Rob Gleasure R.Gleasure@ucc.ie robgleasure.com IS3321 Information Systems Solutions for the Digital Enterprise Lecture 10: Crowdfunding Rob Gleasure R.Gleasure@ucc.ie robgleasure.com

Crowdfunding Last session Open Innovation, Lead Users and Contests From the Wisdom of Crowds to the Wisdom in Crowds The case of InnoCentive Today’s session Crowdfunding Rewards-based Crowdfunding Peer-to-Peer Lending Charitable Crowdfunding Equity-based Crowdfunding

Consider the Following Problem Some goods can be created with little or no cost, e.g. ‘pure’ digital goods such as software, 3D designs, or images Other goods require some financial outlay to make them happen, typically for Physical inputs and materials Salaries for full-time employees Legal counsel Physical infrastructure (e.g. office space) Travel and promotion Generating finance is a massive burden which often requires time, concessions, and frequent failure

Jumping Off Point Up to now, we have leveraged the knowledge and action of the crowd en masse, including coding, writing, classifying, voting, labelling, etc. But now we need real financial resources to make things happen, effort alone isn’t enough anymore We don’t want small amounts of people’s time, we want lots of people to chip in small amounts of hard cash Put differently, we aren’t looking at wisdom, we’re looking at the wealth of crowds

Crowdsourcing  Crowdfunding Images from http://innovationatyourfingertips.weebly.com/pros-and-cons.html and http://oonaghmurphy.com/2013/01/30/crowdfunding-bootcamp/

Different types of crowdfunding Amateur investment Paying to participate Philanthropy

Peer-to-Peer Lending Loan applicants ask for money in return for repayment plus interest (as per standard unsecured loans from banks) Lenders may choose to invest, then receive regular lodgement as money is repaid Massive industry, e.g. US-based Lending Club facilitated loans totalling over $2.2 billion last quarter, and over $13 billion to date Sites vary in the level of background checks, as well as how interest rates are set (some are done automatically, others are auction-based, e.g. prosper)

Examples Zopa, Prosper, Lending Club Mostly focused on personal loans http://www.lendingmemo.com/video/beginners-guide/lending-club/introduction/ Kabbage, Funding Circle, LinkedFinance Focus on business loans https://beta.linkedfinance.com/ Kiva 0% interest loans to entrepreneurs and small business owners in developing countries http://www.kiva.org/lend

The interesting questions How many people are defaulting? About 5% Why aren’t more people defaulting? Credit score concerns Social contract (arguably) What sort of returns are people getting? 8-9% (ish) Open question: what’s new about this and where is it going?

Charitable Crowdfunding Fundseekers ask for donations with no material reward offered, only the satisfaction of helping a needy cause Projects include anything with a strong prosocial or philanthropic element, e.g. Projects in developing worlds Medical bills Animal rescue Religious projects

Examples Razoo, Crowdrise, Pledgie, Firstgiving, iCrowdfund*, Fundrazr General call to prosocial donations https://pledgie.com/ https://www.razoo.com/us/home/ Experiment.com, DonorsChoose, LoveAnimals Cater to specific types of causes https://experiment.com/discover http://www.donorschoose.org/ Generosity Spinoff from Indiegogo https://www.generosity.com/

The interesting questions Why are people donating? Rationalistic altruism vs normative giving Who is donating? Lots of one-off donations (friends and family) Lots of anonymous donations

Rewards-Based Crowdfunding Rewards are offered, mostly in exchange for material goods Rewards tend to be tiered so that larger donations get larger rewards Had success in a range of areas (mostly B2C focused), e.g. Creative industries Software Hardware Games/Toys Educational materials Basically anything that can capture the public’s attention

Examples Kickstarter Creative focus https://www.kickstarter.com/ Indiegogo* Cause focus https://www.indiegogo.com/ Pozible, Sellaband, Unbound Specific areas https://unbound.co.uk/ * Blurs the line between charity and rewards

The interesting questions What if people don’t do the thing they said they would? Very small number deliver nothing (though most projects are late) How do backers react when things don’t go as planned? Differently… Open question: why is this only about start-ups and small independent businesses?

Equity-Based Crowdfunding Businesses (often startups) ask for donations in return for equity in the business itself Basically takes the standard venture capital/angel investor model and applies it to an online community Slowest growing form of crowdfunding (along with charity) due to massive legal complexities Need to protect investors from shady businesses Need to protect businesses from undesirable assocations 2012 JOBS Act in the US is probably the most high-profile attempt at legislating for this

Examples CrowdCube, Seedrs Early movers in Europe https://www.crowdcube.com/ Fundable, EquityNet, Crowdfunder, EarlyShares, AngelList Grown in the US post JOBS Act https://www.crowdfunder.com/ https://angel.co/ https://www.equitynet.com/how-it-works.aspx Some hint of royalties-based examples but most of these vanished pretty quickly http://www.appsfunder.com/us

The interesting questions How does this thing work legally? Technically unregulated in Ireland JOBS Act in the US made far-reaching legislative changes, rather than focusing on ‘crowdfunding’, per se How big is this thing going to get? To date, not as big as people thought Open question: why would this appeal to investors more than regular stocks and shares? Why would it appeal to entrepreneurs more than VCs or angel funding?

Advantages Fast money, often within 30-60 days A chance to test ideas before they’re ready for full launch Huge branding and marketing potential Many backers feel a sense of ownership for the company/project that makes them want to drive things forward Means giving up little (or no) creative and strategic control compared with traditional financiers

Disadvantages Very public forum means there may be concerns over Disclosure The consequences of failure Perceptions of desperation Lacks support ecosystem that comes with traditional investors Serious sense of ownership when people have put money in may present issues later Hard to come back for more money if things turn out to be more complex than first thought

Amanda Palmer and her weird music https://www.kickstarter.com/projects/amandapalmer/amanda-palmer-the-new-record-art-book-and-tour/description Ted talk at https://www.youtube.com/watch?v=xMj_P_6H69g

The Oculus Rift https://www.kickstarter.com/projects/1523379957/oculus-rift-step-into-the-game?ref=nav_search

Zenefits https://wefunder.me/zenefits Raised $370K on a $9 million valuation in 2013, rose to $4.5 billion valuation in May 2015 Images from https://www.buzzfeed.com/williamalden/how-high-flying-zenefits-fell-to-earth?utm_term=.unyXdlYlV#.xsyGjJ8Je, http://diginomica.com/2016/03/08/zenefits-after-the-crash-will-it-burn-or-rise-like-a-phoenix/, https://www.saastr.com/zenefits-how-we-hyperscaled-inside-sales/

Star Citizen https://www.kickstarter.com/projects/cig/star-citizen?ref=nav_search

Readings More lending choice as peer-to-peer financer launches in market http://www.independent.ie/business/more-lending-choice-as-peertopeer- financer-launches-in-market-30722096.html Will JOBS Act Equity Crowdfunding Ever Happen? http://www.forbes.com/sites/kevinharrington/2015/02/03/will-jobs-act- equity-crowdfunding-ever-happen/ African Entrepreneurs turn to crowdfunding http://www.voanews.com/content/unable-to-get-credit-african- entrepreneurs-turn-to-crowdfunding/2639392.html How To Build An Enterprise Investment Scheme With Equity Crowdfunding http://www.forbes.com/sites/goncalodevasconcelos/2015/02/09/how-to- build-an-enterprise-investment-scheme-investment-portfolio-using- equity-crowdfunding/ Amanda Palmer’s TED Talk about crowdfunding https://www.youtube.com/watch?v=xMj_P_6H69g