Crowdfunding Industry Report 2013

Startup Hive

2 massolution 2013, All rights reserved. Confidential.

Massolution provides you with a limited license to view and use this report subject to the

terms contained herein. If you do not agree to the terms of this license agreement, you

may not view or use this report and must immediately delete or destroy all copies of this

report within your possession.

Massolution provides you with a limited, non-exclusive, personal, non-transferrable,

and revocable license to view one copy of this report and to publish up to two charts

contained within this report for non-commercial use. All published charts must contain a

full citation to the report and a link to http://www.crowdsourcing.org/research. All other

rights are reserved.

You are expressly prohibited from reproducing, creating derivative works of, distributing,

publicly performing, publicly displaying, or transmitting the report in a manner not

otherwise expressly allowed under these terms, including photocopying, forwarding,

publishing, or providing the report to unlicensed users. You acknowledge and agree that

all proprietary information contained within this report is the property, trade secrets,

and confidential information of massolution. Please contact massolution directly with all

inquiries concerning multiuser licenses or any other questions.

2013CF MASSOLUTION.COM2

33 2013CF MASSOLUTION.COM

Every big change starts off small. And nobody appreciates that fact more than Victor Emanuel Dijon von Monteton.

Victor is a former orchestral conductor who now conducts business as a consultant at A.T. Kearney a skill just as prized in business as in music.

As one of the top management consultancies worldwide, A.T. Kearney prides itself in leveraging the power of diverse teams to bring the best mix

of skills to our clients. Our promise: Immediate Impact, Growing Advantage. To find out more, visit www.ATKearney.com.

But unlike Beethoven, we dont leave anything unfinished.

Every great composition starts with a single tone.

Ellenoff Grossman & Schole LLP

212 370 1300

[email protected]

www.CrowdESQ.com

Ellenoff Grossman & Schole is the leading law firm serving the security crowdfunding industry.

Recognized as a thought leader and expert on the nuanced legalities of the JOBS Act,

Douglas S. Ellenoff, a member of the firm, speaks prolifically at conferences and events.

Hes been a key representative and advocate for the industry and has actively engaged with

the SEC to discuss many aspects of the proposed new law. Additionally, EG&S is working with

securities professionals internationally to assist them with shaping smart legislation to foster

investment crowdfunding in their jurisdictions. EG&S is actively engaged with clients in the

crowdfunding industry, including funding portals, broker-dealers, technology solution providers,

software developers, investors and entrepreneurs.

FOUNDING SPONSOR


1. Introduction ............................................................................................ 6a. Foreword ................................................................................................... 7

b. Key Findings ............................................................................................. 9

i. Highlights ........................................................................................... 9

ii. Predictions ........................................................................................ 9

iii. Key Messages .................................................................................. 10

iv. Developments ................................................................................. 11

c. About this Research ................................................................................. 12

i. The 2013CF Industry Report .............................................................. 12

ii. The Research Team .......................................................................... 14

iii. About massolution ........................................................................... 17

d. Crowdfunding Defined ............................................................................ 18

i. Definition and Taxonomy .................................................................. 18

ii. Crowdfunding Models ...................................................................... 19

2. The 2012 Crowdfunding Market .................................................. 21a. Market Growth and Composition ........................................................... 22

i. Crowdfunding World Map; Total Funds Raised ................................ 23

ii. Growth by Crowdfunding Model ...................................................... 25

iii. Predictions; Regions ......................................................................... 27

iv. Predictions; Crowdfunding Models ................................................. 29

b. Campaign Statistics .................................................................................. 31

i. Campaigns Worldwide ....................................................................... 32

ii. Crowdfunding Models ...................................................................... 33

c. Success Rates ............................................................................................ 35

i. Threshold-Pledge Systems ................................................................ 36

ii. Funding Probabilities ........................................................................ 38

iii. The Pledge vs. Pay Out Ratio ........................................................... 39

d. Most Active Categories ............................................................................. 40

i. Across all Models ............................................................................... 41

ii. Financial vs. Non-Financial Return ................................................... 43

iii. Individual Models ............................................................................. 45

