2 Crowdfunding defined: from policy orientations to academic literature
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24 Previati, Galloppo and Salustri
In the same line, in the EU, De Buysere et al. (2012) report that ‘crowdfunding can be defined as a collective effort of many individuals who
network and pool their resources to support efforts initiated by other
people or organizations. This is usually done via or with the help of
the Internet. Individual projects and businesses are financed with small
contributions from a large number of individuals, allowing innovators,
entrepreneurs and business owners to utilize their social networks to raise
capital.’ In this way crowdfunding activity facilitates innovation and
entrepreneurship using the Internet as a platform for raising the funds
that are necessary for the development of an entrepreneurial project.
The subject of the Internet is crucial also for the well-documented home
bias issue. As an example, take the trend that transactions are more
likely to be completed between economic actors that are geographically
located as neighbours, that is, in the same country or state, rather than
outside. The Internet has become an increasingly important source of
financing for social entrepreneurship like click-to-donate sites, online
charity auctions and shopping malls, philanthropy directories or crowdfunding sites (Wei-Skillern et al., 2007).
In the Derev Report (Calveri and Esposito, 2013) we find that ‘Social
Causes’ is the category that has the highest share, 27.4 per cent out of
all crowdfunding categories. The World Bank has launched Crowdfund
Capital Advisors (CCA) to define crowdfunding’s role in the developed world and developing world. The project aims to identify ways to
leverage the new crowdfunding industry, with particular reference to
the theme of Web 3.0, where social media and small investor communities create access to capital and seek funding directly and effective from
their social relationships.
An expert group for the European Commission’s Directorate General
for Enterprise and Industry in 2011 have proposed a framework of best
practices for equity crowdfunding. The framework of best practices
consists of three pillars: Regulation, Education and Research. The former
can help to correct for market failures such as the presence of asymmetric
information and moral hazard. In this light the appropriate amount of
regulation can help to improve transparency and security for financial
transactions in each way they occur. Education is linked to households’
decisions to invest their money in business and social projects. Research,
in the Commission document (European Commission, 2015), is mainly
interpreted as relationship and knowledge exchange process between
the academic and industry sectors.
From an academic point of view, the crowdfunding phenomenon
is recent, multidimensional by nature and analysed by different
‘Wisdom of the Crowd’ as an Antidote to Credit Crunch
25
perspectives and with different goals: main interests are focused on
entrepreneurship, consumer behaviour and start-up finance (venture
capital, above all). The attention to crowds, otherwise, is quite old, in
modern times: among others, see Le Bon (2009), whose psychological
contribution, first edited in 1895, is cited in De Buysere et al. (2012).
But while Le Bon underlined the many limits of crowds (impulsiveness,
irritability, incapacity to reason, the absence of judgment, of the critical
spirit, the exaggeration of sentiments), in our times we also talk about
the ‘wisdom of crowds’ (Surowiecki, 2004).
Analysing a rich body of academic contributions, we discovered that
the term crowdfunding first appeared in 2006 (cited in Lawton and
Marom, 2010), but it comes from practitioners, as stated by Castrataro
(2011): ‘Michael Sullivan is credited with coining the term crowdfunding
back in 2006 with the launch of fundavlog, a failed attempt at creating
an incubator for videoblog-related projects and events including a
simple funding functionality. This scheme was “based on reciprocity,
transparency, shared interests and, above all, funding from the crowd”,
but the term crowdfunding only really began to be used by the masses a
few years later with the advent of the platform Kickstarter.’
Crowdfunding’s roots are linked to the crowdsourcing concept. This
concept underlines the mix of contributions (services, ideas and content)
from a large group of people to achieve a task, dividing a complex task
into small enough pieces so as to make it more easily achievable: ‘the
act of a company or institution taking a function once performed by
employees and outsourcing it to an undefined (and generally large)
network of people in the form of an open call’ (Howe, 2008). These kinds
of phenomenon are economic in nature, stemming from an industrial
organization view: ‘crowdfunding is an open call, essentially through
the Internet, for the provision of financial resources either in form of
donation or in exchange for some form of reward and/or voting rights
in order to support initiatives for specific purpose’ (Belleflamme et al.,
2010). On the same line of reasoning, Rubinton (2011) defines crowdfunding as ‘the process of one party financing a project by requesting
and receiving small contributions from many parties in exchange for
a form of value to those parties’. The economic view is not the only
relevant in crowdfunding: social and IT perspectives, strictly linked in
social networks, are extremely significant, as legal matters are, too.
