Discussion – Crowdfunding

Discussion – Crowdfunding

A startup business needs financing to ramp up to profitability. Typically, new business ventures have access to different forms of finance throughout their life cycle. Initially, the most common form of startup funding includes an entrepreneur’s resources or financial resources from friends or family members. The financial need of a business usually varies according to the need and size. Many of the entrepreneurs’ sources are often insufficient to build their business in the face of small revenue. Most entrepreneurs avoid borrowing or bringing investors on board lest they dilute their equity. More recently, some entrepreneurs have started to seek financial help from a large audience rather than a small group of investors. This approach is called crowdfunding and involves requesting a large amount of money from a vast network of people through social media and websites, especially with the entrepreneur detailing business activities and objectives. Evaluation of the emergence of crowdfunding shows that the capital financing strategy is replacing the traditional sources of capital funds.

Types of Crowdfunding

Crowdfunding comes in various forms with different degrees of complexity and contractual relationships. The most common forms of crowdfunding include donations, pre-selling, rewards or sponsorship, and lending. In the first case, contributors, mostly from charities and nonprofit organizations, provide financial assistance as gifts (Gierczak et al., 2016). Pre-selling involves providing financial funding to help the new company produce some products or services and, in return, receive these commodities at a reduced price or receive an early version of them. The third form of crowdfunding is the reward, whereby contributors are given a pre-defined reward for their financial contribution and marketing. On the other hand, lending refers to the entrepreneur providing interest to the investors at the end of the agreed-on period (Gierczak et al., 2016). These forms of crowdfunding have created opportunities for startup businesses to raise a vast amount of money from anyone to invest.

Factors for Successful and Unsuccessful Crowdsourcing Campaigns

Several factors, including the richness of media and reward-offering, can influence the ongoing crowdfunding campaign to reach its goals and objectives. The symbolic cues provided by the medium reduce receivers’ uncertainties (Amann, 2017)). The argument is that media with sophisticated projects whose cues extend beyond textual description to match the related task influence contributors’ decision quality. For instance, including a quality video to outline the project details can increase the utility and, ultimately, the success of a campaign. Another factor that underlies the success of crowdfunding campaigns is reward offerings (Amann, 2017). In this approach, contributors are granted the possibility to pre-order new products or services or are given goodies as a way of appreciation. For instance, donors may receive the ability to pre-order a new electronic gadget as a reward for their efforts. Thus, the richness of media and reward offerings can play a significant role in the success of crowdfunding campaigns.

Some crowdfunding campaigns are also bound to fail, courtesy of a limited budget and poor marketing campaigns. An increase in the number of campaigns in the face of a limited budget means that backers can only support a small portion of the campaigns (Amann, 2017). Put another way; such campaigns would receive less per backer, limiting a crowdsourcing campaign’s chance to meet its target. In the same breadth, lack of marketing efforts is another cause of campaign failure. Amann (2017) posits that marketing involves using information gathered from various platforms to inform crowdfunding strategy and, ultimately, fundraising success. Furthermore, the marketing strategy should make it easy for potential contributors to find the project and tags online. Therefore, with a limited budget, fewer marketing efforts, and ineffective marketing strategies, crowdfunding is bound to fail because of a lack of visibility.

Business Process Crowdsourcing (Thuan et al., 2018)

Studies suggest that determining whether a business deserves crowdsourcing involves the coordination of activities. The first step is to determine the nature of business tasks and whether they can be delivered and collected online (Thuan et al., 2018). Thuan et al. (2018) posit that crowdfunding should only be used for internet activities. The next step is the interaction property, based on the inter-relationship between the startup venture and members during crowdfunding activities. According to Thuan et al. (2018), crowdsourcing is not suitable for businesses that require extensive interaction because the crowd members are usually anonymous to the infant company, making it a challenge to create an interaction between them. The third stage looks at the sensitive information tied to the business, such as intellectual property, security, and privacy (Thuan et al., 2018). The fourth step is to determine whether the project can be broken down into small pieces of work. The subsequent step involves considering people who perform tasks regarding the availability of crowd members and employees. The availability of the two parties will influence the crowdfunding decision. Theatre, the entrepreneur should consider risk and risk management, not to mention the environment of the business.

Crowdfunding Platform

Amazon Mechanical Turk (MTurk) is one of the most successful crowdfunding platforms. The platform is majorly concerned with equity crowdfunding, whereby it helps startup companies to raise money through Title III investing (Hirth et al., 2013). MTurk is popular in equity crowdfunding and serves a community of accredited investors in line with rule 506b of SEC Regulation D (Hirth et al., 2013). The platform’s success is attributed to several factors. Foremost, MTurk has sponsored software to connect brands with startup ventures they want to sponsor. The company also has a marketing service called Tracks. by, which it uses to represent top-performing artists. MTurk also guides organizations that host crowdfunding platforms by providing recommendations for incorporating governance mechanisms in their media to enhance their capabilities.

