Crowdfunding for Startup Finance

This assignment delves into the relationship between crowdsourcing and startup finance. It examines various forms of crowdsourcing, including crowdfunding, and analyzes their role in providing capital for early-stage ventures. The text emphasizes crowdfunding as a tool to address financing challenges faced by startups during initial funding rounds. It also highlights the importance of demonstrating value to potential investors within the crowdsourcing community.

Crowd Sourcing- An effective way for
funding start-ups
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Executive Summary
Crowdsourcing is also referred to as crowdfunding in the literature and is now a day’s very
popular way of raising finance amongst the small business or start-up ventures. Being an
attractive as well as valuable source of finance. It also helps in minimising the time consuming
fundraising process so that start-ups can spend more time on their business. Crowdfunding is
also very beneficial for attracting attention as well as to market the ideas or projects amongst the
crowd. It also provides an opportunity to sell the products or the services to the early adopters. It
also helps start-ups to test their products, bring investments. Thus this report analyses the
benefits of crowdsourcing as the potential means for funding in case of start-ups.
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Table of Contents
Executive Summary.........................................................................................................................2
1. Introduction..................................................................................................................................4
2. Crowdsourcing – A Concept of Funding.....................................................................................4
2.1 Advantages of Crowdsourcing..............................................................................................5
2.2 Leveraging Business through Crowdsourcing.......................................................................5
2.3 Crowdsourcing to Crowdfunding..........................................................................................6
2.4 Start-ups and Crowdfunding..................................................................................................7
3. Conclusion...................................................................................................................................8
Bibliography....................................................................................................................................9
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1. Introduction
Crowdsourcing is very popular phenomenon through which organizations take help from public
to help in achieving activities that are commonly performed by the employees/ contractors
(Bayus, 2013). Crowdfunding can be defined as the process where the individuals appeal for
contributions from public by making use of online platform, and it is turning out to be a powerful
way for raising funds for new entrepreneurial ventures as well as projects. According to
Massolution, a crowdsourcing firm specialising in research and advisory indicated that during
2012 there was seen a growth of 81 percent in the crowdfunding platforms and together they
raised US$ 2.7 billion (Sally, 2013).Crowdsourcing can act as a tool with multiple benefits if it is
leveraged in successful manner. This report will thus introduce the contemporary issues of
crowdsourcing by putting forward supporting facts from literature reviews available. Further
theoretical entrepreneurship frameworks will be applied to develop the concept of
crowdsourcing. Finally the report will also provide few effective applications as well as
judgements so that advanced knowledge about crowdsourcing can be developed.
2. Crowdsourcing – A Concept of Funding
There are many ways of financing the start-ups ( Bellefalmme, Lambert & SChweinbacher
2011) and crowdsourcing is one of them in which crowd is being used to develop a profit-
oriented activities of an organization. Crowdfunding is a part of crowdsourcing and both the
phenomenon is different from each other. The term crowdsourcing was firstly coined by Jeff
Howe in June 2006. The term has been defined as the cat of organisation or firm taking up the
function that was earlier performed by employees and outsourcing to the undefined network of
people in form of an open call (2). Crowdsourcing is different from other functions like open
sourcing; user generated content (UGC), collective intelligence as well as outsourcing
(Lehdonvirta & Bright, 2015).
Crowdsourcing cannot be considered as a silver bullet for economy, but it does provide various
approaches that help the enterprises to operate in a successful and efficient manner in on-going
changes in policies, technology & skills as wells fluidity seen in the world economy. Businesses
as well as various organizations believe that crowd can help them in dealing with various
challenges ranging from simple rote tasks for example raising money / voting, image labelling
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to handling complex issues like designing of new products or services , strategic planning or
brainstorming ideas. Crowdfunding is a form of crowdsourcing and it is related to outsourcing.
Thus it means transferring task of one organization to another, thus crowdsourcing means
outsourcing to crowd that is large group of individuals mainly through Internet. Companies use
crowdsourcing like, involving customers in the innovation process of the company (Leimeister &
et al, 2009).
