was uploaded The specified ending date The amount of money needed for the campaign to succeed The amount of money pledged at the end of the crowdfunding campaign Whether it succeeded or failed in reaching the necessary amount of money after the ending date was reached This way, success rates across different factors were set according to each research question. This study was conducted between June and October 2013, being the starting date of the first project 12/06/2013 and the ending date of the last one 09/10/2013. The dates range was extended as much as possible in order to minimize the effect of 24

25 seasonality, mostly when summer months were in between projects were analysed in total, adding the five research questions. Nevertheless, some of these projects were analysed in more than a research question, taking into account the relevant information for each of them. After each campaign reached an end, the amount raised by each project was listed, compared to the amount needed, and finally divided into failures and successes. Consequently, at the end of the funding campaign each project could fall only into one category: If A needed > A raised, the project is considered a failure If A needed A raised, the project is considered a success Some projects were cancelled by their promoters before their fundraising campaign reached the end. In this case, for the purpose of the study, they were considered a failure. This study focuses on the reward-based category, the largest one in the industry (see section 2). For the specific object of this research, homogenizing data in this sense avoids confusion, as each category has a different dynamics. The reward-based category is the most extended one, information about it is easily available and thus, the sample is much more consistent. As stated before, to ensure the global scope of the analysis, 15 platforms took part in the study. Each of them has a different positioning in the industry. As traffic across them was unequally distributed, the most visited ones contributed with more projects to the study. The distribution of projects in each research question will be explained 25

26 in sections 3.1 to 3.5.Some platforms were only used to complement a specific research question because they had a better fit with its specific research objective. The study was conducted by analysing the available data of the projects in following platforms: Kickstarter The US-based Kickstarter is the world s largest crowdfunding platform. Launched in 2009, it has raised $764 million by more than 4.7 million people, giving birth to more than creative projects ( It focuses on creative projects related to various artistic disciplines, although it also includes a technology section. Their revenue incomes come from a 5% commission on every successfully funded project, whereas if a project does not reach its funding goal, the money is refunded to the backers and Kickstarter does not charge any fee. Projects are screened by Kickstarter before the launch to check whether they fit into their categories. For instance, social causes cannot raise funds on Kickstarter. Kickstarter enjoys a dominant position in the industry and a large volume of project traffic. In fact, probably crowdfunding owes a big part of its growth to the success of this online platform. In May 2012, Kickstarter hosted the most successful crowdfunding campaign until that date: the Pebble smartwatch, a customizable watch which synchronizes with Apple and Android devices. In 30 days, people contributed with $ , an average of $ per day. Kickstarter was also the platform where the videogame Star Citizen started their crowdfunding efforts, raising slightly more than 2 million $.Nevertheless, shortly after their campaign in 26

27 Kickstarter, the project relied on crowdfunding through its own website and raised more than 20 million $, becoming the world s most successful crowdfunding campaign of all time. Indiegogo Indiegogo is the other big player in the crowdfunding industry. Also US-based, it was launched in This platform does not have any limitation on project categories. Artistic projects, social causes and technology gadgets created by anyone seek financing without any previous filter. The other difference with Kickstarter lies in the the pricing. Creators can choose between Flexible Funding and Fixed Funding. In any case, if the project is successful, Indiegogo charges a 4% commission. In the event of an unsuccessful project, a creator who chose the Flexible Funding option will keep the money raised, while Indiegogo will charge a 9% commission. If a project is unsuccessful but the creator chose the Fixed Funding Option, the money will be returned to the contributors and no commission will be charged. Rockethub The third US-based platform in the study works in a similar way as Indiegogo. With no previous limitation on the projects (which can be uploaded by anyone in the world), it does not use the all-or-nothing method. Creators keep the funds they raised 27

