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

2. 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

3. 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

4. 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

5. Crowdsourcing  Crowdfunding
Images from and

6. Different types of crowdfunding
Amateur investment
Paying to participate
Philanthropy

7. 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)

8. Examples Zopa, Prosper, Lending Club Mostly focused on personal loans
Kabbage, Funding Circle, LinkedFinance
Focus on business loans
Kiva
0% interest loans to entrepreneurs and small business owners in developing countries

9. 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?

10. 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

11. Examples Razoo, Crowdrise, Pledgie, Firstgiving, iCrowdfund*, Fundrazr
General call to prosocial donations
Experiment.com, DonorsChoose, LoveAnimals
Cater to specific types of causes
Generosity
Spinoff from Indiegogo

12. 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

13. 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

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

15. 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?

16. 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

17. Examples CrowdCube, Seedrs Early movers in Europe
Fundable, EquityNet, Crowdfunder, EarlyShares, AngelList
Grown in the US post JOBS Act
Some hint of royalties-based examples but most of these vanished pretty quickly

18. 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?

19. 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

20. 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

21. Amanda Palmer and her weird music
Ted talk at

22. The Oculus Rift

23. 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

24. Star Citizen

25. Readings
More lending choice as peer-to-peer financer launches in market
financer-launches-in-market html
Will JOBS Act Equity Crowdfunding Ever Happen?
equity-crowdfunding-ever-happen/
African Entrepreneurs turn to crowdfunding
entrepreneurs-turn-to-crowdfunding/ html
How To Build An Enterprise Investment Scheme With Equity Crowdfunding
build-an-enterprise-investment-scheme-investment-portfolio-using- equity-crowdfunding/
Amanda Palmer’s TED Talk about crowdfunding