ASTER ' S T HESIS 2014 B USINESS M ODEL OF C ROWDFUNDING M

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BUSINESS MODEL OF CROWDFUNDING

MASTER'S THESIS

2014

University of Groningen

International Business and Management

2.1 & 2.2 semesters

Supervisor: Dr. John Qi Dong

Co-assessor: Dr. André van Hoorn

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Acknowledgements

Every journey in life has its ups and downs, and writing my thesis at the University of Groningen was a great journey of mine. Studying in a different country in a different language was a challenge that will always cherish. During this journey I have got support from many people around me who encouraged and believed me.

Therefore, I would like to take the opportunity to thank and express my gratitude to my supervisor, Dr. John Qi Dong who always discussed the materials with me providing comments, suggestions and feedback. His advices guided me through the research process and helped me to internalise the requirements in a professional manner.

Furthermore, I would like to thank Mr. Marc Clemens, the founder and CEO of Sommelier Privé, who gave meaningful insights into crowdfunding during a friendly interview. I would also thank for all the enthusiastic business-owners devoting time and for contributing to my survey. Without their willingness to participate in this study, this paper would have been more challenging than it was.

Last but not least, my special thanks goes to my family. The endless patient, motivational talks and all the inexpressible help during this hard time mean everything to me. I would like to express my admiration of my father, who was not only always there for me, but also supported me with his exceptional professional skills along my studies.

I hope that the readers will find the results of this paper interesting enough to start their own research on the topic and to engage more in crowdfunding and its endless potentials.

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Abstract

Crowdfunding is a contemporary phenomenon that emerged from micro-financing with the help of WEB 2.0. Currently, quality papers are missing on the topic; however; literature has just started to emerge on crowdfunding. Based on the limited and existing literature, relevant data is collected to understand crowdfunding and its place in the financial cycle. In-depth discussion follows about its different classifications and types. The aim of this study is to draw on Osterwalder and Pigneur’s (2009) business model to crowdfunding and take it one step further to the dynamism of the business model of crowdfunding. In order to identify the elements of the business model, multi-method is conducted, consisting of a case study, a survey, and systematic analyses of crowdfunding platforms. The case study engages to understand the process of crowdfunding in-depth, the survey helps to reach a higher amount of entrepreneurs, and the observation of the platforms observes the real-life events. Therefore, the multi-method can provide different perspectives, and makes the findings’ validity higher. From the results, the blocks of the business model are identified in the crowdfunding context successfully. The research takes the business model canvas of crowdfunding further. The descriptive, static model is developed in order to catch the dynamism of the business model of crowdfunding. With the help of a business model-matrix, the connections between the drivers of the model are revealed in this study, and these relations within the model generate the business model graph of crowdfunding. Along the graph, crowdfunding can be now better understood, improved, and developed in order to be successful in it.

The research and its results are meaningful for researchers and contributors in the field of entrepreneurship. The findings of this study are able to demonstrate the dynamic aspect of the business model of crowdfunding that enhances the successful use of crowdfunding for entrepreneurs using crowdfunding platforms, owners of the platforms and even for investors. The author encourages other researchers to further study the presented model with the aim of improving, developing and testing the findings.

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Table of Figures and Tables

Figure 1: Stages of Entrepreneurial Firm Development and its Financing Options ... 10

Figure 2: Drivers Influencing Crowdfunding ... 15

Figure 3: The Major Forms of Capital Provision Ranked by Process Complexity ... 19

Figure 4: Business Model Canvas ... 21

Figure 5: Research Framework ... 25

Figure 6: Research Methods: Triangulation, the Multi-Method Design ... 28

Figure 7: The Process of Investment on Companisto ... 36

Figure 8: The Investment Process in Practical Terms ... 38

Figure 9: Preferred Crowdfunding Model ... 41

Figure 10: Potential in Crowdfunding based on sixty Answers ... 46

Figure 11: Preferences of Reward-based Model Users on Financial Sources ... 50

Figure 12: Preferences of Equity-based Model Users on Financial Sources ... 51

Figure 13: Preferences of Early-stage Businesses on Financial Sources ... 51

Figure 14: Preferences of Growth-stage Businesses on Financial Sources ... 52

Figure 15: Distribution of Industries among the Respondents ... 54

Figure 16: Business Model Canvas of Crowdfunding ... 55

Figure 17: Business Model Canvas-Matrix ... 56

Figure 18: Business Model Graph of Crowdfunding ... 60

Table 1: Main Results of the Survey ... 42

Table 2: Getting Know about Crowdfunding ... 82

Table 3: Complementary Sources to Crowdfunding ... 82

Table 4: Real Fund Percentage of Companisto’s Projects ... 82

Table 5: Projects on Prosper, first three days of observation ... 83

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1. I

NTRODUCTION

In our dynamic world, creating new business is an attractive form of self-fulfilment, being independent, and to give meaning to life (Westhead, Wright and McElwee, 2011). Businesses can have different aims, from targeting being global from the start, having a business with discrete growth rate or opening a small firm without the desire to grow, although in all cases entrepreneurs need to acquire the adequate finances in order to start their dreams. Capital can come from the founder’s resources or they can choose from debt finance, business angels, venture capital, (Westhead et al., 2011) or the not-well known, but another tool of finance, crowdfunding (Kleemann, Gunter Voss and Rieder, 2008; Manchanda and Muralidharan, 2014). In order to better understand the problem statement, the author will place the role of crowdfunding in the financial cycle that reveals when and where crowdfunding can be an alternative and/or a complementary tool in the hands of the entrepreneurs (Manchanda and Muralidharan, 2014; Cumming and Johan, 2014; Collins and Pierrakis, 2012). We will discuss the phenomena and different types of crowdfunding and see how it grew to be a true business investment and alternative for founders (Tomczak and Brem, 2013; Burkett, 2011; Gerber, Hui, and Kuo 2012; Belleflamme, Lambert and Schwienbacher, 2013; Hemer, 2011, Collins and Pierrakis, 2012; Schwienbacher and Larralde, 2010). The dynamic of crowdfunding is rapid. It has some great advantages but one must keep in mind where, how and which stages of the business it can be successfully used (Cumming and Johan; 2014; Collins and Pierrakis, 2012).