From an economic point of view, we find contributions about crowdfunding in the field of entrepreneurship (Agrawal et al., 2010; Belleflamme
et al., 2010 and 2014; Harrison, 2013; Larralde and Schwienbacher,
2012; Lehner, 2013; Ley and Weaven, 2011), of consumer behaviour and
26 Previati, Galloppo and Salustri
marketing (Ordanini et al., 2011) and of financial intermediation, with
special regard to start-up financing venture capital and private equity
(Mollick, 2014; Agrawal et al., 2011).
The main issues addressed by this kind of literature are:
●
●
●
by entrepreneurship scholars, the contributions of crowdfunding to
new ventures, in different business models (donation, reward, lending,
equity based crowdfunding; active and passive role of funders), and
the involved agents’ behaviour1;
by marketing scholars, the use of crowdfunding not only for financing
business, but for supplying other services to enterprises by consumers
and backers;
by banking and finance scholars, the disintermediation of traditional
ways of financial intermediation (banks, other financial institutions,
financial markets); crowdfunding as a complementary or alternative
way to satisfy enterprises’ financing needs; liquidity risk and projects
assessment in different kinds of crowdfunding business models.
Other contributors are more difficult to classify in scholarships or strands
of literature. Together with general books about crowdfunding (Lawton
and Marom, 2010 and 2013), we can find papers with general introduction to crowdfunding and description of crowdfunding platforms
(Giudici et al., 2012), articles describing evolutionary scenarios of capitalism and finance (Shiller, 2013) and of crowd-capitalism in emerging
economies (Beugrè and Das, 2013). To our aims in this paper, very
important are the contributions about the investors’ motives to fund,
above all Gerber et al. (2012) and Harms (2007). Gerber et al. (2012)
underline that financial and not financial reward, together with closeness to funded projects’ values and ideals, are the main determinants of
investors’ behaviour. Harms (2007) identifies different kinds of value,
embedded in projects that influence investors: financial, social, functional and emotional value.
The social and IT perspectives highlight the relevance not only of
individual investors’ motives and behaviour, but the so-called wisdom of
crowds (Surowiecki, 2004) that is analysed and surveyed in social networks
and platforms sustaining some types of crowdfunding, i.e. P2P lending.
Prediction markets for financial variables produce surprisingly accurate
information (Ray, 2006), revealing the wisdom of crowds. This is especially true and evident where you can find peer learning in e-markets,
like P2P platforms (Yuma et al., 2012). Of course, wisdom of crowds is
influenced by cultural profiles of peer learners, especially the country of
‘Wisdom of the Crowd’ as an Antidote to Credit Crunch
27
origin cultures (Bechter et al., 2011). From a theoretical point of view,
the wisdom of crowds as a form of collective intelligence can emerge
with naïve updating of individual beliefs in social networks (Golub and
Jackson, 2010). ‘Given the relatively high uncertainty in borrower trustworthiness and the lack of lender expertise and information, estimating
borrower trustworthiness is a probabilistic problem. So the online P2P
lending environment appears to meet the conditions that prior theoretical
studies have identified. Thus, we expect the wisdom of crowds approach
to work for the online P2P lending platform, and lenders may be able to
take advantage of the voting results when they make credit decisions with
respect to different borrowers’ (Yuma et al., 2012). Maybe these considerations can be extended to different crowdfunding models.
Summarizing, the academic literature about crowdfunding evolves
fast, putting attention at many sides of the phenomenon. In our paper
we try to offer some contributions about two aspects that seem underrated: on one side the microfoundations of individuals’ (households’)
choices in crowdfunding environments (wisdom of crowds is an evocative word, but we think we need better economic foundations); on
the other side the forecasting, at the macro level, of the crowdfunding
market in different countries.
2.3 Different kinds of crowdfunding and some data
about crowdfunding market
To better understand investors’ decisions it is of the utmost importance
to go in depth on the different kinds of crowdfunding: donation, reward,
lending and equity based.
For donation-based crowdfunding, basically the motivation at the
bottom of the funding is social return, that is, no legally binding financial obligation is incurred by recipient to donor, and this is the most
typical way of funding that NGOs have been using to attract donations.
Indeed donation-based crowdfunding typically supports cultural and
religious projects, as well as deals in which people are not interested
in business affairs involving reward in terms of money. For this kind
of crowdfunding activity donors also tend to give recurring donations
if the social organizations keep them updated about the progress of
the project and make funders satisfied when they see that a project, in
which they believed, is going to be realized.
