A major concern in pushing the sustainability agenda is whether it will get funding. But the motivation for funding is whether sustainability “sells,” whether people are willing to pay for sustainability. A nice way to understand this problem is by observing and studying crowdfunding platforms. These are online websites wherein everything from a person struggling from an illness, to an artist looking for backing for a project, to a person looking to do a trip around the world, to students in less fortunate areas needing better school equipment, can be met by someone with a little extra to give and who is happy to support. It taps into the human instinct of altruism, giving without expecting much in return. Nowadays, sustainability projects that cater to recycling, climate change prevention, and biodiversity get a fair share of their backing of crowdfunders. However, my former thesis student, Jade Tissier, and I wondered: What makes crowdfunders select to support one project over the thousands available to them? Is a project with a sustainability orientation more attractive than others, like art related or charity related? We examined this question using a unique database of projects from KissKissBankBank, Europe’s oldest crowdfunding platform. In these next weeks, I will share some findings of this thesis, which won the IESEG Best Sustainability Thesis Award in 2016.
To kick off: what is crowdfunding? Crowdfunding pools together people with innovative ideas on the one hand and people who have some funds to contribute to back these ideas on the other via an efficient internet platform. Often, these people do not know each other yet have common interests. It is an interesting development in financing small ventures or advocacies that either will not qualify for traditional means of equity or debt financing or are in need of additional funds. The recent rise in crowdfunding came about during the 2008 US Presidential election when Barak Obama raised $750 million in funding from small donors via a website. Today, there are around 1,250 crowdfunding platforms worldwide. A recent study by Goldman Sachs mentions that 47% of millennials surveyed have backed or are likely to back a crowdfunding campaign with a growth rate of 112% each year.
Crowdfunding involves two main parties: the beneficiaries of the campaign (the project creator/s) and the individuals willing to contribute, called “funders” or “backers.” The internet is the communication intermediary that links these two parties. Typically, a financial objective is set. If this objective is met then the project goes ahead. If it is not, then either the entrepreneur can keep the funds or these are returned to the backers. The latter “all-or-nothing” model is more common.
There are two distinct investment models: one is “crowd-investing” where campaigners either issue equity to the investors or engage in peer-to-peer (P2P) lending and pay back contributors which provided them with debt. The second, called “crowd-sponsoring,” is either a donation wherein the contributor receives no monetary compensation in return or receives a simple reward, usually the product or service it set out to fund. P2P lending comprises three-fourths of all campaigns whereas rewards and donation crowdfunding account for the next biggest chunk. Given the legal limitations to equity ownership, equity crowdfunding is the least popular. North America is the leading crowdfunding geography having over 50% of all funding volume, followed by Asia (31%), and then Europe (19%).
CAMPAIGNERS’ MOTIVATIONS FOR CROWDFUNDING
Studies in entrepreneurship are clear: the startup stage of a business faces difficulties in accessing capital. These firms lack collateral and information asymmetry that poses a risk to banks and equity investors. Without a proven track record, it is challenging to convince investors of future success, yet such businesses need financing because they drive economies. We know from recent history that these innovative startup firms can end up becoming giant enterprises: the likes of Apple, Microsoft, Airbnb, Facebook, and eBay all began as small projects with their entrepreneurs fumbling for financing.
Crowdfunding is jumping on this trend of taking risks to back the next billionaire, but also to back projects that have a non-financial meaning to a person. Yet apart from a new way to access financial capital, having the intellectual input of the internet’s “crowd” is at the heart of crowdfunding success. The internet promotes openness, participation, and collaboration. In fact, the concept of crowdfunding is rooted in the broader concept of crowdsourcing, which refers to using the crowd to obtain ideas, feedback, and solutions to develop corporate activities. Crowdfunding allows for the possibility of creativity and new ideas to emerge. It also highlights the need for a strong collaboration between the parties involved and is no longer just a source of capital but a new way for “connectivity” in investing. As such, crowdfunding not only provides a platform but importantly increases anonymity of the relationship between the funder and the entrepreneur, and democratizes the financial decision by drawing upon a large number of relatively small contributions.
Finally, crowdfunding is a good and inexpensive marketing platform. Crowdfunding becomes a first contact between the entrepreneurs and the future customers. The campaigner can measure the demand for its product or service, the project’s attractiveness, and gather opinions about the price or the design during the crowdfunding campaign. In rewards-based platforms, the final product is often the reward and is thus an inexpensive way to fund and distribute a prototype. Entrepreneurs also use pre-ordering as a screening device to understand product demand.
Why, however, would random individuals back projects of people they do not even know and whose risks are very high? And the million-dollar question: What attracts funders to select to fund one project over hundreds of thousands of projects currently available to them? We know less about this and need empirical evidence.
(To be continued)
Note: This paper is based on a Masters in Finance thesis at IESEG written by Jade Tissier and supervised by the author. References are available upon request.
Daniela “Danie” Luz Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IÉSEG School of Management in Paris and maintains teaching affiliations at IÉSEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.