Micro-financing existed before (Hemer, 2011); nonetheless academic research on crowdfunding is still limited. More and more researchers turn their interest to crowdfunding, and literature is just about to boost on the topic, but till now it is not a well-understood phenomena. The limited research papers on the topic also possess questionable quality. However a bunch of findings proved to be fruitful and able to give useful insight into different parts and aspects of crowdfunding. The revision of the literature review is a key part of this paper. It boosts the general knowledge about this financing tool.

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How can Crowdfunding be successful for its players?

The answer to this question can be answered from several different perspectives; however it is not the aim of this research to list all of the aspects. This paper targets the fundamental, often forgotten, basic of success, The Business Model. The model can be exploited by the entrepreneurs raising capital, the investors to better understand the underlying processes, and also by the crowdfunding platforms to improve their services and activities.

This business model of crowdfunding is important as it helps understanding the processes around crowdfunding integrating into a system-view that is able to clarify what are the values providing to the customers, who the customers are, what are they paying for, what is more to offer in the model, how and for what payment can be and will be paid...etc. (Osterwalder and Pigneur, 2009; Teece, 2010). Without it, it is hard to see all elements at one and once it is done the crowdfunding field can be easily exploited, improved and used by all its members seeing the relevant blocks. Till now, there is no one who published the business model canvas of crowdfunding; and the author believes that doing great job in crowdfunding starts with this holistic-aspect. The different drivers within crowdfunding can relate, modify, enhance and complement each other; these factors act around crowdfunding generating the business model leading to new potentials to exploit at its best.

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This holistic view on crowdfunding can be the fundamental basic to be successful in crowdfunding. As once one can see holistically the whole procedure of crowdfunding, can strategically answer the questions along the business model leading to the best exploitation of this financial method.

2. T

HEORETICAL

B

ACKGROUND

In the following sections, the valuable and relevant literature will be treated. These sections are done in a logical way beginning with the understanding that crowdfunding can be an option for entrepreneurs, what crowdfunding actually is, and it is followed by its different types, classifications and important drivers of crowdfunding. The aim of the literature review is to collect and internalize the existing knowledge of the topic leading the study closer to its holistic-view.

2.1. Crowdfunding in the Financial Cycle

This section clarifies why and when can crowdfunding have a role in the financial cycle. Instead of studying crowdfunding in medias res, this research wishes to show that crowdfunding is an option for entrepreneurs, not a must, or just a fashionable choice. The usage of crowdfunding seems to be dependent on which stage the business is in.

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its users spread from 1990s. There are several examples for early micro-financing projects; well known examples are the famous pianists Mozart and Beethoven who financed concerts via advanced subscription from interested parties (Hemer, 2011). Even till 2006, the online version mostly promoted only creative artistic, social or health care...etc. projects; but from that time an increasing number of entrepreneurs realised the opportunity it provides to finance early start-ups. In the pre-seed stage when the business usually is still just an idea, there is no need of capital, but when it steps into the seed stage, raising capital become important in order to grow.

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According to Collins and Pierrakis (2012) there are two gaps where start-ups are not likely to find financing options and crowdfunding can be the bridge for the financial source’s black hole (Figure1).

1. When the 3F resources dried up, but the required amount of money not big enough for angels to be attracted;

2. When the business angels are already active, but the money required is still too small for venture capitalist to be interested.

Once the business overcome these difficulties and reach a size, they are able to attract venture capital firms.

Attracting the crucial investors is always a key point in order to get the adequate financial instruments, but investors want to know the start-up’s know-how, whether it will be profitable and so on. However in the first period no one can predict the firms’ future (Cusumano, 2013). That is why crowdfunding can be a useful instrument. Founders must show on the platform to the ‘crowd’ via the business and financial plan whether their business worth investing in it. The differences in the way how people invest in projects are key component. For example, in case of the donation-based crowdfunding collected money is usually funds for a better life, health care, or special social projects. Here, the driving force is altruism, not profit generation (Rubinton on, 2011; Schwienbacher & Larralde, 2010). With the emergence of equity-crowdfunding, the contributors can make true investments in order to gain profits, considering carefully which start-up ideas they will support, although this consideration tends to be not as

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2.2. Definition of Crowdfunding

In this chapter, the exact definition will be discussed. Definition helps to guide the readers through this research and clarifies what the author means on crowdfunding in this paper building on other literatures.

The definition of crowdfunding derives from the definition of crowdsourcing. According to Kleemann et al (2008) “crowdsourcing takes place when a profit oriented firm outsources specific tasks essential for the making or sale of its product to the general public (the crowd) in the form of an open call over the internet, with the intention of animating individuals to make a (voluntary) contribution to the firm's production process for free or for significantly less than that contribution is worth to the firm” (p.6). Lambert and Schwienbacher (2010) applied this definition to crowdfunding as the mixture of crowdsourcing, financing from the crowd and microfinance, small amounts contributed; “an open call, essentially through the Internet, for the provision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights in order to support initiatives for specific purposes” (p.4). If crowdfunding offers equity in exchange for the amount of money requires attention. General solicitation is limited to publicly listed equity unless national securities regulator authorizes it. Usually it is under national laws and rules creating legal limitations (Schwienbacher and Larralde 2010). That is why sites such as the well-known Kickstarter or Indiegogo are more famous until nowadays, raising money only in exchange of products.

Kleemann et al. (2008) argue that for the development of crowdfunding the Web 2.0 was a prerequisite. Web 2.0 can be defined as “a term used to describe the current incarnation of the World Wide Web where there is a high degree of interaction and collaboration between users using software such as social media” (Ince, 2013). According to Schwienbacher and Lee et al. (2008) there are three main attributes of Web 2.0 that makes flourish crowdfunding. Collaboration makes feasible to complement each others’ resources and skills. Openness makes it possible to participate freely to several projects. Accessibility allows users of internet to increase. They concluded that Web 2.0 opens up the opportunity for small firms to create value. In the case of crowdfunding these intermediary web-based “sites” call themselves “crowdfunding platforms”. The two other players in game are the fundraisers and the investors, the ‘crowd’ (Tomczak and Brem, 2013).

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campaign founders by building up on personal needs of the members (e.g. promoting early start-up, investment ...etc.) with, in most cases, the help of business-structured crowdfunding platforms (Kleemann et al,2008; Lambert and Schwienbacher, 2010; Ince, 2013; Tomczak and Brem, 2013).