Reward-based crowdfunding can involve types of projects similar
to donation-based funding, but most of all include financial aids to
small- and medium-sized enterprises (SMEs), or commercial pre-sales of
28
Previati, Galloppo and Salustri
products as well as creative and cultural projects. Project owners provide
funders with rewards of a symbolic value. Frequently the reward is the
product itself, in terms of a standard output of entrepreneurship activity
asking to be supported. In fact reward-based crowdfunding is increasingly being used to ramp up new products or improve existing ones, in
partnership with existing or potential customers.
Lending-based crowdfunding can be used for social or business
purposes. In social lending, we are in an interest-free loans environment. In this way of funding typically we have micro-loans to support
development or social aid projects. The motivation from the lender side
is in social change similar to what happened in donation-based crowdfunding, and also the actors are roughly the same. With lending-based
crowdfunding for business purpose, a firm borrows money from a group
of people instead of a bank. Here the main motivation for the funder is
a financial return according to the specific risk-factors of the company
funded. This market segment does exist when lenders hope to receive
a higher interest payment than they would receive from an alternative
investment, while for borrowers who are looking for a loan at better
conditions than those they can get from a bank (or even in those cases
in which the bank is not going to fund them). Borrowers typically are
both companies looking for small business loans of for project finance
activity and households looking for consumer lending.
Equity crowdfunding is when an entrepreneur wants to attract an
investment from a group of people, with the purpose of dividing future
earnings, exactly as it happens in every entrepreneurial business. Usually
originators of projects supported are small- and medium-sized enterprises offering the same benefits and rights as shares, and the investee is
a creditor who has a contractual right to receive that payoff.
In the middle, that is among funders and actors taking money, there
are crowdfunding platforms generally exercising a basic due diligence
and business plan screening, when projects involve reward in terms of
money, or simply presenting, at a glance, business ideas when main
motivations are for social purposes.
At present, a large part of data pertinent to crowdfunding business
(e.g. number of platforms, geographical distribution of participants
and number of successful campaigns) are proprietary. This evidence
limits further efforts on the research, and in this work we can’t apply
econometrics due to lack of data, but we deal with descriptive analysis.
Nevertheless, we consider our effort useful because it can provide a good
starting point for further analysis when public data will be available for
the academic community.
‘Wisdom of the Crowd’ as an Antidote to Credit Crunch
29
About market size we have to mention that there is a substantial lack of
data, making a market analysis quite difficult and incomplete. However,
at present day Massolution’s ‘Crowdfunding Industry Report’ provides
estimates and extrapolations based on surveys on the most important
market players. According to the Report’s content we find that worldwide, 452 active crowdfunding platforms raised 1.5 billion USD in
2011, in 2012 that number jumped to 2.7 billion, and Massolution’s
2013 ‘Crowdfunding Industry Report’ predicts for 2013 the remarkable
amount of 5.1 billion USD. This indicates a significant growth near to
100 per cent year on year. This increase is due in particular to the rise
in total value of campaigns while the survey data suggests that the total
volume of successful campaigns has remained relatively unchanged.
North America was the largest market for fundraising (over 1.6 billion
USD in 2012), however Europe is gaining percentage share within the
market in aggregate, reaching almost 1 billion USD of total amount in
raising activity. Both continents together account for the vast majority
of the market, reaching more than 95 per cent of the total, where South
American and African countries are just in the beginning.
In 2012 the majority of these campaigns were in the donation-based
category; indeed, donations and reward-based funds reached an 85 per
cent year on year growth corresponding, in value, to an amount of 1.4
billion USD. Equity campaigns were, on average, much larger in size
in terms of funds raised (there are also a small number of cases where
reward-based models have reached multi-million USD or euro amounts),
while the lending-based category is the smallest in terms of the number
of platforms.
The European Commission’s ‘Consultation Document: Crowdfunding
in the EU’ (2013), on the whole, confirms evidence for the EU, stating that
in 2012 crowdfunding in Europe reached 65 per cent growth compared
to 2011 and reached a total amount of funds raised equal to 735 million
euro. This figure is promising compared to the limited supply to innovation projects funding given from European venture capital markets, that
is 3 billion euro, although it stays modest if compared to the European
IPO markets (in the range of 16.5 billion euro). Results drawn from the
‘Crowdfunding Industry Report’ in the UK (Baeck et al.,, 2014) show
that for UK SMEs in 2013, the alternative finance market (peer-to-business lending, equity-based crowdfunding, invoice trading and revenue/
profit-sharing crowdfunding) has supplied 332 million pounds to SMEs
in the UK – a more than 12-fold increase in just three years. The number
of SMEs that have used these alternative financing mechanisms in the
UK between 2011 and 2013 amounts to more than 5,000.
30 Previati, Galloppo and Salustri
2.4
Crowdfunding drivers
Crowdfunding appears as a mix of innovation, technology and entrepreneurship to create opportunities for job creation and poverty reduction.