28 at the end of the campaign, regardless of achieving the funding goal or not. May the campaign be successful, Rockethub charges a 4% commission, while if it turns out to be unsuccessful, the commission raises to 8%. Additionally, Rockethub has recently partnered with the TV channel A&E, in order to help their projects raise awareness. As a result A&E will provide Media coverage to entrepreneurs raising money in Rockethub. WeFund For the purpose of this study, every relevant European crowdfunding market is represented by its most important crowdfunding platform. The UK s largest platform is WeFund. Launched in 2011, its focus is also on creative projects, although the filtering process is not especially hard. With an approach similar to Kickstarter, WeFund only charges 5% a commission if the project is successful. If it does not reach the funding goal, the money goes back to the contributors of the project. One of WeFund s key features is the need of a video where the creators explain what they need the money for. The value of the pledges ranges from 1 to Verkami The Spanish-based Verkami also uses an all-of nothing funding model, in which the company only charges a 5% commission in case of success of the campaign. Verkami also establishes a previous filter and is focused mainly on creative projects. The website also fixes the timing allotted for each campaign: 40 days. 28

29 This webpage is considered to be the pioneer of the digital crowdfunding movement in Spain. Additionally, between February and March 2013, it hosted the most successful campaign in Europe. The documentary l Endemà, focused on the potential independence of Catalonia and its consequences, was able to raise euros, placing itself in the fifth place in the worldwide ranking of the most successful crowdfunding platforms. Ulule Ulule was chosen to represent France for the object of this study. Although this platforms in French-based, it has hosted projects from 67 countries. Ulule also uses an all-or-nothing approach, in which only successful projects enable the creators to keep them money they raise. In the event of success, Ulule charges a 5% commission on the collected amount of money. Startnext Startnext is the largest crowdfunding platform in the German-speaking area. It aims at providing artists, creators and entrepreneurs a tool to raise both awareness and financial resources. Also based in an all-or-nothing funding model, with a commission only on the successful projects, Startnext offers a different approach when it comes to the timings of the campaigns. In this case, every project must go into a two-phase model. 29

30 The objective of the first phase is to raise awareness of the project by gaining new fans, as well as receiving feedback from them on the project. After 40 days, once this part has been completed, the second one consists of the typical fundraising campaign, which also lasts 40 days. The difference, in this case, lies in the fact that the campaign has already been promoted at that time. Voordekunst Voordekunst is one of the most important crowdfunding platforms in the Netherlands. It is entirely focused on artistic projects, where creators are able to access a network of potential donors to finance their work. Voordekunst is also based in an all-or-nothing model with a 5% commission, with some slight changes. If the project does not reach above 80% of its financing goal, money is given back to the contributors. On the other hand, if a project is able to raise between 80% and 100%, creators are given a chance to rearrange their plans and establish a new cost structure to be able to finance their project. At this point, contributors of these projects receive the information of the modified plan for the project and they are able to decide whether they keep the investment or get the money back. Catarse Latin America is still developing its crowdfunding platforms and their volumes are significantly lower than the ones in Europe and the United States (see section 2). 30

31 However, in order to ensure the global scope of this analysis, it is convenient to include one of the most important crowdfunding platforms in this region, the Brazilian Catarse. Campaigns can use from 1 to 60 days to raise their financing goal, under the all-ofnothing model. If a project is successful, Catarse charges 13% of the amount pledged. The reason for this number is the inclusion of the Paypal or credit card payment commission, which the platforms itself manages. Wishberry Wishberry was picked for the object of this study to represent an emerging economy like the Indian one. It allows the publication of artistic projects and social ventures. In this case, the cost structure for the creators is slightly different because Wishberry charges INR right after the approval of the project, what could be considered as a consulting fee. Also, 500 INR a month are deducted as monthly operations. Finally, successful projects are charged with a 10% commission. Unsuccessful projects are able to keep the money raised, as long as they reach at least 50% of the funding goal. Nevertheless, in this case the commission rises until 20%. 31