Additionally, MTurk has a PayPal for Bitcoin that facilitates a transaction fee less than a money transfer. These competencies have seen the company bring in money from funders like Google and Facebook. MTurk is a commendable crowdfunding platform that can help entrepreneurs raise finance without upfront fees and pitch their projects through media platforms to realize the benefits of marketing through feedback.

Threats of Crowdsourcing

The emergence of crowdfunding poses significant risks to multinational enterprises (MNEs). Essentially, MNEs serve as a great source of contributors. However, these companies face numerous risks, including loss of invested capital, lack of transparency, and fraud relating to charges, interest rates, and expected yields (Gierczak et al., 2016). MNEs face uncertainty in crowdfunding because it is difficult to assess the entrepreneurs to generate equity value and the quality of the projects. Gierczak et al. (2016) add that potential contributors have no requisite knowledge to screen firms and evaluate risks and returns before entering a contract with the startup’s business ventures, exacerbating the levels of risks involved. Furthermore, these firms are forced to bear costs when seeking necessary information about certain startups.

Speculation on the Effects of Crowdsourcing on Traditional Capital Financing

According to the research, crowdfunding, especially equity-based funding, has replaced the traditional forms of venture financing, such as banks. Typically, funders are treated as investors in crowdfunding and are given equity stakes or equal consideration to funding an infant business. The advantage of this model is the absence of any constraints involved in accessing financial capital. In this sense, crowdfunding has increased the flow of funding to SMEs and micro-firms.

 References

Amann, C. (2017). Factors of the successful implementation of a crowdfunding campaign. Conference Proceedings Trends in Business Communication 2016, 101-105. https://doi.org/10.1007/978-3-658-17254-1_9

Gierczak, M., Bretschneider, U., Haas, P., Blohm, I., & Leimeister, J. (2016). Crowdfunding: Outlining the new era of fundraising. FGF Studies in Small Business and Entrepreneurship, 7-23. https://doi.org/10.1007/978-3-319-18017-5_2

Hirth, M., Hoßfeld, T., & Tran-Gia, P. (2013). Analyzing costs and accuracy of validation mechanisms for crowdsourcing platforms. Mathematical and Computer Modelling, 57(11-12), 2918-2932. https://doi.org/10.1016/j.mcm.2012.01.006

Kubo, T., Veríssimo, D., Uryu, S., Mieno, T., & MacMillan, D. (2021). What determines the success and failure of environmental crowdfunding? Ambio, 50(9), 1659-1669. https://doi.org/10.1007/s13280-021-01522-0

Schwienbacher, A., & Larralde, B. (2012). Alternative types of entrepreneurial finance. Oxford Handbooks Online. https://doi.org/10.1093/oxfordhb/9780195391244.013.0013

Thuan, N., Antunes, P., & Johnstone, D. (2018). A decision tool for business process crowdsourcing: Ontology, design, and evaluation. Group Decision and Negotiation, 27(2), 285-312. https://doi.org/10.1007/s10726-018-9557-y

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Overview
Entrepreneurs launched more than 800,000 startup companies in 2020. Instead of seeking traditional forms of funding from a few wealthy investors, many pursued crowdfunding, which enabled them to seek financing from a large pool of investors, often consisting of friends, family members, customers, and other interested parties.

In this assignment, you will have the opportunity to research crowdfunding and report your findings.

To successfully complete this assignment, you will need to use the Strayer Library to research crowdfunding. You may also consult business news websites, such as Bloomberg, CNBC, Marketplace, or the Wall Street Journal.

Instructions
Use Basic Search: Strayer University Online Library to research crowdfunding and write a 4–6 page report of your findings in which you:

Accurately describe the four major types of crowdfunding.
Explain the factors that lead to successful and unsuccessful crowdfunding campaigns, using practical examples.
Outline the steps necessary to determine whether a business is suitable for crowdfunding.
Recommend a crowdfunding platform with a track record of success.
Be sure to justify your recommendation.
Determine whether the emergence of crowdfunding poses a threat or opportunity for multinational enterprises (MNEs).
Be sure to include your rationale.
Speculate, based on your research, how crowdfunding will affect traditional capital fundraising.
Be sure to provide evidence to support your assertions.
Use a minimum of five sources to support your writing.
Choose sources that are credible, relevant, and appropriate.
Cite each source listed on your source page at least once within your assignment.
Access the Strayer Library or review library guides for help with research, writing, and citation.
Formatting
This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions. Note the following:

The preferred method is for your paper to be typed, double-spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
Use headers to highlight each topic (such as Types of Crowdfunding, Successful Versus Unsuccessful Crowdfunding Campaigns, and Suitable Business for Crowdfunding).
Include a cover page containing the assignment title, your name, your professor’s name, the course title, and the date. The cover page is not included in the required page length.
Include a source list page. Citations and source list entries must follow SWS format. The source list page is not included in the required page length.
Learning Outcomes
The specific course learning outcomes associated with this assignment is:

Hypothesize how crowdfunding will impact traditional capital fundraising.