Specifically, crowdfunding is a function of all of these socio–economic
trends, and we want to define an indicator of crowdfunding activity
which takes account of these drivers.
About the centrality of technology, Crowdfunding Industry Report in
UK (Baeck et al, 2014) states that crowdfunding platforms are themselves technology start-ups. In their survey 80 per cent of the platforms
mention that they had created and developed the technology used on
their platforms and 60 per cent indicated that they would continue to
develop their platform technical features. Another 10 per cent of all platforms surveyed aim at the development of new or complementary services to increase or extend the capacity or functionality of their existing
service. In the Derev Report (Calveri and Esposito, 2013) communication and technology projects count for 14.9 per cent of total equity
crowdfunding. Definitely advancement and availability of web- and
mobile-based applications facilitated the access to this new form of business funding.
Moreover, exploiting another crucial component of the crowdfunding
world, there is no question that the rise of the crowdfunding industry
in recent years is directly linked to the failure of the financial services
industry to answer demand for small business and project financing,
since banks’ lending activity is reduced and access to finance is more
difficult (credit crunch rationed). The latest ‘Survey on the Access to
Finance of Small and Medium-Sized Enterprises in the Euro Area’ (ECB,
2013), realized in the period from April to September 2013, reports
that in Euro Area level, on balance, five per cent of the SMEs reported
an increase in their need (demand) for bank loans. SMEs in Italy and
France contributed most to the net increase in the need for bank loans.
In the same period, the net percentage of Euro Area SMEs reporting
deterioration in the availability of bank loans increased marginally.
This mainly resulted from the strong deterioration signalled by Italian
SMEs. Regarding the success of bank loan applications increased in most
Euro Area countries, except in the Netherlands, France and Italy. The
percentage of SMEs reporting a fully successful application was highest
in Germany (87 per cent) and Finland (81 per cent) and lowest in Greece
(33 per cent) and the Netherlands (32 per cent). Regarding the cost of
funding in the Euro Area, mainly SMEs in Spain and Italy reported an
increase in interest rates. In the lights of this critical financing scenario,
‘Wisdom of the Crowd’ as an Antidote to Credit Crunch
31
crowdfunding could represent a new fundamental chance for access to
funding for a wide range of entrepreneurship activities, ranging from
innovative and creative micro-enterprises to small- and medium-sized
enterprises.
Consequently, we propose an index to measure the attractiveness
of different European countries for the development of crowdfunding
procedures. In our opinion, this is the first step to understand the
complexity of the real-world situations in Europe with regard to crowdfunding. In the concluding remarks, we offer some suggestions for
further research steps and for positive action, at micro and macro levels,
to sustain crowdfunding procedures all over Europe.
2.5
Crowdfunding Attractiveness Index
The Crowdfunding Attractiveness Index (CFA) should be interpreted as
a fundamental indicator of the criteria that affect crowdfunding activity.
According to Groh and Wich (2012) the ability of countries to attract
business activity is a function of many criteria, basically socio-economic
country characteristics, combined together with some weighting and
aggregation techniques. We have decided to focus on a little group of
euro countries, to easily understand the impact of our basic measures via
graphic and table inspection. Indeed we concentrate our analysis on 11
countries that made up the Euro Area when the euro was introduced in
1999, plus the UK because of the influence of this country as an international crowdfunding player.
The index structure, as proposed in Table 2.1, is based on two levels.
The first is the level of the five key driving forces. The criteria of lowest
orders are grouped and aggregated to the next superior level. Overall
these key driving forces include 53 variables.
We considered annual data from Eurostat, European Central Bank
and World Bank databases with yearly data ranging from 2003 to
2013; in most cases we refer to the average value of the last three
years (specifically, 2010–13) or, due to impossibility to compute a
mean value, to the last data record. The rationale behind the choice
to consider just these three data providers is related to the willingness
to provide all readers and researchers with a very sound and easy to
run dataset. Not all data series are raw data, but represent sometimes a
ready-made index (see the Table 2.1, where we report comprehensive
definitions and descriptions of the data series that we have used to
calculate our index, their units and sources), e.g. the Strength of legal
rights index.
