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Success Factors of Crowdfunding for Founders and Funders

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Introduction

Getting startup capital in order to start a business often leads to multiplied debt for the early years of any business, the leading from the bank, family members and friends results to break evens or, in most cases losses for new businesses. The idea of crowdfunding allowed entrepreneurs to get a pool of money, in small amounts from a huge amount of people who were outside their network. Instead on indebting themselves or their company, entrepreneurs received funding from the general public. As a result, if 1 000 people would each contribute R30 the targeted capital of R30 000 would be reach instead on going to the bank.

Most projects today are funded through crowdfunding platforms. These platforms have a number of rule, for an example, some platforms allow you to keep all the capital you have raised, while other platforms will only give you the capital if your project’s targeted budget is exceeded. Some are fully focused on the creativity of the project and its business ideas, and others are mostly suited for personal ventures. In conclusion these platforms guides entrepreneurs on which platform is best suitable for them to launch on, and plan the transition to start the business.

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Contributing factors

Crowdfunding can create a lot of possibilities for business owners to launch their products though crowdfunding. Reason being that with crowdfunding there are benefits that entrepreneurs can benefit from like;

Getting a following: if done correctly, crowdfunding can offer more than just startup capital, however can give you a fully committed audience. Nowadays entrepreneurs can have a huge following on social media which would secure a dedicated following before the first product is made available to the audience.

Getting funding without getting debt: after getting the much needed audience to invest your project, there will be no need to go to the bank to ask for funding, your audiences are there to establish the crowdfunding for business because of their interest in it. Even better, id the business ideas can the put into the actual products promised to the audience, and then the company fails, without the baggage of a debt hanging over it. There is still hope that the company will pick up and generate new ideas that will become successful.

Getting market research: apart from running a campaign and engaging on social media, crowdfunding is the most affordable way to conduct a market research. Crowdfunding reduces the risks that are main reasons why businesses fail, it also serves as a great way to test the market, to estimate whether the product or service has real potential. It creates a direct dialog between the entrepreneur and customers.

Findings

The history of crowdfunding can be traced can to the year of 1997, the rich history and roots of crowdfunding go back from the 1700’s. This indicates how modern crowdfunding and contribution had created an urge to this type of activity.

The beginning of modern crowdfunding: the most successful record of crowdfunding took place in 1997, where a rock band got funding from fans through online donations in order to get capital for their reunion tour. Therefore, this act created the first crowdfunding platform for artists, resulting to Artist Share being the very first dedicated crowdfunding platform in 2000. Shortly after that, more crowdfunding platforms begin to rise, and started the industry of crowdfunding, increasing on an annual basis.

Crowdfunding becoming a major funding source: in 2009 the crowdfunding industry grew rapidly becoming the most popular way for entrepreneurs to reassure their ideas, get exposure and secure funding. Is it stated that crowdfunding can boast 74% annual growth rate, making it an extremely important source of funding because other funds are becoming significantly less available as the years progressed.

Gaining Washington’s support: the former president of the United States of America, President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act as part of the USA’s law. The Act was set out to alleviate the burdens that regulated small businesses and legalized equity crowdfunding. Therefore removing the ban on solicitation that prohibited entrepreneurs from making money rising publicly. Though the Act was signed into law during 2012, the Security Exchange Commission was still in the process of putting regulations to make sure that the investors and entrepreneurs are protected. Those regulations were finalized in early 2013.

Fundable launches the first business crowdfunding platform: launched in 2012, the Fundable platform is there to assist entrepreneurs fund and grow their businesses through rewards and equity crowdfunding.

Success factors of crowdfunding for founders and funders

Crowdfunding has become one of the most effective platform for entrepreneurs to raise capital, more especially in the creative industries. Organizations and private investors are contributing more to the emergence of the new crowdfunding platforms. In other countries, like the Netherlands, the government assists artists to gain financial access through crowdfunding platforms. Therefore, the research looks at the success factors of crowdfunding projects, from both the founders and investor’s point of view. There are websites designed for founders and investors so that they can evaluate crowdfunding behaviors. These websites also contribute to crowdfunding success factors relating to trust issues and decision making in order to provide practical recommendations.

Practices and dynamics of modern crowdfunding

Looking at these dynamics it is possible to look amongst the platforms within each field, including their aims and orientations. There are three identified categories of dynamics that characterize donation crowdfunding platforms:

  1. Participation dynamics, which impact the terms under which in which donors and project owners are able to start or access a project.
  2. Risk/reward dynamics, which pertain to the terms under which donors give funds to projects and the returns they may expect in advance.
  3. Funding dynamics, the conditions by which donors give and project owners receive funds after the successful completion of a project – i.e. the campaign has met the terms required to release funds. For a summary of these dynamics, refer to Table 1-1.

There are three principal variables in participation dynamics.

  • The first is whether or not the platform allows any individual to post a project on the site (open posting), such as IndieGoGo or Spacehive, or whether only certain categories of user are allowed. Citizinvestor, for instance, only allows government agencies and associated non-profits to originate projects.
  • Secondly, some platforms choose to make the identity of all donors and the amount of their donation public (public donations), while others do not.
  • Lastly , campaigns may have a limited lifespan, such as a time limit, or a mechanism whereby projects are terminated upon reaching their funding

Effect on local and international economies

Since the establishment of ThundaFund is one of South Africa’s leading crowdfunding platform for innovation, Patrick Schofield was involved in the creation of BackaBuddy, which is a South African crowdfunding platform that is created and designed to assist entrepreneurs create online campaigns in order to raise funds for their businesses. Five years ago, BackaBuddy has raised R44 million to help individuals in need. In August 15 2017, Uprise.Africa was established as one of the platforms to assist entrepreneurs raise venture capital through the crowd. Although crowdfunding has been, since 2010, and still is a new concept, it has proven that it works and future entrepreneurs will venture into it because it had managed to raise R12 billion, ($880 million) from the first seven years it has been established, according to the Forbes Magazine in 2010. In 2015, one of the United States of America crowdfunding platform, Kickstarter, raised $3.2 billion since it was launched in 2009. Thundafund is one of the platforms that sort of introduced the South African market to crowdfunding, however that has significantly changed over the past years. Schofield said “At the moment, we have 75 live projects with 32 last years. Crowdfunding is definitely coming to mainstream”. An example of crowdfunding in SA, would be the R1 million raised by a local music band, Fokofpolisiekar in order to launch their first album. Their pledge in return was a free show in Cape Town and Gauteng. The same model has helped raised Honest Chocolate in Cape Town, which raised R66 000 with the help from Thundafund.

All this goes to show the huge impact that crowdfunding has in the South African economy because it has helped and assisted small businesses that had great ideas, be able to generate capital for their ventures. In doing so the South African has grown tremendously. Likewise, in other countries, to name a few, like the United States of America, has helped their entertainment industry to be more independent and market itself the way it suits them.

Conclusion

Crowdfunding seems to be the future of getting capital without accumulating interest rates and debts, therefore new entrepreneurs should be looking in to it as a source of getting funds and promoting their products in a more convenient way.

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