The Issues Involved with Crowd Funding Initiatives - Thesis Proposal Example

1.0 Background Startups have been growing at phenomenal rates particularly in the US market and this has spurred the demand for financing. Risks persist in startups both for the investors as well as the company. Crowd funding as a means to raise funds has emerged in the recent years to fill the gap where large investments from venture capitalists is not forthcoming or is not required. These startups are unable to resource funds through traditional means such as banks or other financial institutions. Crowd funding enables raising funds from several small to medium-sized investors, from a crowd (Ordanini et al, 2009). Crowd funding involves several players such as the customers, the subjects who propose the ideas, the investors who bear a risk and expect a certain payoff, and then there is the crowd funding organization that brings together the investors and the startup. The role of consumer has evolved over time and now they are not only empowered but can also extend investment support. Crowd funding is a collective effort by people who network and pool their money together, generally through the internet (Belleflamme, Lambert & Schwienbacher, 2010). This is a means to offer support to startups initiated by other people or organizations. Crowd funders may participate in strategic decision making or having voting rights but they do not have equity participation. Thus crowd funding is associated with community-based experiences that generate “community benefits” for participants (Belleflamme, Lambert & Schwienbacher, 2013). 2.0 Problem Identification Ordanini et al (2009) highlight some of the issues involved with crowd funding initiatives. These include selection of the initiatives to be supported, the monetary investment from customers, the outsourcing of entrepreneurial risk by the organization that sets up the crowd funding activity and the blurring of boundaries between marketing and finance. Belleflamme, Lambert & Schwienbacher (2013) identify that there is little academic understanding of the economic factors that determine an entrepreneur’s choice of a particular form of crowd funding. Crowd funders could either pre-order the product, thereby fund the project, or they advance a fixed amount in exchange of a share in profits. Investors would pre-order of the fund requirement is small but prefer profit sharing if capital investment required is high. However, the decision is affected because of uncertainty and information asymmetry. Because of this crowd funding does not offer any reward to the investors and the projects live on donations (Schwienbacher & Larralde, 2010). The problem lies in the lack of ability of entrepreneurs to identify the right project as well as the right funder, in addition to risk assessment. However, the mindset and motivation of the investors also influence the outcome of the project. 3.0 Theoretical Perspective Crowd funding appears to be an attractive proposition for entrepreneurs that are unable to obtain funds through traditional means. Kickstarter.com is one such platform that has helped entrepreneurs to enter into market through incremental growth where funding comes from public prior to final production. However, investors are at a loss when it comes to evaluating the potential of startups because of lack of a defined measure to help “crowd” take the investing decision. Ordanini et al (2009) identify a gap in knowledge on how consumers participate and interact in crowd funding initiatives where the service outcome depends upon the group rather than identified participation. Consumers’ monetary funds and project screening capabilities are important resources that trigger the service process and determine the extent of consumer participation. Ordanini et al find that consumers must possess traits such as innovative orientation, or the desire to be a part of the initiative and the desire to expect return on their investments. Schwienbacher & Larralde (2010) elaborate on intrinsic and extrinsic motivation of crowd funders that influence their investment decision. It could be for sheer pleasure or in expectation of returns or monetary gains, for recognition or even dissatisfaction with current products. The authors also find that the form of organization is an important driver in the success of crowd funding initiatives. 4.0 Management Perspective Crowd funding is based on the premise that crowds may be more efficient than individuals or small teams. They may infuse more innovative ideas and members of the crowd may build their own solutions using others’ suggestions (Schwienbacher & Larralde, 2010). Because of the use of web 2.0 technology crowd funding may help firms in testing, promoting and marketing their products. This may also help them in gaining insight into consumer needs and possibly modify their service offering accordingly. However, this also gives rise to the issue of tapping the right crowd (Belleflamme, Lambert & Schwienbacher, 2013). Therefore, this also points to the entrepreneurs’ ability to identify the right investors. Identifying the right investor is essential because Schwienbacher & Larralde (2010) find that the average user is an elite web user, educated and married and he may be motivated by the desire to learn and have fun at the same time. This may not be the right investor that benefits startups. 5.0 Research Aims and Objectives The goal of this thesis is to highlight the major changes taking place in funding startups. Crowd funding involves consumers from its very inception. Authors and scholars highlight on the different motivation that investors/consumers may have in funding startups. While crowd funding has emerged as a solution for startups that could not gain access to capital from traditional sources, failures of startups can deter future investors. At the same time, investors/consumers have their own motivation in funding projects and startups. Thus it appears that the motivation of crowd funders plays a major role in the success of startups. At the same time information asymmetry may occur as different investors have access to different information about the entrepreneur about the proposed project and the future potential. The entrepreneur may be reluctant to disclose all information equally to all investors but this can jeopardize the project. Thus, with the aim to evaluate the reasons for failures of startups that receive crowd funding, the objective of the study would be: To explore the characteristics of the investors in crowd funding To evaluate the communication shared between the entrepreneurs and the crowd funders To ascertain the ability of entrepreneurs in identifying the right crowd funder 6.0 Research Questions What are the characteristics of those that engage in crowd funding? Does the success or failure of startups that receive crowd funding depend upon investors’ characteristics? Do entrepreneurs have the ability to tap the right crowd funder? Do entrepreneurs have adequate product knowledge? Do entrepreneurs communicate effectively to all potential investors? Is information asymmetry a determinant of success or failure of projects? 