32 Previati, Galloppo and Salustri
Table 2.1
Raw data sample and sources
#
Name
1
Corporate
Hardware
Enterprises – level of Internet
access
1.2 Enterprises – computers: devices
and communication systems
Internet Turnover
1.3 Digital single market –
promoting e-Commerce for
businesses
1.4 Internet purchases by individuals
1.5 Share of enterprises’ turnover on
e-commerce
1.6 Enterprises sending and/or
receiving e-invoices
1.7 Enterprises having received
orders online (at least 1%)
1.8 Enterprises’ turnover from
e-commerce
1.9 Enterprises purchasing via
Internet and/or networks other
than Internet
1.10 Enterprises having purchased
online (at least 1%)
Social Economy
1.11 Purpose of social media use
1.1
2
2.1
2.2
2.3
2.4
2.5
Unit
Source
Percentage of enterprises
Eurostat
Percentage of enterprises
Eurostat
Percentage of enterprises
Eurostat
Percentage of individuals
%
Eurostat
Eurostat
Percentage of enterprises
Eurostat
Percentage of enterprises
Eurostat
Percentage of turnover
Eurostat
Percentage of enterprises
Eurostat
Percentage of enterprises
Eurostat
Percentage of enterprises
Eurostat
Percentage of the ICT
sector value added
Percentage change of
value added of the ICT
sector
Euro per inhabitant
Eurostat
Percentage of the ICT
personnel on total
employment
Head count
Eurostat
Innovation Environment
R&D Activity
Percentage of the ICT sector on
GDP
Percentage change of value
added by ICT sector at current
prices
Total intramural R&D
expenditure
Employment
Percentage of the ICT personnel
on total employment
Total researchers, by sectors of
performance
Eurostat
Eurostat
Eurostat
Continued
‘Wisdom of the Crowd’ as an Antidote to Credit Crunch 33
Table 2.1
Continued
#
Name
Unit
Source
2.6
Doctorate students in science
and technology fields – Total
Total R&D personnel and
researchers as % of total labour
force
Self-employment head count
Macroeconomic Factor
High-tech exports – Exports of
high technology products as a
share of total exports
Share of government budget
appropriations or outlays on
research and development
Turnover from innovation
Venture capital investments
Patent Activity
High-tech patent applications to
the EPO
Community design (CD)
applications
% of the population aged
20–29 years
Percentage of active
population
Eurostat
Percentage
Eurostat
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14
% of total general
Eurostat
government expenditure
% of total turnover
% of GDP
Eurostat
Eurostat
Number
Eurostat
Number
Eurostat
World Bank
(WDI)
World Bank
(WDI)
World Bank
(WDI)
World Bank
(WDI)
World Bank
(WDI)
World Bank
(WDI)
World Bank
(WDI)
World Bank
(WDI)
World Bank
(WDI)
World Bank
(WDI)
World Bank
(WDI)
3
Legal Environment
3.1
Time to import
days
3.2
Time required to enforce a
contract
Procedures to register property
days
Start-up procedures to register a
business
Procedures to enforce a contract
number
(% of GNI per capita)
3.7
Cost of business start-up
procedures
Time to resolve insolvency
3.8
Time to prepare and pay taxes
hours
3.9
Strength of legal rights index
(0=weak to 10=strong)
3.3
3.4
3.5
3.6
3.10 Time required to register
property
3.11 Time required to start a business
Eurostat
number
number
years
days
days
Continued
34
Previati, Galloppo and Salustri
Table 2.1
Continued
#
Name
4
Household & Internet Skill
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
5
5.1
5.2
5.3
Hardware
Households with access to the
Internet at home
Skill for Job
Way of obtaining e-skills
Skill for Web Interactivity
Individuals using the Internet
for finding information about
goods and services
Individuals using the Internet
for downloading software
Skill for Social Economy
Individuals using the Internet
for uploading self-created
content
Individuals using the Internet
for participating in social
networks
Individuals using the Internet
for selling goods or services
Individuals using the Internet to
buy or order online content
Unit
Source
Percentage of households
Eurostat
Percentage of individuals
Eurostat
% of individuals aged 16
to 74
Eurostat
% of individuals aged 16
to 74
Eurostat
% of individuals aged 16
to 74
Eurostat
% of individuals aged 16
to 74
Eurostat
% of individuals aged 16
to 74
% of individuals aged 16
to 74
Eurostat
Eur billion – current
prices
ECB Euro
Area
accounts
ECB Euro
Area
accounts
Eurostat
Credit Market
Asset
Short-term loans to
non-financial corporations
Long-term loans to non-financial Eur billion – current
corporations
prices
Liabilities
Short-term loans to
non-financial corporations
Eur billion – current
prices
5.4
Long-term loans to non-financial Eur billion – current
corporations
prices
5.5
Short-term loans to households
Eur billion – current
prices
5.6
Long-term loans to households
Eur billion – current
prices
ECB Euro
Area
accounts
ECB Euro
Area
accounts
ECB Euro
Area
accounts
ECB Euro
Area
accounts