32 Startme Startme was founded in South Africa as a platform where entrepreneurs could find means to finance their projects: artistic, new companies The South African platform uses the same approach as Indiegogo, in which creators can choose between a Fixed or Flexible funding model, in which projects set under the Flexible model can keep the money they raise at a higher commission rate. Goteo Goteo was born in Spain with the ultimate goal of promoting initiatives which help achieve common welfare. However, they aim to differentiate themselves by focusing on open source projects, in which every initiative which helps build a community around is welcomed. Projects run into two phases. The first one is focused on attaining the minimum goal, which is set by the creator, and works on an all-or-nothing model. Only if the first round (40 days) ends up with success, a second one starts focused on achieving the optimum goal. Goteo s commission is 8% throughout the process. Crowdfunder Crowdfunder aims at developing entrepreneurial systems in the US and Mexico. Although its general progression is towards equity-based crowdfunding, right now this model fits companies who have products or services that supporters are willing to pre-purchase, contribute to, or support for personal reasons. 32

33 Startsomegood Startsomegood is a US-based crowdfunding campaign focused solely on social campaigns. Like other platforms, it also establishes two different goals, named as tipping point and ultimate goal, being the minimum and the optimum amount to set their social ventures. Startsomegood finances itself with a 5% commission on the successful campaigns. Fundageek Fundageek is a digital platform which objective is to enable entrepreneurs to finance projects related to research, science and technology. It is a rewards-based platform, although they are considering moving further and including equity crowdfunding once the SEC finishes the implementation of the JOBS Act. Fundageek charges 5% commission, or 9% within the Premium option, in which they give advice to creators on how to improve their chances of success 33

34 3.1 Research question 1: What are the success rates across geographical location? According to section 2, it seems clear that the United States and Europe are both far away from the other world regions in terms of crowdfunding volumes. In this research question, the aim of the study is to determine, with a sample of 300 projects, if success rates in the United States are higher or lower than in Europe. For this purpose, 150 projects from each region were randomly analyzed and followed while they were active. When they reached the ending date, they were classified as success or failure. In order not to focus on single platforms for each region, the United States is represented in this sample by: 50 projects hosted by Kickstarter 50 projects hosted by Indiegogo 50 projects hosted by Rockethub. Europe is considered, for the purpose of this research question, as a single market for crowdfunding. However, penetration across the different countries differs. In this analysis, the five countries with a higher number of crowdfunding platforms were selected to represent Europe, namely United Kingdom, the Netherlands, France, Germany and Spain. Each of them is represented by the most important 34

35 crowdfunding platform. Consequently, the sample for projects in Europe is as follows: 30 projects hosted by the UK-based WeFund 30 projects hosted by the Spain-based Verkami 30 projects hosted by the France-based Ulule 30 projects hosted by the Germany-based Startnext 30 projects hosted by the Netherlands-based Voordekunst 3.2 Research question 2: What are the success rates across the nature of the project? The crowdfunding industry is very broad; in fact, virtually every project could take advantage of crowdfunding to get access to financial resources in any of his variants: donation-based crowdfunding, rewards-based crowdfunding, lending-based crowdfunding and equity-based crowdfunding (see section 2). However, after a quick review of most of the crowdfunding digital platforms, it is noticed that most of them can fall into one of the following categories: art, social cause, technology / science or new company. The objective of this second research question is to determine which the success rates are across projects which fall into these categories. 35