2.3. Classification of Crowdfunding

In the following chapter, several classification of crowdfunding will be discussed. Crowdfunding is not unified; different view-points let distinguish sub-types of crowdfunding. Divergences between the different types of crowdfunding can be slight, not changing the ‘crowd’-like of funding; but it can realise different timing of payments, payout models of crowdfunding, investment modes and also different rewards in exchange for the capital. These deviations are not only interesting, but also give options for both entrepreneurs and investors to choose from which one can fully fulfil their needs and requirements.

2.3.1. Direct vs. Indirect Crowdfunding

It is necessary to distinguish between direct and indirect fundraising modes of crowdfunding. We are talking about direct fundraising when the entrepreneurs try to raise money through direct appeal, through its own website and/or with own supporters. Conversely, indirect mode appeals the ‘crowd’, the general public, with the use of crowdfunding platform, the intermediary. The importance of making the distinction is to emphasize that it is not a must for fundraisers to use external crowdfunding platforms; however it is appealing to use, as via this tool entrepreneurs can gain access to a large number of people. (Tomczak and Brem, 2013)

2.3.2. Ex Ante vs. Ex Post

We can distinguish between the funds when the financing and the reward for it actually happens. Ex ante funding means when the financing occurs before offering an exchange for it and we are talking about ex post funding when the product just offered after financing. Most crowdfunding is ex ante. In this case usually there is a prototype or an experimental design for further developing and the money raised can be used for realization. In this way, the investors have a direct impact on the execution (Tomczak and Brem, 2013; Burkett, 2011).

2.3.3. Payout Models of Crowdfunding

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money to the fundraisers. We can distinguish four types of payout model within the crowdfunding phenomenon (Tomczak and Brem, 2013).

The threshold model or also called as the all-or nothing, or fixed funding model that refers to that the amount of money will only be released when the minimum money for the campaign is met (Gerber et al., 2012; Belleflamme et al., 2013). Usually there is also a time limit to fulfil it; if it does not succeed the money will be allocated back to the investors (Hemer, 2011, Collins and Pierrakis, 2012).

The funding model, when the fundraisers can keep the money even if they did not manage to reach their target threshold, is called keep-what-you raise or flexible funding or the all or more model. Usually there are different fees for meeting the target money, exceed or fail to achieve. In this way they incentivize not to set “arbitrarily funding goals” (Tomczak and Brem, 2013, p. 346).

The so called holding model “involves the platform operator creating a subsidiary company as an individual holding for each of the crowdfunding ventures that are to be funded. Each holding owns the above mentioned shares of its venture and sells them to the crowd. It acts as a single investor in the crowdfunding venture, alongside other potential investors from the conventional capital market" (Hemer, 2011, p.16).

The club model tries to overcome the public offerings’ limitation. As mentioned before the public offering of investment is highly regulated and in many countries it requires the publication of sales prospectus (Hemer, 2011; Westhead et.al, 2011). The procedure around it costly, time-consuming but crowdfunding overcame by organizing investment clubs. This club model means involvement of the ‘crowd’ as members of a closed circle. The regulation on the members of the club is less strict as they are thought to be known as ‘qualified investors’ who need less protection by the law (Hemer, 2011). The investors become members rather than shareholders circumventing regulations (Schwienbacher and Larralde, 2010). The line between crowdfunding as a club model and public offering is opaque (Tomczak and Brem, 2013).

2.3.4. Investment Modes of Crowdfunding

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(Schwienbacher and Larralde, 2010). Once the investment occurred, the investors are not involved any more in the project (Tomczak and Brem, 2013).

Passive investment is when the investor only wants to invest but does not want to participate or influence the business. The businesses searching for passive investors are “solely interested in raising money but not using the crowd as active consumers or giving up some control over the product” (Schwienbacher and Larralde, 2010, p.13). On the other hand, with the active investment the investors wish to directly affect the project e.g. by having voting right. Hybrid modes can evolve such as a donation mode can turn into active investment when the fundraiser let the investors to participate in major decisions (Westhead et.al, 2011; Tomczak and Brem, 2013).

2.3.5. Non-equity vs. Equity Rewards

Crowdfunding helps the entrepreneurs to identify the possible ‘crowd’ who are willing to support their projects. These people can be more passionate than business angels, venture capitalists (Heminway and Hoffman, 2011). Therefore, one of the most important issues in crowdfunding what the investors can expect in exchange and why they engage in supporting businesses. We could see that the investment can be given as donation, passive or active investment, but we should see how the investor can be rewarded for their resources. With the donation type of investment modes we could see that this type of investor prefers reputation, or just want to be part of the ‘launching’ process (Tomczak and Brem, 2013; Schwienbacher and Larralde, 2010). The type of motivation that is driven by fun, its own sake (Kleemann et al., 2008) or participation in execution an important business, social issue (Hemer, 2011); it is called intrinsic motivation. When investors get in exchange for their money tangible assets such as gifts or products associated with the project they support, it is called the patronage style rewards (Burkett, 2010). They can also pre-order the products, that is equal to the ex ante way of funding with the combination of the patronage style. It means funding a project to execute the product that they get as a reward; in other words buying a product in advance with their initial investment. As no equity is involved in the process, it is not regulated by law. (Tomczak and Brem, 2013)

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2.4. Important drivers influencing crowdfunding

Figure 2: Drivers influencing Crowdfunding

Adopted from Schwienbacher and Larralde (2010)

According to Schwienbacher and Larralde (2010) there are seven drivers that can influence the use of crowdfunding (see Figure 2).

Lack of pre-existing resources can influence the use of crowdfunding in terms of assets to secure for the fund and skills possessed by the founder(s). Debt finance tends to require collateral assets to secure the transfer. It is also called as ‘stupid money’ as it does not provide additional managerial support in “sales, marketing, accounting, operations, and distribution” …etc. (Westhead et al., 2011). On the other hand, VC funds can contribute with skills and knowledge in addition to the funds (Schwienbacher and Larralde, 2010; Keuschnigg, 2004; Botazzi and Da Rin, 2001). Founders who does not have enough collateral, but skills can benefit from the use of crowdfunding.