4

TABLE OF CONTENTS


3. Web 2.0 Financing ................................................................................. 50a. The Collaborative Web .............................................................................. 51

b. Crowdfunding Dynamics .......................................................................... 52

i. Introduction ....................................................................................... 52

ii. Social Ties .......................................................................................... 53

iii. Social Proof ....................................................................................... 55

iv. Third-level Acceleration: Strong Ties, Weak Ties, & Beyond ............ 56

c. Legal Frameworks ..................................................................................... 58

i. Global Overview ................................................................................. 58

ii. Europe ............................................................................................... 60

ii. USA ..................................................................................................... 61

iv. Key Markets and Initiatives ............................................................. 62

d. Direct Crowdfunding ................................................................................ 66

i. Case Studies ....................................................................................... 66

ii. Applicability ....................................................................................... 68

iii. Costs and Benefits of CFPs .............................................................. 68

4. Outlook ........................................................................................................ 70a. Emerging Crowdfunding Platforms ......................................................... 71

i. A New World Map .............................................................................. 72

ii. Niche Platforms ................................................................................. 74

iii. Crowdfunding Models and Threshold-Pledge Systems ................. 75

iv. Financial Backing .............................................................................. 77

b. Capital Inflow ............................................................................................ 78

i. Crowdsourcing Primer ....................................................................... 79

ii. Capital Inflow Distribution ............................................................... 80

c. Developments ........................................................................................... 82

i. Industry Focus / Niche Platforms ...................................................... 83

ii. Locavesting / Community Platforms ................................................ 83

iii. Hybrid Platforms .............................................................................. 85

iv. Enterprise Crowdfunding ................................................................. 85

v. Crowdfunding Economic Development ........................................... 86

vi. LIVE Crowdfunding ........................................................................... 86

Appendix ............................................................................................................... 87

Acknowledgments ................................................................................................ 88

5

TABLE OF CONTENTS (CONT.)

6FOREWORD

KEY FINDINGS

ABOUT THIS RESEARCH

CROWDFUNDING DEFINED

INTRODUCTION

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS

2013CF MASSOLUTION.COM

If you think that crowdfunding just means smaller companies that launch games

and device projects on platforms like Kickstarter, think again. Crowdfunding has

now emerged as a viable, scalable alternative to public and private finance.

These developments have implications for how governments frame economic

development programs, and leverage public investments.

Behind the scenes major, global companies are running the rule over crowdfunding

as a way to leverage their innovation portfolios into the marketplace. Crowdfunding

is helping enterprises interact with lead customers, and validate R&D outputs.

No financial institution can afford not to be informed about how crowdfunding is

evolving across the world and providing new opportunities for banks, investment

houses, and financial intermediaries.

We founded massolution in order to study and advise on how crowdfunding models

are emerging in different parts of the world, impacting government policy, informing

enterprise innovation and changing the role of financial institutions.

We hope you find our 2013CF Industry Report insightful and that you embrace how

crowdfunding will change the way business is done.

Carl Esposti

CEO/Founder

Massolution and Crowdsourcing.org

FOREWORD

Introduction

7

CROWDFUNDING HAS

NOW EMERGED AS A

VIABLE, SCALABLE

ALTERNATIVE TO

PUBLIC AND PRIVATE

FINANCE.

THE NEW FINANCIAL REVOLUTION

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


2012 was a year of acceleration for the crowdfunding markets! It was the year where

crowdfunding platforms raised a total of $2.7bn compared with $1.5bn in 2011. In

massolutions 2012CF Industry Report, we predicted that the total funding volumes

would reach $2.8bn; our forecast was therefore correct within a very low margin of

error (~5%), and we can thus confirm that the global crowdfunding markets have

accelerated from an annual growth of 64% in 2011 to an 81% growth in 2012. We

are forecasting $5.1bn in total global funding volumes in 2013.

2012 was also the year where in January, the Elevation Dock became the first

individual campaign to reach the $1m milestone. A few months later in April, Pebble

Technology showed how to reach this milestone in only 28 hours; a campaign that

resulted in over $10m total funds raised.