36 Of course, art could be divided into projects such as films, books, paintings, theatre pieces or CDs. However, for the purpose of this study, it has been considered as a single group, mainly because of one reason. That is, it is very difficult to divide the other categories and consequently, equalize them downwards. The study would lack rigor if social causes and technology success rates were compared to those of films, CD s, paintings, books or theatre pieces, instead of being compared to a single category called art. Additionally, new companies category has not been included as the fourth category to be analyzed. The reason is double: first of all, all projects analyzed in this study fall into the reward-based crowdfunding category. New companies, on the other hand, fall into the equity-based crowdfunding. This distortion would cause a lack of homogeneity in the research question. Also, access to information on equity-based crowdfunding is typically restricted. The invested amounts are higher, and so is the risk. As a consequence, most digital platforms require previous identification as an investor in order to be able to access the campaigns. The difficulty in accessing this type of information made it impossible to collect enough data to complete the sample of new companies and be able to compare it to the other categories. In order to preserve the global scope and homogeneity of the analysis, projects were randomly picked from a variety of the digital platforms named before. In the case of social cause and technology, the study includes information of digital platforms specific to each category: Startsomegood and Fundageek. The reason is that, while art projects are present into every website, social cause and technology are 36

37 banned or absent from some of them. However, only a slight part of the sample was taken from these platforms, in order to hold homogeneity. 300 projects constituted the total sample (100 in each category), which were determined as success or failure when they reached the ending date. First 100 projects fall into the art category: 10 projects hosted by Kickstarter 10 projects hosted by Indiegogo 10 projects hosted by Rockethub 10 projects hosted by WeFund 10 projects hosted by Verkami 10 projects hosted by Ulule 10 projects hosted by Startnext 10 projects hosted by Voordekunst 10 projects hosted by Catarse 6 projects hosted by Wishberry 4 projects hosted by Startme Some of these digital platforms are not focused on social causes ; others simply do not allow them on their website. This is the case, for instance, of Kickstarter. This explains why some other websites, as Goteo and Startsomegood, contributed to the social cause projects selection: 10 projects hosted by Indiegogo 10 projects hosted by Rockethub 37

38 6 projects hosted by WeFund 10 projects hosted by Verkami 10 projects hosted by Ulule 6 projects hosted by Catarse 5 projects hosted by Wishberry 5 projects hosted by Startme 10 projects hosted by Crowdfunder 10 projects hosted by Goteo 18 projects hosted by Startsomegood Finally, technology projects were also typically hard to find, mostly in the European websites, where art and social causes are much more present. This was the distribution of the projects in this category: 22 projects hosted by Kickstarter 20 projects hosted by Indiegogo 20 projects hosted by Rockethub 6 projects hosted by Ulule 10 projects hosted by Startnext 12 projects hosted by Goteo 10 projects hosted by Fundageek 38

39 3.3 Research question 3: What are the success rates across the number of rewards? Reward-based crowdfunding takes place when the responsible of the project establishes a scale of rewards according to the level of contribution of the funders, so that the higher the amount of money they lend, the better reward they obtain (section 1.4). As a study focused on the reward-based category, the aim of this research question is to determine whether there is a significantly different success rate across projects offering different levels of rewards to their contributors or not. For the purpose of this study, three different categories were made: projects below six levels of rewards were considered low, projects between six and nine levels of rewards were considered medium and projects above nine levels of rewards were considered high. An overview of the most important websites shows that this is an accurate classification, although in some platforms it is almost impossible to find projects in all categories. This was the example, for instance, of WeFund, where projects typically do not have more than five reward levels. As there was an option to replace WeFund by other platforms with presence in the three categories, this particular one was excluded from this research question, with the ultimate purpose to ensure homogeneity. 39

40 The sample for this research question also consists of 300 projects randomly picked, and classified as success or failure at the end of their funding period. In this case, every category is comprised by 100 projects. All of them were picked according to the same distribution: 20 projects hosted by Kickstarter 20 projects hosted by Indiegogo 20 projects hosted by Rockethub 10 projects hosted by Startsomegood 10 projects hosted by Verkami 10 projects hosted by Ulule 10 projects hosted by Goteo 3.4 Research question 4: What are the success rates across the minimum amounts needed to finance the project? Another interesting categorization of the project deals with their volumes. That is, to analyze whether projects with a lower minimum goal have a different success rate than those with a higher minimum goal. There is an important previous consideration to do which relates to this question. Projects average value in North-American crowdfunding websites is significantly higher than projects located in European platforms. Such different levels made it a non-sense to merge projects from both regions into the same categories, as 40

