INTERNATIONAL SCIENTIFIC CONFERENCE INFORMATICS IN SCIENTIFIC KNOWLEDGE 2014

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1 Crowdfunding Business Models and Their Use in Software Product Development Todor BRANZOV, Nelly MANEVA Abstract: The paper presents some results of our research work on the crowdfunding financial scheme and its possible usage for software projects. In order to investigate the problem we have prepared role models of donations-based and rewards-based crowdfunding and process models of the three main financial schemes All-or-Nothing, Take-It-All and Stretched-Goals. A linear cost model for fundraisers is presented and its usefulness is commented. Further we have made an assumption that beyond mere financial source, crowdfunding can have significant influence over several key areas of software engineering. We have stressed on several areas and reviewed a possible joint application of crowdfunding and Participatory Design approach. The paper ends with some propositions for future and in-depth research. Key words: Computer Software, Crowdsourcing, Business Models, Donations-Based Crowdfunding, Rewards-Based Crowdfunding, Participatory Design. INTRODUCTION The global software market grew by 6.6% in 2011 to reach a value of $292.9 billion. In 2016, the global software market is forecast to have a value of $396.7 billion, an increase of 35.4% since 2011 [MarketLine, 2012]. Such numbers illustrate the constantly growing importance of software products and services in the global economy and in our everyday life. In the last 30 years the software companies and startups became very attractive for investors and venture capitalists and serves as a permanent experimenting ground for emerging new financial instruments and innovative business models. One such promising financial scheme is Crowdfunding. Generally speaking, it is a form of crowdsourcing focused on obtaining part or all of the necessary financial resources for a project through a massive online public fundraising campaign. Although the campaign is usually online, very often some other traditional offline techniques and tools are also used. In Wikipedia an ordered list of top crowdfunded projects can be found, showing that 10 of top 20 highest funded projects of all time (until the end of 2013) are software entertainment products [Wikipedia,2014]. According to the report on research of Massolution [Reuters, 2013], the crowdfunding campaigns performed only through specialised crowdfunding platforms, raised to 2.7 billion USD during the fiscal About 1.5 billion USD of those money are gathered without any promises for financial award or return of financial investment to the public investors. Four models of crowdfunding can be differentiated [Rothler, 2011] taking into account the relations between backers and fundraisers: Equity-based crowdfunding backers receive equities in the company; Lending crowdfunding backers receive interest over the sum they pledge; Donations-based crowdfunding backers donate without expecting any material or virtual rewards in return (however, sometimes fundraisers can decide to express their gratitude); Rewards-based crowdfunding backers receive predefined material or virtual goods based on the amount they donate.