It was also the year where attention shifted towards crowdfundings potential

impact on entrepreneurial finance. Equity-based crowdfunding got the bulk of

media attention in the US when the Jumpstart Our Business Startups Act (JOBS Act)

was signed into law on April 5th.

Since crowdfunding markets are nascent and the concept itself not broadly

understood, discussions about its applicability and potential often strands in

polemic narratives that contributes very limited (if any) value to the discussion. The

2013CF Industry Report therefore provides clarity on the taxonomy for the industry.

In addition to this we have added a separate chapter, Web 2.0 Financing, to provide

a deeper understanding of the very core of crowdfunding. Namely, capital formation

on the collaborative web. We are grateful for eminent contributions of Bryan Zhang

(Cambridge University), Dan Marom (The Hebrew University), Kristof De Buysere

(Tilburg University), and Sean Carr (University of Virginia).

Kevin Berg Kartaszewicz-Grell, Ph.D.

Research Director (Crowdfunding), Massolution

FOREWORD

Introduction

8

WE ARE

FORECASTING

$5.1BN IN TOTAL

GLOBAL FUNDING

VOLUMES IN 2013.

A YEAR OF ACCELERATION

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


The 2012 worldwide crowdfunding volume reached $2.7bn raised from

over 1.1m campaigns. Worldwide crowdfunding volumes grew 81% in 2012,

which is an acceleration from the 64% growth in 2011.

Growth rates by region:

North American crowdfunding volumes grew 105% to $1.6bn.

European crowdfunding volumes grew 65% to $945m.

On average, all other markets grew close to 125%.

Growth rates by crowdfunding models:

Donations- and Reward-based crowdfunding grew 85% to $1.4bn.

Lending-based crowdfunding grew 111% to $1.2bn.

Equity-based crowdfunding grew 30% to $116m.

HIGHLIGHTS

KEY FINDINGS

Introduction

9

THE 2012

WORLDWIDE

CROWDFUNDING

VOLUME REACHED

$2.7BN RAISED

FROM OVER 1.1M

CAMPAIGNS.

$5.1bn will be raised via crowdfunding platforms in 2013.

North America will remain the largest market in 2013:

72% will be raised in North America.

26% will be raised in Europe.

The remaining 2% will be raised primarily in Asia and Oceania.

Lending-based crowdfunding to exceed $2bn in 2013:

Lending-based crowdfunding is expected reach $2.1bn.

Crowdfunding without financial return is expected to reach $2.8bn.

Out of the $2.8bn from non-financial crowdfunding, $1.4bn will be raised

via pure donation-based crowdfunding.

Equity-based crowdfunding is expected to reach $166m.

PREDICTIONS


The total number of successful campaigns across all models is largely unchanged,

but the aggregate funding volume almost doubled! This indicates a new level of

market maturity, in part because crowdfunding models are picking up traction

among start-ups and SMEs who have higher funding requirements than the

usual crowdfunding campaign.

Social Causes is by far the most popular category and drives close to 30% of all

crowdfunding activity. We expect this position to change as start-ups and SMEs

continue to take additional market share.

As crowdfunding resonates with the broader public, crowdfunding platforms will

have to prepare for further disruption as direct crowdfunding, outside platform

domains, drives a greater level of market disaggregation.

There is increased activity as regulators, especially in North America and in

Europe, are preparing for equity- and lending-based crowdfunding.

Crowdfunding platforms will need to develop strategies to either respond to or

participate in enterprise crowdfunding, as large enterprises have begun to either

partner or host their own platforms.

KEY MESSAGES

KEY FINDINGS

Introduction

THE TOTAL NUMBER

OF SUCCESSFUL

CAMPAIGNS

ACROSS ALL

MODELS IS LARGELY

UNCHANGED, BUT

THE AGGREGATE

FUNDING VOLUME

ALMOST DOUBLED!


Massolution has identified six major developments within the crowdfunding

market.

Niche Platforms As platforms try to benefit from market differentiation, a

clear niche-, industry-, and sector-orientation is emerging.

