Chapter 2 : Crowdfunding Flashcards
Crowdfunding vs. Crowdsourcing
- Crowdsourcing = soliciting contributions (ideas, content, services) from a large group of people (e.g. Wikipedia, open-source software).
- Crowdfunding = a subset of crowdsourcing → financial contributions from a crowd.
Crowdfunding Models
Model Group Logic Examples / Variants
Equity Investment in return-yielding assets - Equity crowdfunding
- Fractional ownership (real estate / other assets)
- Revenue or profit-sharing agreements
- Royalty agreements
- Community shares
- Debt-based securities
- Security Token Offerings (STO)
- Initial Coin Offerings (ICO)
- Crowdfunded invoice trading
Lending Investment in return-yielding credit - P2P lending for consumers
- P2P lending for businesses
- Property development lending
- Mini bonds
- Microfinance and prosocial lending
Non-Investment Purchase of goods/services or donation - One-time donations
- Recurring donations
- Reward-based crowdfunding (e.g., Kickstarter)
1) Donation-Based Crowdfunding
o Individuals give money without expecting a return
o Motivated by altruism, social causes, or personal connections
o Common in non-profit projects, medical support, or community initiatives.
o Platforms: GoFundMe, Leetchi.
2) Reward-Based Crowdfunding
Investors contribute funds in exchange for a non-financial reward, typically the product or service being developed.
a) Stretch Goals
o If the campaign exceeds its initial goal, additional features or products are unlocked.
o Creates excitement and motivates additional funding.
b) Rewards & Campaign Dynamics
o Backers choose a reward tier depending on the amount pledged.
o Campaigns often follow a U-shaped curve:
o Strong launch → mid-campaign slowdown → final push.
o Success factors: video quality, storytelling, social proof, early traction.
c) Legal Aspects
o Legally considered pre-sales or donations.
o No ownership or financial return is granted.
o Subject to consumer protection laws, not financial regulation.
3) Crowdlending / Peer-to-Peer Lending
This model allows individuals to lend money to others (consumers or businesses), expecting to be repaid with interest.
a) Mechanics and Investor Types
o Platforms match lenders and borrowers.
o Lenders can be retail individuals or institutional investors.
o Borrowers can be individuals, SMEs, or real estate developers.
b) Interest Rate Formation
o Fixed by the platform, auction-based, or risk-adjusted.
o Often depends on credit scoring, loan duration, and project type.
c) Risks
o Credit risk: borrower may default.
o Platform risk: platform bankruptcy or fraud.
o Liquidity risk: loans may not be easily resold.
o Regulation: increasingly supervised (e.g., by AMF in France, or FCA in the UK).
4) Crowdinvesting / Equity Crowdfunding
Investors receive shares (equity) in the company they fund, becoming minority shareholders.
a) Direct Investment or via SPV
o Direct: investor is a direct shareholder in the startup.
o SPV (Special Purpose Vehicle): investors pool their money into a single vehicle that invests in the startup.
→ Simplifies cap table and management for the startup.
b) Exit Options
Equity crowdfunding investors earn returns only if there’s an exit, such as:
o IPO (Initial Public Offering)
o M&A (Merger or Acquisition)
o Secondary market resale (rare but emerging)
c) Legal Frameworks
o Regulated under MiFID II and EU Crowdfunding Regulation (ECSP).
o In France: supervised by l’Autorité des marchés financiers (AMF) and l’ORIAS.
o Platforms must comply with rules on disclosure, risk warning, investor protection, and offer limits.
- All-or-Nothing (AON)
- The project only receives the funds if the fundraising goal is met.
- If the goal is not reached, all contributions are refunded to backers.
- Common on platforms like Kickstarter.
- Reduces risk for both the project creator and backers:
o Creator isn’t forced to deliver a project with insufficient funds.
o Backers only pay if the project reaches the budget it needs.
- Keep-It-All (KIA)
- The project keeps all funds raised, regardless of whether the goal is reached.
- Often used on platforms like Indiegogo or for donation-based campaigns.
