The most basic basics Crowdfunding: “the practice of raising funds from two or more people over the internet towards a common service, project, product, investment, cause, and/or experience” For both for-profit and non-profit endeavors Non-profit endeavors include museum/building leases, as well as “creative works” (e.g. music production, film production, book production) and even “pet projects” Very fragmented industry: over 500 crowdfunding services online Almost no academic research yet on this topic! But that doesn’t mean that this topic is unimportant to Entrepreneurial Finance!
Recent success stories “Tile” ($2.6 million from almost 50,000 backers on SelfStarter, 2013) “Pebble Watch” ($10.3 million from 69,000 backers on Kickstarter, 2012) “Coolest” ($13.3 million from 62,000 backers on Kickstarter, 2014)
The evolution of crowdfunding Explosive growth 2010 fundraising worldwide: USD $89 million 2011: USD $1.47 billion 2012: USD $2.66 billion 2013: ~USD $5.1 billion
Different categorizations of crowdfunding Reward-based crowdfunding: entrepreneurs pre-sell a product or service, or give “praise” and other non-tangible rewards “All-or-nothing” “Keep-it-all” Equity-based crowdfunding: backers receive unlisted shares of a company Credit-based crowdfunding: e.g. Let’s take a brief look at and together…www.Kickstarter.comwww.prosper.com
Crowdfunding: spending something, while hoping for others In crowdfunding, as a funder: You spend money, for some kind of return. At the same time, you are hoping that others will contribute too. But those other people might be waiting, because they don’t want to spend money yet. In other words, in some ways, as a funder: You are trying to cooperate, and you want others to cooperate. You are “competing” with others to make sure that you aren’t cheated. This is a good time to present a basic game in Game Theory that addresses this tension.
The infamous ‘Prisoner’s Dilemma’ The setup The interrogation & deal The game box What is the likely result? What about agreeing to cooperate and hold out if they had met beforehand? We find this difficulty whenever cooperation and competition are combined in the same game! Especially when we are talking about investment of your “irreversible” effort What is it about crowdfunding that is so different from the Prisoner’s Dilemma? Note: Numbers indicate years of imprisonment Tchaikovsky You -3 Hold outConfess Hold out Confess
What would you imagine are the key differences between VC/Angels/Crowdfunding?
Crowdfunding: pros and cons for the creator Benefits Market and finance at the same time! Co-Ideate and finance at the same time! No need to share ownership with investors! Drawbacks Widespread reputational effects at stake? IP protection? Less average due diligence from the crowd?
Choosing the funding amount What happens when you ask for too little? What happens when you ask for too much?
Choosing rewards to give: some options Thank you cards “Souvenirs” or “paraphernalia” “Credit” as an investor “Early bird” access to a product Special edition of a product Creative input into the product development Special access to filming, in a video promotion Meeting the creators What else?
Describe how your team could use crowdfunding (take minutes to discuss in your small group) Tell us again: What is your group’s venture idea? How much do you think you’d request for funding? And roughly why? What kinds of rewards would you use? And at what kinds of funding levels? And what funder number limit at each level? What would your video look like?