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Organizational form can be another important factor. According to the study of Lambert and Schwienbacher (2010) the non-profit firms are better able to raise funds, than for profit organisations. They argue that for profit organisations will concentrate on the profit seeking nature of the business leading diminishing quality and increasing quantity.

Control between the shareholders and managers can lead to conflicts. Shareholders focus on profit maximizations to increase their share value and have dividends; on the other hand, managers have other interests such as prestige building, value creation…etc (La Porta, Lopez-de-Silanes and Shleifer, 1999). In order to decrease the conflict one of the parties should have better control. Also incentives could be given to the top management to align them with the corporate direction (La Porta et al., 1999). Questions should be raised up; to what extent ‘the crowd’ can have voice in the operation of the company. There can be large number of inventors contributing a small amount of money. This would create difficulties to give power in the hands of the crowd. However, the Web 2.0 gives possibility to convey ideas and voting power, but unlikely to be feasible in the long run (Schwienbacher and Larralde, 2010).

The amount required by entrepreneurs is also a factor. As we could see, high-potential businesses are more likely to attract VCs or business angels funds, however if smaller funds are required it could fit well to crowdfunding (Schwienbacher and Larralde, 2010, Westhead, 2010).

Legal issues regarding equity issuance and multiple investors is another important factor. For private companies there can be regulation on equity issuance and it can shape which platform will be used. In some countries limitations are present on the number of shareholders and/or only qualified investors can invest money (Schwienbacher and Larralde, 2010; Buysere, 2012).

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2.5. Different goals of the players

Crowdfunding is a two-sided market, and the different players on each side have different purposes. The different classifications and drivers are not equally important for the players within the model. Generally speaking, the entrepreneurs are more concerned about: the classifications of the type of crowdfunding, the crowdfunding platforms and the drivers of crowdfunding. These aspects are adjusted by the investors to why and how they are willing to support campaigns.

Therefore, on one side, there are the founders, who are willing to raise capital via crowdfunding and offering opportunities to the crowd to invest (Argawal, Catalini and Goldfarb 2013). They try to attract people to participate in realisation of their business. On the other side there are the funders, who possess financial capabilities. They are looking for good bargains and projects that can fulfil their motivations. The place where all this can happen is the so called crowdfunding platform. In this section we will have a closer look on the different players and their aim in the crowdfunding game.

2.5.1. Goals of founders

In crowdfunding, funders can have several different goals unlike with other forms of venture financing (Mollick, 2013). Most of the projects are looking for small investments, to raise small amount of capital for a particular event or project (Schwienbacher and Larralde, 2010); however funding from the crowd is available also for those firms that are already established. It is unclear, to what degree crowdfunding will substitute and/or complement the long-established way of venture funding, especially in light of the emergence of equity crowdfunding (Manchanda et al., 2014).

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2.5.2. Goals of funders

The relationship between investors and investee in crowdfunding differs from the traditional methods. It depends on the context and also on the nature of the funding effort (Belleflamme et al., 2012). We can distinguish between four contexts; however they can overlap as investors can fulfil more of their aims with one project (Mollick, 2013; Hemer, 2011). With the donation-based crowdfunding, they can be philanthropist as they do not expect direct returns in exchange of their money. In the reward-based model, as mentioned in sections 2.3.4 and 2.3.5, the funders in exchange of the resources will be rewarded with, for example, being involved in the early development, meeting the creators, being credited in a movie...etc. In the lending model, the funders will have some expectation on return on the capital invested, and the main goal of them is to support a project. They wish to contribute to help a project come to reality. We can see that in this model, the donation-based model’s funders’ interest and the lending model funders' wish can overlap. With the emergence of the equity crowdfunding, funders appear as investors, the desire to have equity stakes or similar consideration in return for their funding such as future profits, royalties, or a portion of returns for a future planned public offering (Mollick, 2013; Hemer, 2011). Although, these groups are not homogenous and driven by personality, sub-context, and history; we can agree that equity crowdfunding funder’s (included for shares, equity, interest...etc.) wish to maximize their profit, and will preferably invest in high-growth potential businesses. According to Hemer (2011) process complexity influences the capital provision’s type (Figure 3).

Figure 3: The Major Forms of Capital Provision Ranked by Process Complexity

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2.5.3. Goals of the Crowdfunding Platforms

Crowdfunding platforms are for profit organizations (Agrawal et al. 2013). Most of them require four or five percent of transaction fee after successful project (Gerber et al., 2011). Some even ask for more, or they would even ask money after unsuccessful projects. One of the types requires paying a monthly fee for using the platform. Their aim is to possess as many members both investors and entrepreneurs with project and/or business as possible. Many creators and great number of ‘crowd’ increase the likelihood of being financed by crowdfunding. In the two-sided market, the platform can be seen as the matchmaker, providing possibility for backers and inventors to find each other (Argawal, 2013). Platforms should facilitate safe crowdfunding, diminish the incentives to cheat and protect the ideas shared and reduce the general risks that one has to face (Gerber et al., 2011). Platforms should not only mitigate the risks in association with crowdfunding, but also to provide due diligence, facilitate efficient matching allowing for effective search on the side of the funders...etc. Crowdfunding platforms also advertise themselves and having a share from media attention with successful campaigns that may help them to have higher number of members, both investors and funders. This can enhance the hidden potentials of crowdfunding, like marketing aims (Kain, 2012).

3. B

USINESS

M

ODEL

F

RAMEWORK

In this section, the author describes a business model guide to provide a framework. Answering the key concepts along the framework and identifying the elements within it. This paper will present the business model of crowdfunding based on the author’s research that can be found in detail in the following chapters.

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manner by which the enterprise delivers value to customers, entices customers to pay for value, and converts those payments to profit” (Teece, 2010, p.172).

