Crowdfunding: Types, History, and Impact on Innovation

CROWDFUNDING 1
Crowdfunding
Name
Institution
Professor
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CROWDFUNDING 2
Abstract
Crowd funding is "an open call, essentially through the Internet, for the provision of
financial resources either in the form of donation or exchange for some form of reward and/or
voting rights to support initiatives for specific purposes.” (Schwienbacher & Larralde, 2010,
p. 2)
Background
Crowdfunding can be traced back to the 1700s when the Irish Loan fund founded by
Jonathan Swift started to give loans to low-income families in the rural parts of Ireland. By
the 1800s more than 300 crowd funding programs gave out small sums for short periods of
time. Bruton et al. (2015, p. 9) noted that its peak, 20% of all Irish households had used this
program. They further explain that after this period there was no documented evidence of
crowdfunding until 1997 when British rock band Marillion funded their U.s tour when their
fan base raised $60,000 online to give to the band. In 2000 Artistshare became the first
dedicated crowdfunding website (Schwienbacher et al., 2013, p. 585). From 2009 crowd
funding kicked off and since then it has become a novel way for entrepreneurs to raise capital
for various projects.
Facilitation of crowdfunding is done through a website, or an application called a
crowdfunding platform. These platforms offer founders/entrepreneurs their webpage where
they explain what the project entails, its outcomes and the outline of the amount of money
they needed to achieve the potential outcome (Schwienbacher et al., 2013, p. 586). They can
also state how many days or months their campaign will run for & collect money from
backers/funders. Research from Northwestern University’s Segal Design Institute suggests
that crowdfunding is often found by campaign creators to be strenuous and time-consuming.
For some entrepreneurs, they must deliver new skill sets entirely new to them for they have to
deal with funder relations, marketing and publicity which require time and effort (Harrison,
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CROWDFUNDING 3
2013, p. 283). Top crowd funding websites include kick-starter, gofundme, Indiegogo,
Crowdrise, Crowdfund, Ozcrowd, Crowder and Pozible
Types of crowdfunding
Equity crowdfunding is whereby an individual /organization invests a big sum of
money in exchange for a piece of equity, shares or a stake in the company. Donation-based
crowdfunding is designed to raise money for charitable or social projects, in this case, there is
no equity nor reward, a tax deduction may be the incentive (NiBusiness, 2018). In the website
of NiBusiness (2018) it is also explained that reward-based crowd funding allows investors to
raise money in exchange for a non-financial reward, the reward may range from free software
licenses, use of the invention or free gifts. Debt crowdfunding consents financiers to fund
your project in exchange for monetary returns on their investment (NiBusiness, 2018). This
finance option may provide you with borrowing at a lower cost than that offered by applying
for a loan through a bank. The advantage of this model is that it may be easier to win support
for a campaign, as investors are attracted to getting a return.
Crowdfunding in innovation
Fast Company (2018), suggests that crowdfunding has changed how entrepreneurs
bring innovations and products to the market. According to this website, it has also allowed
millions of innovators to raise money, join a wider network of potential funders and build
brand awareness, all while still in the product development process. Examples of
crowdfunded products include the Glif. Photography has become an integral part of cell
phone users with new smartphones coming out with more focus on the camera pixels. In
2010, almost eight years ago, through Kickstarter, Dan Provost & Tom Gerhardt launched
the Glif, a tripod mount for the iPhone 4 (Fast Company, 2018). After realizing that
smartphones had become an integral tool, for journalists, filmmakers, regular smartphone
users and photographers, they had one target- to create the best tripod mount for smartphones.
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