7.0 Significance of the Study The outcome of this study would help future entrepreneurs evaluate the characteristics of the investors and disseminate information to attract the right “crowd”. 8.0 Methodology An interpretive, qualitative method of research would be employed. Qualitative research requires prolonged contact with the field of study. This can be done through the case study approach where two or three companies would be focused upon. Case study methodology is ideal when an in-depth investigation is solicited. While literature review will form a major portion of the research, primary data will also be gathered through qualitative interviews. The researcher will be interning in San Francisco, the hotspot for startup ventures. This will enable the researcher to gather primary data through structured but open-ended interviews of entrepreneurs as well as investors. Interviews will be taken with companies, which have made market entry through crowd funding but have encountered failure; the reasons for failure will also be included. Interviews will also be taken of a few investors that have engaged in crowd funding as this will allow the researcher to triangulate the findings. Thus, interview as a method for data collection will enable the researcher to gain insight into the personal experiences of the investors and entrepreneurs. While 15 questions will be prepared in advance based on the literature review, open-ended interviews will be conducted as they are more spontaneous and they enable the interviewer to delve deep into social and personal matters (DiCicco-Bloom & Crabtree, 2006). Such interviews offer two-way interaction not generally permitted by standard methods. 9.0 Data Analysis A huge amount of unstructured data is generated in qualitative research and synthesizing can be tedious and monotonous. Thus data reduction strategy would be employed which occurs from the beginning in qualitative projects. The findings from interviews would be then discussed along with literature and theories from secondary sources, which is available in abundance. This would help corroborate findings and since they would be from authentic sources, secondary literature can be relied upon to arrive at conclusions. Case studies available on the subject would also help achieve the study objectives. The interviewer has knowledge of the subject and hence would be able to initiate discussions and control the interview sessions. Further limitations will be explained and recommendations set when using crowd funding as effort to evolve as a startup company. 10.0 Structure of the Study Outlining the study serves as a guide for the researcher and enables the researcher to proceed systematically. Thus, the study would have the following sections as detailed below. Declaration The researcher would declare to the supervisor that this is an original study and no portion of the study has been copied or has ever been published at any time. Title Page This page would contain the subject of the thesis, the author of the study and the name/s of the faculty. It would also contain the name of the institution and the date of submission. Abstract This is an executive summary of the purpose of the research, how the study was conducted, the methodology employed and the main findings. Acknowledgements In this section the researcher would extend gratitude and thanks to all those who supported in fulfilling the study and its requirements. Table of Contents This page clearly spells out chapter details including page numbering. Introduction In this section the context of the study, the problem statement, the research aims and objectives will be presented. Literature Review This is the main section where in theories would be reviewed and the framework for the study developed. Methodology In this chapter the research methodology adopted would be discussed and justified. Findings Findings from interviews would be presented in a manner that would facilitate analysis and discussion Analysis and Conclusion This chapter would summarize the findings and based on the imitations of the study, recommendations for further research would be made. 11.0 Feasibility of the Study Literature is available in abundance through online academic libraries and reputed databases such as Emerald, Taylor & Francis, Sage Publications, ProQuest, Science Direct and EBSCO Host. In addition, search would also be made on scholar.google.com for academic papers and articles. Search through reputed search engines would also be made to extract the latest information and practices in the field of crowd funding. A review of available literature would give an idea of what needs to be done. 12.0 How this study would fit with existing Literature A lot of literature on the subject is available through online sources and some of it has already been touched upon in this proposal. Most of the literature used for this study are easily accessible online and also through offline sources. 13.0 Motivation for the study The researcher is keen to explore the causes of failure of startups that take in crowd funding because the researcher plans to start a new venture. This is also the purpose of interning in San Francisco. The researcher keeps reading in the media about the success and failures of startups but these only give a fragmented idea of what actually happens in startups. This study would enable the researcher to gather firsthand information on how startups function and attract crowd funders. This research is of particular importance because the number of startups has gone up phenomenally but not all have achieved success. The motivation for this study has arisen out of a desire to understand the motivation of the funders as well as the motivation of the entrepreneurs. References Belleflamme, P., Lambert, T. & Schwienbacher, A. (2010). Crowdfunding: An Industrial Organization Perspective, Retrieved from http://perso.uclouvain.be/paul.belleflamme/papers/JBV2013.pdf Belleflamme, P., Lambert, T. & Schwienbacher, A. (2013). Crowdfunding: Tapping the right crowd, Journal of Business Venturing DiCicco-Bloom, B., & Crabtree, B. F. (2006). The qualitative research interview, Medical Education, 40, 314–321 Ordanini, A. et al. (2009). CROWDFUNDING: TRANSFORMING CUSTOMERS INTO INVESTORS THROUGH INNOVATIVE SERVICE PLATFORMS, Retrieved from http://didattica.unibocconi.it/mypage/upload/49036_20110414_125339_JOSM_CROWD_FINAL.PDF Schwienbacher, A. & Larralde, B. (2010). CROWDFUNDING OF SMALL ENTREPRENEURIAL VENTURES, Book chapter forthcoming in Handbook of Entrepreneurial Finance, Retrieved from http://xn--lillebrs-b5a.dk/wp-content/uploads/edd/2013/06/Schweinbacher-Larralde-2010.pdf Read More