2 The main goal of the paper is to present the intermediate results of our research efforts in modelling the reward-based and donations-based crowdfunding. We decided to exclude from our study the other two forms - equity crowdfunding and lending crowdfunding due to their venture investment character which makes the decision model for the backers and the cost model for the fundraisers very different. The proposed role model, process models and cost model will be further analysed so as to examine their feasibility and usefulness as a financial source for software development and to show how they could influence some activities, recognised as significant during the software life cycle. We try to make parallel with some recent advancements in software engineering so as to mark some features of crowdfunding model that reveal its impact beyond mere purpose of financing the project. As an example of mutually beneficial use of a crowdfunding scheme and a contemporary software development approach - developed by us version of the Participatory Design [Maneva, 2002], we consider their possible joint application. The investigated hypothesis is that the popularity of the crowdfunding scheme reflects the emancipation of the general public, increases the level of its technical culture and enriches it with some new responsibilities: acting not only as a client, but to participate directly in software development and decision making. A HISTORICAL OVERVIEW Since online payment processor gateways appeared in early 2000 s, many enterprises put Donate button on their sites. If the crowd likes the site or enterprise it can donate for its future development or to support its existence. An example for this is the Wikimedia Foundation, which is doing regular fundraising campaigns for keeping its main project Wikipedia, independent and free for all. If the enterprise is with a high profile and there is a perception for its high public value, then the response to such campaign or initiative can raise millions of USD the Wikimedia Foundation raised 35.2 million USD through 2 million donators in US during the fiscal 2012 and 32 million USD in the fiscal 2013 to that moment [Hernandez, 2014]. Although this is also a form of crowdfunding, the term is usually used more narrowly for describing online fundraising campaign for a project which is in its planning phase and before any result of this project actually exists. Two kinds of crowdfunding - donations and rewards-based crowdfunding, use a simple idea, successfully explored for ages: a project is announced in public and the author(s) of the idea or organising committee is pleading to the community to support the project. Their request is based on the assumption that the project has significant value for the public in general or for some large social group. A number of institutions like art galleries, churches, universities and schools are funded that way even nowadays. Crowdfunding uses such approach and applies Web technologies and Web marketing techniques in its implementation. Especially the donations and rewards-based crowdfunding are very popular in USA, Canada, UK, Australia and South East Asia in the last three years, but are still rare or even unknown in the rest of the world. Crowdfunding in general is a hot phenomenon with considerable media hype, generated by several projects with tremendous financial success. The most successful use of the crowdfunding financial scheme till now is the MMORPG software project, named Star Citizen, which announced about 40 million USD fundraised with rewards-based scheme in March Also in March 2014 the leading crowdfunding platform Kickstarter operates for 762 projects tagged as software and 4362 projects tagged as video games.

3 ROLE MODEL FOR DONATIONS AND REWARDS-BASED CROWDFUNDING Three main roles can be differentiated in donations and rewards-based crowdfunding fundraising campaign process Fundraiser, Backer, Mediators. The role of the Mediators is optional and includes all third parties that can have direct influence over the process most notably crowdfunding Web sites and online payment processors. The Mediator role in the model is designed to be complemented with other third parties if and when they appear in the future. We propose the following role model, describing roles and relations between them in donations and rewards-based crowdfunding (see the Fig.1). Provides campaign information Mediator Fundraising Platform Initiates campaign Provides campaign information Fundraiser Send information about campaign results Orders transfer to the Fundraiser or refund to the Backer Orders transfer to the Fundraiser or refund to the Backer Send information about pledged sums Backs the campaign goals Pledges Backer Refunds Send information and transfers pledged sums Mediator - Online Money Processor Backs the campaign goals Figure 1. The main responsibilities, which we have identified for the Fundraiser s role are: Initiates a project; Announces the project in a fundraising platform or/and its own site; States and sets fundraising scheme; Completes some activities needed to provide all necessary campaign information to the potential backers; Transfers back pledged sums to backers (depends on chosen crowdfunding process model). The main responsibilities, which we have identified for the Backer s role are: Gets information about the project; Pledges a sum; Gets satisfaction or some reward; Can be refunded if the stated goal is not achieved (depending on the chosen crowdfunding process model) The main responsibilities, which we determine for the Mediator s role, accomplished through online fundraising platforms and online payment processors: Serves as intermediate in all money transactions and information for pledged sums; Guarantees refund to the backers if stated goal is not reached (depends on