Drawing on Osterwalder and Pigneur’s (2009) business model framework is used as the theoretical foundation (Figure 4). This framework is only a guide how to generate valid business models, which questions must be answered along the model. As it is a general theory about business models, application of it must be careful. This framework is also called as the 'business model canvas', that is a visual representation in a simple manner. Companies like IBM, Ericsson, Deloitte...etc (Chesbrough, 2009) use also this method, therefore the author found it relevant to apply this model to the crowdfunding field. With this model, the paper will be able to represent crowdfunding leading to further potentials to enhance its power. The business model canvas describes the business model along nine fundamental “building blocks”. These nine blocks are organized around four main sections that are customers, offer, infrastructure and financial liability. These four segments are broken down into blocks. The customers segment includes three building blocks: customer relationships, customer segments and channels. The offer area includes the value propositions building block. The financial liability includes two building blocks: cost structure and revenue streams (Osterwalder and Pigneur, 2009)

Figure 4: Business Model Canvas

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In order to identify these building blocks in the crowdfunding phenomena, we need to engage in what we are looking for (based on Osterwalder and Pigneur’s work, 2009):

Customer segments: “An organization serves one or several Customer Segments” (p.16) “defines different groups of people or organizations an enterprise aims to reach and serve”. (p. 18). This segment is the main pillar in any business model as customers generate the profit. In order to identify the needs of them and serve them, it is a good strategy to group them. Grouping can happen around same needs, behaviours and expectations. This is the phase when some of the segments must be ignored in order to focus the main consumers. There are different types of segments such as mass market, niche market, and segmented, diversified, multi-sided platform.

Guiding questions to identify ‘Customer Segment’ block:

 Creating value, but for whom?

 Who are the most important customers?

 What are the customer archetypes?

Value propositions: “It seeks to solve customer problems and satisfy customer needs with value propositions” (p.16) “describes the bundle of products or services that create value for a specific customer segment” (p. 22.). Generally speaking this is the reason “why”. It is the benefit of a company/organization/choice. It can be innovative, representing new or disruptive order or adding features to an existing solution. Values can be quantitative or qualitative. Quantitative elements can be the low price offered, the fastness of the service and the qualitative examples are the experience offered, the brand, the design...etc.

Guiding questions to identify ‘Value Proposition’ block:

 What value is delivered?

 Whose problem is solved?

 What kinds of products/services are offered?

 What kinds of needs are satisfied?

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Guiding questions to identify ‘Channels’ block:

 Through which channels do the customer segments want to be reached?

 Which one is the best?

 Which one is the most efficient?

Customer relationships: Customer Relationships are established and maintained with each Customer Segment“(p.16.); It “describes the types of relationships a company establishes with specific customer segments” (p. 28.). It can range from automated to personal customer relationship. It influences the customer experience.

Guiding questions for identifying ‘Customer Relationships’ block:

 How can the customers be got, kept, and grew?

 How the customers are integrated?

 How costly is it?

Revenue streams: Revenue streams result from value propositions successfully ordered to customers” (p. 17), It “represents the cash a company generates from each customer segment” (p. 30). Different pricing mechanisms, such as “fixed list prices, bargaining, auctioning, market dependent, volume dependent, or yield management can be possible options”.

Guiding questions to identify ‘Revenue Stream’ block:

 What is the revenue model?

 What is the pricing tactic?

 For what do the customers pay?

 For what value are they willing to pay?

Key resources: “Key resources are the assets required to order and deliver the previously described elements… “(p. 17), It “describes the most important assets required to make a business model work” (p.34.). In order for a business model to work the essential resources must be possessed to reach markets, maintain relationships, to create products/services...etc. Resources can be capital-intensive production facilities, human resources, physical, financial, intellectual...etc. These resources can be owned, leased or have access via a third party to it.

Guiding questions to identify “Key Resources” block:

 What are those resources that...the value proposition

 ...distribution channels

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 ...revenue streams require?

Key activities: “…by performing a number of Key Activities” (p.17), It “describes the most important things a company must do to make its business model work” (p. 36). These are those activities that maintain successful daily operations. It can be categorised into three different sections: production related to design, making, delivering; problem solving related to new solutions; platform/network related.

Guiding questions to identify ‘Key Activities’ block:

 What are those activities that...the value proposition

 ...distribution channels

 ...customer relationships

 ...revenue streams require?

Key partnerships: “Some activities are outsourced and some resources are acquired outside the enterprise” (p.17), It “describe the network of suppliers and partners that make the business model work” (p. 37). Partnerships can mean alliances, strategic decision to mitigate risks/have access to key resources/achieve economies of scale, joint venture, and buyer-supplier relationship.

Guiding questions to identify ‘Key Partnerships’ block:

 Who are the key partners?

 Who are the key suppliers?

 What kinds of resources come from third party?

 What kinds of activities do partners perform?

Cost structure: “The business model elements result in the cost structure” (p.17). It “describes all cost incurred to operate a business model” (p.40). It includes all the costs that occur meanwhile operating the model. The target is to minimize these costs, however it depends on how sensible is the model to these costs. In this sense we can distinguish among “cost-driven”, “value-driven”, “fixed costs”, “variable costs”, “economies of scale”, and “economies of scope models (p.41).

Guiding questions to identify ‘Cost Structure’ block:

 Which resources are expensive?

 Which activities are expensive?

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4. M

ETHODOLOGY

In the following sections, the research design, its multi-method, data collections and its analyses will be presented. In order to keep the research well-structured, Figure 5 shows the research framework that was followed.

4.1. Research Design

When a phenomenon is relatively new, and the academic research in relation with the topic is limited, exploratory or descriptive designs are well-accepted way to analyze it. Exploratory study refers to the “what” questions which makes it suitable for studying new fields, and gaining new insights. It mainly includes literature analysis, and interviews and talking with experts. The descriptive study can answer questions like ‘who’, ‘where’, ‘how many’, ‘how much’ and also ‘what’ questions can be complemented by this type of research. The exploratory method uses qualitative information, while the descriptive method also involves quantitative data (Yin, 2003). Bryman and Bell (2011) find it important to connect the scientific data with theory. They differentiate between deductive and inductive approach. The difference between the two approaches is the first one starts with theory and test it, while the last one is about developing or extending theory from data (Bryman and Bell, 2011).

In this study, the author follows an inductive approach using qualitative data. The results of the empirical data will be used to relate the different factors of crowdfunding to generate the theory of business model of crowdfunding. This theory can be in the future used for

Figure 5: Research Framework

Adopted from the University of Groningen

Preparation phase

• Choose topic

• Systematic literature review • Specifying research question(s)

Research

• Select research strategy and sample • Conduct measurement and data analyses

Implication and report

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enhancing success at crowdfunding. To the best of my knowledge, there was no previous aim to see holistically the crowdfunding method.