- Higher risk:
o Backers may contribute to a project that doesn’t have the minimum budget to succeed.
o Creators may have to deliver with insufficient resources.
The choice between AON and KIA reflects risk-sharing:
- AON: more conservative – risk is shared between creator and contributors.
- KIA: more flexible – backers bear more risk.
Project Type Best Funding Model
Project Type Best Funding Model
Tech products, innovation AON (high fixed costs, needs full funding)
Charitable campaigns KIA (every donation helps, no minimum threshold)
Community projects Depends on visibility and commitment level
Fraud vs Project Risk
- Project risk: The project is genuine but may fail (delays, bad execution, underestimated costs, etc.).
- Fraud: The project is deliberately fake or misleading, created only to collect funds with no intention to deliver.
- Investors face both risks when contributing, especially in reward-based and equity-based crowdfunding.
Reward-Based Crowdfunding: (Legal)
- Treated as pre-sale or donation.
- Regulated by consumer protection laws.
- No financial return expected → less legal scrutiny, but still subject to rules on honest advertising and delivery promises.
Equity-Based Crowdfunding:
- Considered a financial investment → subject to securities regulation.
- In the EU: regulated under the European Crowdfunding Service Providers Regulation (ECSP).
- In France: under AMF and ORIAS supervision.
- Requirements:
o Disclosure of risk
o Limits for non-professional investors
o Clear information on rights, dilution, exit, etc.
Role of Platforms
- Platforms act as intermediaries, helping to reduce information asymmetry:
o Due diligence: verifying project legitimacy
o Providing standardized information
o Facilitating secure payments
o Enforcing basic rules and transparency - Trust in the platform’s reputation is key for backer confidence.
- Patronage
- Long-term support to creators or artists (e.g., via monthly contributions).
- Common on platforms like Patreon.
- No obligation to deliver a specific product — it’s about sustaining creative work.
- Reverse Auctions
- A type of dynamic pricing model where backers offer how much they’re willing to pay, and the price is set accordingly.
- Less common, but offers interesting possibilities for crowd-driven price discovery.
- Entrepreneur’s Motivation
- Democratization of funding: Crowdfunding removes traditional gatekeepers (VCs, banks), making it easier for any entrepreneur to access capital.
- Venture & job creation: It stimulates startup formation and contributes to employment and innovation.
- Non-financial benefits:
o Visibility (public exposure to potential customers)
o Credibility (a successful campaign signals legitimacy to investors and partners)
- Success Drivers
a) By model:
* Reward-based campaigns: success linked to marketing, product appeal, and community.
* Equity-based campaigns: success depends more on team quality, business plan, and trust.
b) Personality traits:
* Founders with confidence, openness, and strong narratives are more successful.
* Ability to engage emotionally with the crowd is key.
c) Network effect:
* Early support from friends, family, and fans triggers social proof.
* A strong personal/professional network increases visibility and traction.
- Campaign Progress
- Most campaigns follow a U-shaped curve:
o Strong launch (from network)
o Mid-campaign slump
o Final rush before deadline - Funding mechanisms:
o First-come-first-served: early backers get better deals → encourages speed.
o Auction-based: investors bid for shares/terms → used in some equity platforms.
- Crowd’s Motivation
a) Gender and homophily:
* Investors tend to support entrepreneurs they can relate to (gender, background, values).
* Female founders may attract more support from female backers (and vice versa).
b) Herding & information cascades:
* When early backers fund a campaign, it creates momentum → others follow.
* This leads to herding behavior, even if the project quality isn’t perfectly assessed.
- After the Campaign
- A major challenge, especially in reward-based crowdfunding.
- Delays and quality issues are frequent.
b) Startup sustainability: - Many crowdfunded startups struggle to survive long-term if no clear growth plan or follow-up capital.
c) VC signaling: - A successful campaign can attract VC attention as a proof of concept.
- Some investors use crowdfunding as deal sourcing.
d) Long-term outcomes: - Mixed results: some become successful companies, others fail post-campaign.
- Long-term performance depends on execution, not just initial hype.