41 dispersion would be too high. Consequently, for the purpose of this study, only projects in United-States platforms were considered, as their variation is higher and allows more range to be included in the analysis. Following the methodology of the previous research questions, 300 projects were randomly picked to configure three categories with 100 projects each. The first one encloses projects with a funding goal below $ and is named low. Projects ranging from a funding goal of $ until $ are grouped into the medium category. Finally, those projects with a funding goal above $ are considered high. All projects were classified as success or failure after they reached their ending date. Again, in order to ensure homogeneity of the results of this particular research questions, the distribution of those project picked for each category is the same: 35 projects hosted by Kickstarter 35 projects hosted by Indiegogo 30 projects hosted by Rockethub 3.5 Research question 5: What are the success rates platforms? Crowdfunding has not been invented in the past decade. In fact, micro financing has existed for much time and there are several proofs of projects which were funded using this method (section 1.3). However, the creation and proliferation of the Internet in the first place, and the digital crowdfunding platforms in the second place 41

42 have been responsible for the tremendous growth of this still flourishing industry (section 2). This study ends up with a research question which aims to analyze the success rates of the platforms which were picked, with no other filter. Unfortunately, not all the analyzed platforms have a significant volume of live projects which allow them to be part into this research question. In order to ensure a minimum validity of this particular analysis, 50 projects were randomly picked from each platform and classified between success and failure. Consequently, the 10 categories for this research question were: Kickstarter, Indiegogo, Rockethub, WeFund, Verkami, Ulule, Startnext, Voordekunst, Catarse and Startsomegood. All together, the last research question has a sample of 500 projects. Wishberry, Startme, Goteo and Fundageek were excluded from the last research question because they did not have a significant volume of live projects at the time when this study was conducted. 42

43 4. Results 4.1 What are the success rates across geographical location? After the analysis of the 150 projects in the United States and 150 in Europe (see annexes 1A and 1B), these are the results of the first research question: FIGURE 3: Success rate for projects in the United States Success Rate for projects in the United States 38% (57 projects) 62% (93 projects) Failure Success *source: personal compilation FIGURE 4: Success rate for projects in Europe Success Rate for projects in Europe 38% 57 projects 62% 93 projects Failure Success *source: compilation personal 43

44 According to the analyzed data, projects in Europe have a higher success rate (62%) than those in the United States (38%). However, in order to contextualize this finding and in order to better structure the explanation, some additional data has been studied. For instance, when analyzing the minimum goal and the money pledged on the projects, it is clear than those published in the United States are significantly higher than those in Europe. This is the comparison between the two means and the money pledged: TABLE 3: Additional information on US and Europe categories United States Europe Average per project $ $ * Average per project without anomalies ** Sum of money pledged in successful projects $ $ * $ $* Source: personal compilation * The projects in Europe w ere published in euros (Verkami, Ulule, Startnext and Voordekunst) and pounds (WeFund). How ever, for the purpose of this comparison, they w ere converted to dollars, using the exchange rate at 19/08/2013: 1 = 1, 5651$ and 1 = 1, 3333$ ** In order to ensure data accuracy, anomalies w ere eliminated from the sample in order to calculate the means. In the US sample, a project w orth 2,5M $ and a project w orth 2M $ w ere eliminated. In the Europe sample, one project w orth , one project w orth and one project w orth w ere also eliminated. Finally, with the aim to provide a deeper understanding of the dynamics of this result, success rates across regions were disaggregated across platforms, in order to see which was the impact of each of them in the total result of this first research question (US = 38% / Europe = 62%). 44