4 Fundraising Platform Money Processor Donator Fundraiser INTERNATIONAL SCIENTIFIC CONFERENCE the chosen crowdfunding process model) DONATION AND REWARDS-BASED CROWDFUNDING PROCESS MODELS Our study shows that three donations and rewards-based crowdfunding process schemes are dominant at the current moment, namely All-or-Nothing (AoN), Keep-It-All (KIA) scheme and Stretched Goals Scheme (SGS). Both AoN and KIA schemes include setting a fundraising goal (minimal amount that have to be raised), but in AoN scheme if that goal is not reached, all backers receive their pledges back. In KIA scheme if the goal is not reached the backers can receive back their pledges by discretion of the Fundraiser. In SGS scheme several stretched goals are stated and bonded with declaration of the Fundraiser to add some prespecified additional value to the product or the service. If and when the stretched goal is achieved, the Fundraiser takes all needed actions to add that value. We have used the swim line diagram with basic flowchart notation to propose a model of these three schemes within previously described role models of donations and rewards-based crowdfunding (see Fig.2). All or Nothing Crowdfunding Scheme Initiation Fundraising Period Closing Phase Project Description, fundraising goal and period End of Campaign Get informed about the project Back? I m done with that! Transfer pledged money to a fundraising platform account Transfer pledged sums to the Fundraiser s account Transfer pledged sums back to the Backers Start fundraising campaign in a platform Account (Escrew) Is stated goal reached in stated period? Figure 2. In the AoN process description we assume that the fundraising platform is used by default. In its role as a Mediator, the fundraising platform guarantees that the backers receive their pledges back if the stated fundraising goal is not reached. We assume that AoN scheme can be more effectively applied when Mediators are active by definition even if a fundraising platform is not used, the backers have to receive their pledges back if the stated fundraising goal is reached, but the fundraising platform guarantees that to happen in AoN scheme, and we assume this as one of the main reasons for the popularity of the fundraising platforms. Also if a Mediator is used she takes part of the administrative burden from the Fundraisers and have to use more resources in the AoN scheme.if a fundraising platform is not used at all, then the AoN process model is a subset of the KIA process model. In KIA process description (see Fig.3) we state that fundraising platform is an optional (shown by dashed connection lines between the related activities). If a fundraising platform is not used, the KIA process model and AoN process model are identical.

5 Fundraising Platform Money Processor Backer Fundraiser Fundraising Platform Money Processor Backer Fundraiser INTERNATIONAL SCIENTIFIC CONFERENCE Keep-It-All Crowdfunding Scheme Initiation Fundrising Period Closing Phase Project Description, fundraising goal and period Account (Escrew) Is stated goal reached in stated time? End of Campaign Order refund? Get informed about the project Back? I m done with that! Pledge to the Fundraiser s account Transfer pledged sums back to the backers. Start fundraising campaign in a platform Figure 3. The SGS scheme is recognised by some of fundraising platforms (i.e. Kickstarter) but there is no platform that has functionality that allows setting a SGS campaign. Thus the proposed SGS process model describes fundraising platform only as an information and advertising tool (see Fig.4). Stretched Goals Scheme Initiation Current Goal Fundrising Phase Project Make description, set fundraising stretched goals Account (Escrew) Is stated goal reached? Is this last goal? End of Campaign Get informed about the project and current fundraising goal Back? I m done with that! Pledge to the Fundraiser s account Start fundraising campaign in a platform Figure 4. Studying the crowdfunding process models and observing the number of key activities in Mediator s swim lanes we can definitely conclude that the Mediators have more influence in the AoN scheme than in any other.