2.1 Advantages of Crowdsourcing
Although many people criticize crowdsourcing because companies treat it as a way for
maximising their profits simply by outsourcing their functions which are traditionally conducted
by employees to the public. This helps the companies to achieve huge savings in cost. This is the
main reason why company’s crowdsource, however there are various other reasons due to which
organisations adopt crowdsourcing. First advantage of crowdsourcing is the huge size of the
crowd itself which acts as a benefit. Whereas most of the companies have less than 10,000
employees and if the contrast is being considered then the potential size of the crowd that also
relies on the activity that is crowdsourced. For example 65,000 mew videos were uploaded on
YouTube when it was acquired by Google in 2006 (4). Thus it was because of the crowd only
that is millions of YouTube users that so many videos were uploaded. It would have been tough
even to imagine doing so for 50 odd employees at YouTube. The second advantage of crowd is
being geographically distributed (Luz, Silva, & Novais, 2015) .
The third advantage of crowdsourcing is diversity present in the crowd. It has been found that
diverse group is able to outperform group of experts while solving problem. For example some
big corporations cast their scientific issues which even their R&D experts cannot resolve to the
website known as InnoCentive. Currently InnoCentive users have successfully resolved more
than half of the challenges or problems posted (Cheung, 2012). The last and fourth advantage of
crowdsourcing is that it reduces the cost of utilising the crowd in order to perform the task.
2.2 Leveraging Business through Crowdsourcing
Crowdsourcing acts as a tool that can be used for boosting efficiency as well as creativity and
helps in creating better and positive customer experience. It can help in filling up the labour gaps
in efficient manner for basic tasks or short-term projects. Like Amazon Mechanical Turk helps
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the companies in outsourcing tasks like transcription, verification , photo moderation etc.
which needs human intelligence. In the field of creativity it helps in website deigning to logo
overhaul. Thus crowdsourcing acts as a cost effective method for the businesses to access custom
design work. Design Hill / 99Deisgns are the crowdsourcing platforms which help businesses
in crowdsourcing design options related to marketing collateral , branding , websites as well as
advertisements (Canarelli, 2017).
Crowdsourcing is also a form of crowdsourcing. There are platforms like Fundable , ANgelList
and Kickstarter which help the businesses , artists and entrepreneurs in raising money without
taking help from traditional funding channels like venture capital or business loans . Thus
crowdfunding is a tool which helps in attracting start-ups and it is not just for the new ventures
only. Even well established businesses can use crowdfunding for expansion of their services,
launch of new products as well as for the fund programs which aim at giving back to the
community (Canarelli, 2017).
2.3 Crowdsourcing to Crowdfunding
When a company is started the entrepreneurs in the field of technology face several challenges
for example limited funds, lack of resources and wide range of technical issues. Accessing the
local funding is very tough as well as restrictive. On top of that searching for resources within a
limited budget is a challenging task. In such cases crowdsourcing acts as a compelling idea
which tackles all these issues by creating connections with resources as well as talented people
all across the globe. These connections act as opportunities for entrepreneurs so that they can
grow the community by adding talent form the target crowd, creating solutions for technical
issues as well as by finding the desired resources (Smith, Manesh, & Alshiakh, 2013).
Thus crowd funding acts as a very fresh and recent method for funding the start-ups and it is
gaining lot of popularity too. It is just like taking a loan, contribution / investments or pre-order
from more than one person and that too at the same time. Crowdfunding works in a way where
an entrepreneur puts a detailed description of the business on a crowdfunding platform. The main
aims of the business will also be mentioned along with the plans for deriving profits from
business, the amount of funding required and the reason why funds are required etc. Then the
customers read all the information about the business and then decide to help with money if they
find the idea genuine one. The people who give money make online pledge, while promising that
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they will pre-buy the product or give a donation. Anyone can make monetary contributions to
help the business in which they believe (Michel, Gil, & Hauder, 2015) . Crowdfunding is a good
option for start-ups to raise funds simply because it can generate interest and thus helps the
business in marketing the product along with arranging for finances. It also acts as a boon for the
business in case one is not sure about the demand of the product being thought of. The process of
crowdfunding cuts the professional brokers as well as investors as the funding is fully in the
hands of common people. It can also attract venture-capital investment in case the company has a
successful campaign. Crowdfunding however, is very competitive place to get funds, is gaining
the attention of average customers just with the help of description or images online is very
tough. Some of the well knows crowdfunding websites in US include: RocketHub, Onevest,
GoFundMe, DreamFunded and Kickstarter (ProfitBooks, 2017).