In this paper, the author conducts multi-method. After the literature review, a case study is done. Afterwards a survey is conducted and then the analysis of secondary data such as blogs, web pages, and sites will be conducted to complement and to add other perspectives to the findings. To strengthen the results observational data of six platforms will be included. When different methods are used to answer research questions that can be answered on different level called triangulation. “Triangulation means that researchers take different perspectives on an issue under study or — more generally speaking — in answering research questions. These perspectives can be substantiated in using several methods and/or in several theoretical approaches” (Flick, p. 445). According to Denzin (1989), triangulation has four types: (1) data, (2) investigator, (3) theory, and (4) methodological. The latter can be further divided into within and between methods. In this paper the combination of qualitative methods are used to combine it with observed quantitative data from different platforms. "Qualitative and quantitative methods should be viewed as complementary rather than as rival camps" (Jick 1983, p. 602). Triangulation can help us to answer the above raised research questions and generate the business model of crowdfunding.

4.2. Research Methods

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sufficient. In the theory building model the researcher can only begin with a question, investigate the real cases and creating a theory or set of propositions as a result of examining the cases (Thomas, 2004). Single case study strategy is the classic application as it allows in-depth investigation, deep understanding (Dyer and Wilkins, 1991). According to Yin (1994) single case study can have three purposes: (1) enabling the deduction of a situation, (2) critical case, and (3) revelatory purpose when the research field has not been research in depth before. Following these aspects, as crowdfunding is a not a well-research field till nowadays, with one chosen business that successfully used crowdfunding method, can be revealed some of the driving factors and relation of them. These aspects can be then taken into account to raise capital via crowdfunding while identifying the segments in the business model canvas and extending the findings into a survey.

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In order to help answering the raised research question, selection of the crowdfunding platforms will be the next step to observe them in real life context. In the crowdfunding field, there is almost no one who has not heard about the great success of Kickstarter. We are not questioning the fame of it, but one can raise the question in what extent crowdfunding-platforms influence the success of projects. Donation/reward-based crowdfunding-platforms, like Kickstarter, mainly support health, social…etc issues. In order to figure it out, I invited platforms to participate in interviews, questions and surveys but all of them declined my requests referencing to their time capacity. As platforms work as any other businesses, probably they do not want to share their precious business models.

Having decided on the target platforms, systematic analysis began. As mentioned before, crowdfunding platforms are also businesses with the desire to generate profits; it is in their interest to appear as attractive both for investors and entrepreneurs as possible. But are they working in a way as we thought? Are they efficient? Do they really raise as much money as they predict, if we see the project one by one? Do they contribute with something else to the campaigns? In order to complement, reject or strengthen the data of the case study and survey, the author observed projects separately daily on six crowdfunding platform. Beginning on 25th of April for two weeks, the author observed all or selected businesses on the target platforms. Therefore, in order to reveal additional information, this research is conducted, called here ‘observation findings’ referring to the systematic analyses of six platforms.

Literature review Talking with experts In-depth interview with the CEO of Sommelier Privé, Case study Survey with entrepreneurs using CF Complementary Data: Observation and Systematic analysis of CF platforms

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4.3. Data Collection

As mentioned in the previous sections, firstly a single case study is conducted with revelatory purpose then survey method is used to extend the findings and help generate valid findings. Finally, observational data complements the theory.

For the single case study, the author has chosen Sommelier Privé. Sommelier Privé raised capital via Companisto, a well-known German platform, managed to run a successful project. It is found to be even more relevant and interesting to use a European, German business and platform. First of all, the author assumed that for American-based firms due to the population it is easier to get the target amount, funders. Secondly, American-English-language platforms generally have higher number of members which can hide some additional information before our eyes. Thirdly Companisto platform is still well-known enough to compete with other national and international platforms. Having decided on the platform, case selection was the next step. As Sommelier Privé, not only an interesting business, but also managed to be overfunded with 400%. The author found it sufficient to make a case study revealing efficient and useful crowdfunding strategy. The interview was conducted with the founder and CEO of Sommelier Privé via Skype program (Appendix 10.1). Skype is a useful application that can overcome the distance difficulties, and still letting to conduct a face-to-face interview.

In order to further develop the theory, the author used the case study’s findings to conduct a target-aimed survey. Social media, namely Facebook helped the distribution of the survey to reach those businesses that used crowdfunding. Most of the projects wish to reach a wide range of people; therefore they also create Facebook-accounts to promote their ideas. The author applied for and was admitted to several different crowdfunding-groups where those businesses/projects could have been found that use crowdfunding. The author researched on their websites and collected e-mail addresses manually through their sites and/or messaged them directly on Facebook. Random sampling does not guarantee a sample’ representativeness in every case (Thomas, 2004), so in this situation the author decided to make 2 equal subgroups of entrepreneurs: Those who used (1) reward and donation-based, and (2) purely loan-based and/or different type of equity-based platforms.

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Thomas (2004) suggests using maximum 100 samples in one group. As the first two types cannot be distinguished I asked 200 people from these types. Purely loan-based and equity-based platform almost never operates together or can be easily differentiated; I asked 100 cases per type. Therefore, the full sample being invited is 400 projects’ owners in order to fill out my survey (Appendix 10.2, Appendix 10.3).

The author created the survey with the help of ThesisTools’ and analysed the results with SPSS. ThesisTools Online Surveys, based in Den Hague, offers an easily usable and till 500 respondents free online survey creating program. ThesisTools already transported coded results of the respondents’ answers (Appendix 10.4) but it needed further adjustment to transfer them into SPSS (www.thesistools.com). SPSS is a well-known “statistical analysis and data management solution”. It can take almost any types of data generating charts, plots of distributions and trends, descriptive and complex statistics and analysis (IBM, SPSS Software, n.b.). In order to use the data in accordance to SPSS, the variables, its attributes and arguments should have been defined from the answers given (Appendix 10.5). The ThesisTools’ data was fixed on the surface of SPSS data (Appendix 10.6). Charts and tables were generated by SPSS and Microsoft Office Excel.