45 FIGURE 5: Disaggregation of US success rate in platforms Success Rate for Kickstarter projects Success Rate for Indiegogo projects 48% 24 projects 52% 26 projects Failure Success 38% 19 projects 62% 31 projects Failure Success *source: personal compilation Success Rate for Rockethub projects 28% 14 projects 72% 36 projects Failure Success FIGURE 6: Disaggregation of Europe s success rate in platforms Success Rate for WeFund projects 33% 10 projects 67% 20 projects Failure Success Success Rate for Verkami projects 53% 16 projects 47% 14 projects Failure Success Success Rate for Ulule projects 83% 25 projects 17% 5 projects Failure Success Success Rate for Startnext projects 67% 20 projects 33% 10 projects Failure Success 45

46 Success Rate for Voordekunst projects 73% 22 projects 27% 8 projects Failure Success *source: personal compilation 4.2 What are the success rates across nature of the project? After the analysis of 100 cultural projects, 100 projects related to social cause and 100 technology projects (annexes 2A, 2B and 2C) these were the success rates collected for each category: FIGURE 7: Success rate for cultural projects Success Rate for cultural projects *source: personal compilation FIGURE 8: Success rate for social projects Success Rate for social projects 55% 55 projects 45% 45 projects Failure Success *source: personal compilation 46

47 FIGURE 9: Success rate for technology projects Success Rate for technology projects 36% 36 projects 64% 64 projects Failure Success *source: personal compilation All three figures show a similar success rate for those projects related to culture or a social cause (57% and 55% respectively), whereas projects which fall into the technology category attain a lower success rate, 36%. In order to contextualize this conclusion, information on the average money needed per project in each category may be helpful. TABLE 4: Average value per project per category in Research Question 2 Culture Social Technology Average per project (*) $ $ $ Average per project $ $ $ without anomalies (*) (**) Source: personal compilation * In order to ensure data accuracy, amounts needed for each project to succeed w ere translated into dollars from their local currency, according to the exchange rate at 19/08/2013. These w ere as follows: 1 = 1,5651 $; 1 = 1,3333 $; 1 BRL = 0,4157 $; 1INR = 0,0158 $; 1 ZAR = 0,0982 $. 47

48 ** In order to ensure data accuracy, anomalies w ere eliminated from the sample in order to calculate the means. In the culture sample, a project w orth 2,5M $ (extracted from Kickstarter) w as eliminated. In the technology sample, one project w orth 2M $ w as also eliminated (extracted from Rockethub) It must be acknowledged that in the present research question, the analyzed sample for each category was composed by a similar proportion of origin platforms, although each one included projects from a platform which specifically targets the analyzed category. These were Voordekunst for cultural projects, Startsomegood for social projects and Fundageek for technology ones. 4.3 What are the success rates across number of reward levels? The analysis of 100 projects with less than six reward levels, 100 projects between six and nine reward levels and 100 projects with more than nine reward levels (annexes 3A, 3B and 3C) led to the following results: FIGURE 10: Success rate for projects with <6 reward levels Success Rate for projects with <6 reward levels 47% 47 projects 53% 53 projects Failure Success *source: personal compilation 48

49 FIGURE 11: Success rate for projects with 6-9 reward levels Success Rate for projects with 6-9 reward levels 56% 56 projects 44% 44 projects Failure Success compilation *source: personal FIGURE 12: Success rate for projects with >9 reward levels Success Rate for projects with >9 reward levels 47% 47 projects 53% 53 projects Failure Success source: personal compilation Results show how projects with 6-9 reward levels display a higher success rate (56%) than those projects below 6 reward levels (47%) and those above 9 reward levels (also 47%). In order to be able to provide a feasible explanation for this difference, average funding goals for each category were calculated as follows: 49