6 A LINEAR COST MODEL FOR FUNDRAISERS To expand the suggested role and process models we define and propose the following linear cost model, evaluating the actual cost of the investment to fundraisers. Rewards based = cost of announcing and advertising + cost of fundraising platform + cost of online money processor + cost of administering campaign + sum(cost of rewards in packages). Donations based = cost of announcing and advertising + cost of fundraising platform + cost of online money processor + cost of administering campaign. Applying the model above, one can also use a rule of a thumb that the cost of the fundraising platform is about 4% of the sum and also the cost of the online money processor is about 3% of the sum. CROWDFUNDING IN SOFTWARE PRODUCT DEVELOPMENT PROCESS Crowdfunding is one of the emerging business models in the software industry. We assume that crowdfunding can go beyond mere business process and that the crowd actually can have significant influence over the whole software engineering process, especially over requirements gathering and quality assurance. In every rewards-based crowd funded software project we have studied, the rewards always included some form of early access (before official market release) to the product. As every beta- or alpha-tester is obliged to sign some form of agreement that she will report bugs and the developers give them tools to do that this early access actually give them a team of functionality testers. This team is so highly motivated that every member is eager even to pay for the opportunity to be a tester. Also some of the projects in SGS scheme gave an opportunity to the backers to pledge to several packages of functionality or content simultaneously, effectively giving them a way to influence the prioritization of the features development. We suggest that in every agile software development lifecycle crowdfunding can easily be the source of the so needed involved client. Also, the SGS scheme in particular, is a perfect match for an agile lifecycle as both are based on the idea of many relatively short periods of time at the end of each some clear and distinct additional value is added to the constantly evolving product. We also suggest that crowdfunding can be used along with a software development approach of Participatory Design (PD). The original model of PD describes user involvement in the design stage of a classical lifecycle only. A modification of this approach has been described [Maneva, 2002], showing how it can be used for usability assurance. Also it was proposed that the development technique of evolutionary prototyping can be applied to PD. It suggests that a sequence of partial software products is produced, each of them an extension of the previous one. When a prototype is ready the user have to test it in a real-life environment and to give a proper feedback to the developers. With crowdfunding rewards packages that include early access to the product the users effectively are involved in that process. In aforementioned Star Citizen project the rewards packages included early alpha-stage access initially the users had access only to a 3D-model of a hangar, initial version of the user interface (UI) and only one 3Dmodel of a spaceship, no other functionality. As the prototype evolved, and users gave their suggestions, the UI got redesigned accordingly.

7 CONCLUSIONS AND FUTURE WORK Realizing the constant growth and social impact of the software market, we are studying a modern technique for financing creative and software projects crowdfunding. It facilitates the start of project, makes a public recognition of its social value and gives a sense for participation in the development process to the public. The purpose of this paper is to give a broad view on the topic and to mark some areas for future in-depth research. We suggested that two crowdfunding schemes - donations and rewards-based, have to be perceived differently than others in existence today as they do not offer any financial returns-of-investment to the investors. We proposed several models: a role model, describing different roles and relations in the donations and rewards-based crowdfunding schemes; three process models and a cost model for the fundraisers. This models can be used in the future research on the topic. We made an initial research on the benefits of unification of the crowdfunding scheme with some contemporary software development lifecycles agile lifecycles and participatory design. Our future work on that topic can be in the following directions: To gather more empirical data and use them for improvements of the proposed models; To apply some formal methods to validate and assess the models; To investigate further the possible integration of the crowdfunding with some other software engineering activities; To study the psychological profile of the Backers in order to find out how to increase their motivation and desire to influence the software development process and its quality results. ACKOWLEDGEMENTS This work is supported by the National Scientific Research Fund under the Contract ДТК 02-69/2009. REFERENCES [1] Klaebe, Helen G., Laycock, Rebecca. How to work the crowd: a snapshot of barriers and motivations to crowdfunding. Australia Council for the Arts, [2] Maclellan, Kylie. Global Crowdfunding Volumes Rise 81% In Reuters, [3] Hernandez, Megan. Fundraising Wikimedia Foundation, [4] Rothler, David, Wenzlaff, Karsten. Crowdfunding Schemes in Europe. EENC Report, [5] Software: Global Industry Guide. MarketLine Report, December 2012 [6] List of highest funded crowdfunding projects. Wikipedia, [7] Maneva, Nelly. Participatory Software Development as a Basis for Usability Programs. Proc. of the CompSysTech 2002, II.6-1, II.6-6. ABOUT THE AUTHORS Todor BRANZOV Ph.D. student, Institute of Mathematics and Informatics, Bulgarian Academy of Sciences, Acad. G. Bonchev str., bl. 8, Sofia 1113, Bulgaria; tbranzov@math.bas.bg Major Fields of Scientific Research: Software Engineering, Project Management, Virtual Communities.

8 Neli MANEVA Professor, Ph.D., Institute of Mathematics and Informatics, Bulgarian Academy of Sciences, Acad. G. Bonchev str., bl. 8, Sofia 1113, Bulgaria; Major Fields of Scientific Research: Software Engineering, Software Quality Assurance, Model-driven software development.