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Companisto, Crowdcube, Crowdfunder, and Indulj.be host relatively small number of projects making it possible to add new project to the research appearing within the research period. Most of the sites allow the registered members to see how much amount of money the entrepreneurs managed to raise. Daily observation for a restricted period will let us see the daily invests in a business and valuation can be done how platforms operates, in what extent they help projects and what they may offer to the entrepreneurs to have successful campaigns. When applicable, special attention will be paid to newly added start-ups in the research period, how fast they can reach their target amount, or whether they are predetermined to fail. This systematic analysis is a complementary data to strengthen the results from the case study and survey and to process the publicly available data on crowdfunding platforms.

4.3.1. Observation findings

Hereby, the secondary data about the platforms will also be presented following by the findings of the observation:

 Companisto

Companisto is analysed deeply in the case study section, therefore only some salient points will be mentioned. On this platform there are only a few campaigns at one time. During the observation period there were only four projects available for investors to fund. On this platform, there is a target minimum amount and target maximum amount defined by the founders. The percentage of financial assistance is measured to the target minimum leading to look like that most of the businesses are overfunded. Naturally, the target maximum amount should be the 100%, although it is not so. Measuring the raised money to the maximum amount gives better picture about the projects (Appendix 10.8, Table 4). The first day 1704 people invested money, and it increased to 2711 at the end of the observation period.

 Prosper

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within this 14 days or until it is not fully funded. Prosper collects the agreed monthly payment for the investors and pays out in one amount unlike Companisto, where the interests for the investors are paid out till the participation of the investors. Prosper receives between 4, 95% and 50% of the amount borrowed depending on the rating and terms. 15 US Dollars can be charged in case of failed withdrawal or late payment (https://www.prosper.com/).

The number of projects that was included in the two-week observation was 36. Clearly, we can see that the platform works and investments arrived to the campaigns. These campaigns on average asked 17529, 78 US Dollars. During this period 7 campaigns were withdrawn and 21 projects ended within the next two days funding 100% of the target money (see Appendix 10.8, Table 6). During the two weeks from the 36 projects only three ended without reaching the target amount.

 Crowdcube

Crowdcube is a British platform founded in 2010 and launched in 2011. It is specialized in funding start-ups and businesses by equity crowdfunding. Via this platform 68,000 registered investors raised more than 22 million British Pounds for 116 businesses. Pre-selection, valuation…etc. are prior to be listed on the platform. Once it is listed investors can fund for equity-share. Crowdcube gets 5% from total funds, 1750 British Pounds as legal and administration fees. Entrepreneurs also have to pay for the payment processing directly to the provider. In order to be able to invest in start-ups, members need to be labelled as sufficiently sophisticated, and warnings about risks considering investments can also be studied on the webpage (http://www.crowdcube.com/).

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 Crowdfunder

Crowdfunder was founded in 2011 in USA. Until the Title III of the JOBS Act, in America, is not passed only accredited investors can fund start-ups. . In the USA there is strict regulation and in order to be an accredited investor it has to be defined by the SEC depending on the level of wealth. After being credited as an investor, one can invest through convertible note, debt or for equity. Currently the numbers of investors exceed 42,000. Crowdfunder does not take a certain percentage of the successfully raised money, but it has a monthly fee. There are different deals depending on what the founders wish to have access to (https://www.crowdfunder.com).

All of the projects were observed in this site and also newly appeared projects were added to the existing ones. 15 new campaigns were added which raised an aggregated sum of 8.050.000 US Dollars (Appendix 10.8, Table 5). Already existing businesses almost did not raise capital. Only four projects raised money during this period with 495.000 US Dollars. Here, the investors were not really active. It may be contributable to the fact the entrepreneurs pay for monthly use of crowdfunding in advance, therefore the platform may not as interested in the success of campaigns as much as other platforms.

 Indiegogo

Indiegogo is an American, reward-based crowdfunding platform founded in 2008. Millions of members have supported hundreds of thousands of projects. Projects’ owners can raise funds in two ways: flexible funding or fixed funding. In the first case, the money raised can be used even if it does not reach the target amount; in the second case the funds can be used only possible when the pre-established amount is reached. Money paid to the platform also depends on these two types of funding. Managing to collect less than the required money only affects flexible funding, 9% of the collected money must be paid to Indiegogo. Considering fixed funding, money is not given away, as they did not meet the target. In the event of successful project (meeting the money required), in both funding types, 4% is paid. Additional fees as always must be paid to third parties for transferring money (https://www.indiegogo.com/).

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 Indulj.be

Indulj.be is a Hungarian reward-based CF platform that was started in November of 2011, and allowed investors to buy on the webpage from January of 2012. The name of the platform can be translated as Be.launched. 432 supporter collected 1.558.490 HUF that is equivalent to 5.195 Euro, which is relatively small next to the formerly presented platforms. The founders expected 150-200 projects per year, however in practice; so far, it did not come to reality. Investors can decide in which project they invest and in accordance to the amount of money they can receive ‘rewards’ which decided by its founders. If the target amount are not met, the founders can decide whether they will realise (part of) the project documented in written or extend the CF period. If both options are rejected then the project is declined unsuccessful and money is refunded to the supporters. As with all platforms both supporters and founders must be registered members. Indulj.be preselects the upcoming projects and shows only those that they found relevant and creative enough. The platform receives 10% of the raised fund included transaction costs (http://indulj.be/).

This platform is a good example for an unsuccessful crowdfunding platform. There was only one project that was still in progress, and during the two weeks, no one funded this campaign. However, on the webpage, there were presented the already finished projects, and it is an interesting event that one of them was funded with a small amount of money.

5. M

AIN

F

INDINGS

In this chapter primary data will be collected and described. The primary data collections are in-depth interview with the funder and CEO of Sommelier Privé, Marc Clemens and the findings of the survey. However for the case study also previous interview data, studies and forum’s information are used and described. In relation to the case study, the Companisto platforms’ website will be described here, as it is relevant for the event. Other secondary data collections such as the literature review and the systematic analysis: websites of Proper, Crowdcube, Crowdfunder, Indiegogo and Indulj.be were described in previous sections.

5.1. Case Study – Sommelier Privé

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present-day success story in Europe can help us understand, how crowdfunding works and to better identify the business models’ elements.