2.4 Start-ups and Crowdfunding
Crowdsourcing’s very well-known model is the Open Collaboration (OC) Model where the
problems or the opportunities made available are being posted by the organisation to the
public with the help of IT systems . The crowds voluntarily engage in these ventures without
any expectation of monetary compensations (Mergel, 2015). Some examples of OC
crowdsourcing include starting an enterprise like Wiki or making use of online as well as social
media communities for gaining contributions (Leimeister & et al, 2009). The crowds level of
engagement is related to several factors for example efficacy of the “open call”, the crowd
capital of company and reach as well as engagement of the platform that is being used (Prpić &
Shukla, 2013). For example as of May, 2015 Twitter quoted it has more than 500 million users
and out of all these users more than 310 million are found to be active on monthly basis.. Thus
it does not convert into significant engagement from users’ potential pool on platform.
Tournament Crowdsourcing (TC) is another form of crowdsourcing where the organisations post
their issues on specialised IT platforms like Eyeka or Kaggle or on in-house platforms like
Challenge.gov (Zhang, Gu, Song, Pan, Dawy, & Han, 2015) . Thus with the help of a platform
mediated by IT organisers create a competition with set rules and rewards for competition. These
TC platforms mostly attract as well as maintain special crowds who show liking towards special
platforms (Brabham, 2013) . Another kind of crowdsourcing is Virtual Labour Markets (VLM)
whish is also an IT-mediated markets in which the individuals render online services to be
carried out anywhere, offered by the firms mainly with the help of micro-tasks thus indicating
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the production model of crowd sourcing in exchange of monetary compensation (Luz, Silva, &
Novais, 2015).
3. Conclusion
The above analysis indicates that crowdsourcing is a tool which makes use of IT –mediated
platform to engage the crowd for the purpose of task completion , production , generation of
ideas or for problem solving , where the dispersed skills as well as knowledge of groups or
individuals are leveraged with a mixture of innovative crowd derived inputs as well as
processes that have top-down set goals as well as organisation initiatives. Crowdsourcing is an
emerging field which is evolving. It encompasses various platforms like virtual labour markets
(VLMs), Tournament crowdsourcing (TC) as well as Open collaboration (OC). Crowdfunding is
a form of crowdsourcing and acts as a tool for financing for start-ups and is current and popular
method. The financing gap that emerges in the start-ups can be easily bridged with the help of
crowdfunding. Thus crowdfunding acts as a tool for raising funds for start-ups during the first
financing rounds. AS far as the start-ups are capable of showing some value to the crowds,
crowd fund will be automatically being considered as financing option by entrepreneurs.
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Bibliography
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Brabham, D. (2013). Using Crowdsourcing in Government. IBM Center for The Business of
Govt.
Canarelli, M. (2017, Feb 22). Harness the Power of Crowdsourcing to Improve Your Business.
Retrieved Oct 11, 2017, from Startupnation.com: https://startupnation.com/start-your-
business/crowdsourcing-improve-business/
Cheung, S. (2012). How Companies Can Leverage Crowdsourcing. Composite Information
Systems Laboratory (CISL).
Lehdonvirta, V., & Bright, J. (2015). Crowdsourcing for public policy and government. Policy &
Internet, 263-267.
Leimeister, J., & et al. (2009). Leveraging crowdsourcing: Activation-Supporting components
for IT-based ideas competition. J. Manage. Inform. Syst., 197-224.
Luz, N., Silva, N., & Novais, P. (2015). A survey of task-oriented crowdsourcing. Artificial
Intelligence Review, 187-213.
Mergel, I. (2015). Open collaboration in the public sector: The case of social coding on GitHub.
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Michel, F., Gil, Y., & Hauder, M. (2015). A virtual crowdsourcing community for open
collaboration in science processes. Americas Conference on Information Systems.
ProfitBooks. (2017). 10 Funding Options To Raise Startup Capital For Your Business. Retrieved
October 11, 2017, from http://www.profitbooks.net/funding-options-to-raise-startup-
capital-for-your-business/
Prpić, J., & Shukla, P. (2013). The Theory of Crowd Capital. 46th Hawaii International
Conference on System Sciences, . Computer Society Press.
Sally. (2013). Cash from the Crowd: How to crowdfund your ideas and gain fans for your
success. Enterprenuer Press.
Smith, D., Manesh, M., & Alshiakh, A. (2013). How Can Entrepreneurs Motivate
Crowdsourcing Participants? Technology Innovation Management Review.
Zhang, Y., Gu, Y., Song, L., Pan, M., Dawy, Z., & Han, Z. (2015). Tournament Based Incentive
Mechanism Designs for Mobile Crowdsourcing. IEEE Global Communications
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Conference, (pp. 1-6).
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