Community Platforms Local investing has proven to overcome traditional

obstacles between investor and investee; relationships of trust are built,

nurtured, and leveraged through community-based crowdfunding.

Hybrid Platforms In the future crowdfunding platforms will no longer be

defined as donations-platforms, rewards-platforms, etc. Platforms will be

merging the various crowdfunding models and will tailor these hybrids of models

to the campaign owners needs.

Enterprise Crowdfunding Large enterprises have begun to look into

crowdfunding. Each model carries a new potential for large companies: raising

social profile, market testing, and spin-ins of entrepreneurial ventures are some

of the most popular examples.

Crowdfunding Economic Development Major development banks and similar

institutions are seeking to leverage crowdfunding for economic developments.

Crowdfundings social profile and its strong connection to micro-finance are the

main drivers.

LIVE Crowdfunding Online crowdfunding has recently been augmented

with exclusive launch events. These events are attributes to any of the basic

crowdfunding models and will become more commonplace because they

provide the much needed feeling of exclusivity to early-bird crowdfunders.

DEVELOPMENTS

KEY FINDINGS

Introduction

MASSOLUTION

HAS IDENTIFIED

SIX MAJOR

DEVELOPMENTS

WITHIN THE

CROWDFUNDING

MARKET.

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


ACROSS THE MODELS

FINANCIAL VS. NON-FINANCIAL CROWDFUNDING MODELS

INDIVIDUAL MODELS

THE 2013CF INDUSTRY REPORT

The 2013CF Industry Report provides a unique and in-depth analysis of

the crowdfunding market trends and composition. The research report is

informed by several sources of data and external research:

362 crowdfunding platforms out of an estimated total of 813 (both active

and pre-launch), have participated in this survey via the industry website,

Crowdsourcing.org. The response rate of 45% is an increase of 6% compared

to massolutions 2012CF Survey, and the quality of the submissions has also

improved, which has resulted in an 85% acceptance rate.

Key was the 2013CF Survey, which was conducted during the first six weeks

of 2013 and resulted in the most comprehensive data collection on the

worldwide crowdfunding market to date. From the 2013CF Survey, we received

308 responses of a sufficiently high quality and integrity. These submissions

provided extensive data related to the analysis presented in this report.

The survey was divided into separate sections depending on whether the

responder represented a launched (active) platform, or a pre-launched platform.

As expected, given that the crowdfunding industry, in many respects, is still in its

cradle, the pre-launch ratio is fairly high: 28%.

Massolution has conducted significant follow-up research via other reliable

channels to complete the profiling of the global crowdfunding industry. 85%

of the total market estimate is explained by primary and secondary research.

The remaining 15% is extrapolated taking regional and model distributions into

account.

The 2013CF Industry Report extends the scope of industry snapshots and trend

assessments of last years report with a deeper dive into one of the core topics

in the crowdfunding literature. We do this in the chapter Web 2.0 Financing. The

chapter was made possible by the collective efforts of massolutions research

ABOUT THIS RESEARCH

Introduction

12

THE 2013CF

INDUSTRY REPORT

PROVIDES A UNIQUE

AND IN-DEPTH

ANALYSIS OF THE

CROWDFUNDING

MARKET TRENDS AND

COMPOSITION.


director Kevin Berg Kartaszewicz-Grell and four of the top tier researchers in

academia: Bryan Zhang (Cambridge University), Dan Marom (The Hebrew

University), Kristof De Buysere (Tilburg University), and Sean Carr (University

of Virginia). The insights presented in the third chapter thus draw upon these

researchers own data, along with additional outreach by massolution.

Massolutions research methodology (C-STEP), crowdfunding industry

taxonomy, and the application of standardized metrics used throughout

this report have been developed over the course of several research and

advisory engagements. C-STEP is a research methodology that facilitates

analyses and assessments of crowdfundings applicability across regions and

verticals. It provides a unifying framework for strategizing, mechanism design,

implementation, and execution against any goal. Please contact massolution at

[email protected] for further information.