Sommelier Privé - www.sommelier-prive.de:

“The comfort of online shopping and the advice of the best sommeliers”

Sommelier Privé is a German e-commerce company who managed to success in the wine segment. Sommelier Privé targets the experienced and less experienced wine lovers creating an online platform with “first-class customer service, stylish ambiance and, most of all, excellent wines” (www.sommelier-prive.de). It was founded in 2012 by entrepreneur Marc Clemens. They offer an outstanding innovative buying experience beginning with the choice of wines to our home’s dinner table. 90% of the turnover comes from B2C that can be divided into three categories: (1) single wine shopping that takes up 75% of the B2C turnover (2) wine package with 5% and (3) monthly ‘wine-ticket’ with 20%. The price of the wines ranges are categorised in three: (1) from 7 to 12 Euro, (2) from 12 to 30 Euro (3) above 30 Euro. They not only offer single and customized, pre-defined wine packages, but also personal wine advice and “the opportunity to experience wine in a way that is innovative and convenient at the same time” (M. Clemens, personal communication, April 15, 2014, www.sommelierprivé.de). Most of the other players in the wine segment opt for being inexpensive and narrow profit margins, but Sommelier Privé catches the other end of it with success (ds-Team, 2012). Sommelier Privé target the dilemma of wine lovers, both experienced and not-experienced; there are millions of different wines where buyers expected to choose from. Sommeliers provide professional help online to find a premium wine with personalised advice 24/7 (Slideshare, Sommelier-Privé, n.d., p.1). It is professional, convenient and fast service, which would be impossible in a supermarket.

How does it work? On their e-platform, via taste-filter they can determine the customers’ preferences. According to these settings, customers can easily choose within the offered wines. They will send a wrapped single or three wines per packages to the given address. For wine-lovers they have service for sending every month packages according to the taste-preferences. In order this to work smoothly, the award-winning sommeliers are in charge of selection, testing and labelling wines. Settings can be modified, discontinue and also suspended for a temporary period (www.sommelier-prive.de).

5.1.1. Companisto - Crowdfunding Platform

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platform with 17% market share of capital collected in Germany. Nowadays Companisto is one of the leading equity-based crowdfunding platforms in Europe. However it calls itself equity-based platform; technically within it, it has a loan-based structure, whereby: (1) investors receive the future profits’ share in the form of interests, and (2) start-ups make own independent decision on the operative business of the projects. Currently, it is available in 53 countries and 17520 people consist of its ‘crowd’ calling them ‘Companists’. At the moment, on their website there are 4 fundable start-ups, and 26 successful campaigns. The crowd of Companisto already managed to raise 5,919,970 Euro (www.companisto.de).

The Companisto-company addresses four principles (www.companisto.de):

 Highest quality – In order to keep quality high, they pre-selected the presented start-ups and provide detailed investment profiles of the companies and balanced contracts of participation.

 Fairness and balance – It refers to the way how contracts of participation should be done. This is done in a way that the investors are provided by economic opportunities without interfering with the flexibility or the growth of the start-up.

 Sustainability – The success of both the investors and investees is key for the platform.

 Transparency – It refers to the model of the crowdfunding platform that they only earn money, if the ‘crowd’ and the founders are both win.

Figure 7: The Process of Investment on Companisto

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Companisto provides a platform whereby the investors and investees can find each other. Companisto has a commission of 10% of every successful project’s raised money on its platform. Start-ups define the minimum amount of money that they need, and if the collected money reach the desired amount of capital then the investment is considered to be successful (www.companisto.de).

The start-up businesses apply for Companisto to participate, and if they are through the pre-selection stage with the platform, then they can appear on the platform. Once they are available online, start-ups should provide detailed presentation about their firm that include a video, a business plan, and a financial plan so as to attract the investors. The page also provides opportunity for the Companists to raise questions and mail to the founders even before funding it (www.companisto.de).

There is no minimum amount to invest, so if people decide to fund a project, they can with also a minimum amount of 5 Euro till 25,000 Euro. On this page, we did not find any explanation about this maximum amount, but usually legal requirements restrict how much money every-day people can invest in risky projects such as start-ups. Members decide on their own which start-up they wish to support. Once the collected money from different individuals reaches the maximum target amount and/or terminates the time period given to raise funds (which is first), the money will be given to businesses. So, investment in the firm occurs in one amount collectively with the different small amounts from the different supporters. One example can be when 400 Companists with different amounts such as 5 Euro, 15 Euro, 25 Euro ...etc collect all in all 300,000 Euro; Only this final amount (deducted by 10% to the platform) will be given to the company, not separately the micro-investments (see Figure 7 and 8) (www.companisto.de).

Companists receive the future profits’ share in the form of interests, exit proceeds and company value in proportion to their individual financial sponsorship. It is important to note that the legal form of the participation of the crowd is in the form of a sub-ordinate profit-participating loan. Therefore, the Companists lend their money for the duration of their participation. Companisto decided that the minimum holding period is eight years to make advantage for the Companists. During these years, supporters will benefit from the profits once a year and also if the business is sold the Companists receives money from the sale. These shares cannot be sold by funders (www.companisto.de).

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business valuation is affected by several factors such as the “scalability of the business concept, the qualification of the management, the business plan, the market potential, the competitive situation”…etc. (www.companisto.de).

In order the investment can be done Companists must register on the website, and then they can search for start-ups in order to invest, and hoping for high interest. If the investment considered unsuccessful, all the people get their money back and Companisto does not earn on that start-up. (www.companisto.de).

Figure 8: The Investment Process in Practical Terms

Adapted from the homepage of Companisto (www.companisto.de)

5.1.2. Sommelier Privé at Crowdfunding

According to interview with Marc Clemens, it can be concluded that crowdfunding is not a new playground (M. Clemens, personal communication, April 15, 2014). However, it is easily accessible and, sites and videos make it interactive, but raising capital should be part of the business and financial strategy.

Carefully planned research by the entrepreneurs on whether crowdfunding a good alternative for the firm and on existing platforms should be prior to the crowdfunding projects. Sommelier Privé decided on crowdfunding method, but not only this tool they used. They complemented it with own resources and subsidy. As they were in the start-up stage, they were not big enough to reach other audience to fund their business. Previously raised

Signing up

•For detailed information, Companists have to sign up •Registration is free

Selection

•Companist select the start-up

•They also select the investment amount

Investment

•Companists can invest easily due to standardized participation contracts

Personal Gain

•Companists receive a personal share certificate