50 TABLE 5: Average value per project per category in Research Question 3 <6 reward levels 6-9 reward levels >9 reward levels Average per project (*) Average per project without anomalies (*)(**) $ $ $ $ $ $ * In order to ensure data accuracy, projects from Verkami, Ulule and Goteo w ere translated from euros into dollars, according to the exchange rate at 19/08/2013 (1 = 1,3333 $). ** In order to ensure data accuracy, anomalies w ere eliminated from the sample in order to calculate the means. In the >9 rew ard levels sample, a project w orth 2M $ (extracted from Kickstarter) w as eliminated. It must be noticed that the sample of 300 projects analyzed in this research question was homogeneously distributed across the same platforms: Kickstarter, Indiegogo, Rockethub, Startsomegood, Verkami, Ulule and Goteo. 4.4 What are the success rates across minimum amounts needed to finance the project? After the analysis of 100 projects with a funding goal below dollars, 100 projects with a funding goal between and dollars, and 100 projects with a funding goal above dollars (see annexes 4A, 4B and 4C), these were the results of this research question: FIGURE 13: Success rate for projects with a funding goal below $ Success Rate for projects with a funding goal below $ 43% 43 projects 57% 57 projects Failure Success *source: personal compilation 50

51 FIGURE 14 : Success rate for projects with a funding goal between $ and $ Success Rate for projects with a funding goal between $ and $ 37% 37 projects 63% 63 projects Failure Success *source: personal compilation FIGURE 15: Success rate for projects with a funding goal above $ Success Rate for projects with a funding goal above $ 25% 25 projects 75% 75 projects Failure Success *source: personal compilation According to the analyzed data, projects with a low funding goal have a greater success rate (43%) than those with a medium funding goal (36%) and the ones with a high funding goal (25%). 51

52 Additionally, it is interesting to disaggregate results across the three analyzed platforms in this research question. It must be noted that, in order to embrace a larger range of project values, only US platforms took part in this analysis, as the amounts of their projects are much higher than the European ones. These were the disaggregated results, compared to the general ones: TABLE 6: Disaggregation of Research Question 4 success rates in platforms LOW MEDIUM HIGH AGGREGATE 43% 37% 25% KICKSTARTER 49% 40% 40% INDIEGOGO 57% 46% 26% ROCKETHUB 20% 23% 7% *source: personal compilation 4.5 What are the success rates across platforms? Finally, the aim of the last research question of this study is to compare success rates in different platforms, without any other factor to be taken into account. After the analysis of 50 projects in Kickstarter, Indiegogo, Rockethub, WeFund, Verkami, Ulule, Startnext, Voordekunst, Catarse and Startsomegood (annexes 5A- 5J), these were the success rates for each platform: 52

53 FIGURE 16: Success rate Kickstarter Success Rate for projects in Kickstarter FIGURE 17: Success rate Indiegogo Success Rate for projects in Indiegogo 46% 23 projects 54% 27 projects Failure Success 46% 23 projects 54% 27 projects Failure Success *source: personal compilation *source: personal compilation FIGURE 18: Success rate Rockethub FIGURE 19: Success rate WeFund Success Rate for projects in Rockethub 26% 13 projects 74% 37 projects Failure Success Success Rate for projects in WeFund 32% 16 projects 68% 34 projects Failure Success *source: personal compilation *source: personal compilation FIGURE 20: Success rate Verkami FIGURE 21: Success rate Ulule Success Rate for projects in Verkami Success Rate for projects in Ulule 66% 33 projects 34% 17 projects Failure Success 60% 30 projects 40% 20 projects Failure Success 53

54 FIGURE 22: Success rate Startnext Success Rate for projects in Startnext FIGURE 23: Success rate Voordekunst Success Rate for projects in Voordekunst 80% 40 projects 20% 10 projects Failure Success 72% 36 projects 28% 14 projects Failure Success source: personal compilation *source: personal compilation FIGURE 24: Success rate Catarse FIG. 25: Success rate Startsomegood Success Rate for projects in Catarse Success Rate for projects in Startsomegood 74% 37 projects 26% 13 projects Failure Success 58% 29 projects 42% 21 projects Failure Success 54