ABOUT THIS RESEARCH

Introduction

THE 2013CF INDUSTRY REPORT (CONT.)C-STEPTM

Crowdfunding - Social

Transformation and

Economic Performance

14 2013CF MASSOLUTION.COM14

The 2013CF Industry Report was made possible through the tireless efforts of:

THE RESEARCH TEAM

ABOUT THIS RESEARCH

Introduction

Kevin Berg Kartaszewicz-Grell

Research Director

Kevin is massolutions Research Director for Crowdfunding and

Crowdsourcing.orgs CAPS Program Director. Research interests

include: Information-flow in distributed networks and Network

driven asset allocation. He holds a PhD in finance, an MSc and a

BSc in mathematics and economics.

Maria Adamowicz

Senior Analyst

Maria is a multi-lingual researcher with a variety of financial and

analytical experience from various countries. She holds a double

MBA in Capital Markets (Warsaw University) and International

Business (HULT International Business School).

Francesco Schiavone, University of Naples

Academic Advisor / Regional Analyst; Italy

Francesco Schiavone is an assistant professor in management at

University Parthenope in Napoli (Italy). He is affiliated professor at

ESG Business School in Paris (France). His main research interest

are innovation, technological change, communities of practice,

crowdfunding.


THE RESEARCH TEAM (CONT.)

ABOUT THIS RESEARCH

Introduction

Sean Carr, University of Virginia

Academic Contributor

Sean is a lecturer and PhD researcher at the University of Virginias

Darden School of Business and director of intellectual capital at

the Batten Institute. Research interests include: entrepreneurship

and organizational dynamics. He holds an MBA, MSc, and a BA.

Kristof De Buysere, Tilburg University


Kristof has been trained in law, engineering (applied computer

science) and finance and is a lecturer and researcher at

the department of Business Law at Tilburg University (The

Netherlands). He also advises technology companies, especially

during their fundraising efforts.

Dan Marom, The Hebrew University


Dan is a PhD researcher at the Hebrew University, and co-author

of The CrowdFunding Revolution (with Kevin Lawton). He holds

an MBA (Cum laude) and a BSc in electrical engineering. His

research focuses on crowdfunding and entrepreneurial finance.

Bryan Zhang, Cambridge University


Bryan is a PhD researcher in crowdfunding at Cambridge

University. He is a Fellow of the Royal Society of Arts and a

Postgraduate Fellow of the Royal Geographical Society. He holds a

BA from Cambridge and an MSc from Oxford.


THE RESEARCH TEAM (CONT.)

ABOUT THIS RESEARCH

Introduction

Tim Haverkamp

Regional Analyst; the Netherlands

Tim is a Business Administration graduate at the Erasmus

University Rotterdam. He did his master in Entrepreneurship

and a second master in Financial Law. His master thesis was on

internationalization strategies of crowdfunding platforms.

Jia Qiao

Regional Analyst; China

Jia Qiao is a graduate of South East University, China. After

completing her Bachelor in Business Administration in 2010, she

went on to further studies in Enterprise Management, obtaining

her Masters in March 2013.

David Shin

Regional Analyst; Korea

David is the CEO of CrowdRI and MARKMOUNT, research and

media platforms about crowdsourcing & funding in South Korea.

He holds a BA from Hanyang University and is finishing his MSc at

the University of North Korean Studies in South Korea.


There is a revolution in how we work and how we fund business and

massolution is at the heart of it.

Massolution is a unique research and advisory firm that is pioneering the

use of crowd-solutions in government, institutions and in enterprises.

Massolutions pioneering work includes:

Consulting to enterprises on the adoption of crowdsourcing and

crowdfunding to leverage enterprise innovation portfolios

Supporting enterprises in the design and delivery of new work processes

that enable crowd labor solutions

Advisory work to Governments and institutions on national crowdsourcing

and crowdfunding strategies that drive social and economic impact

Advising nations on the design and build of future digital workforce

strategies to create new high-income digital jobs

Agency advisory on the use of the crowd to improve public sector processes

and drive new forms of capital formation.

Massolution is helping to write the guidelines for a new way to do and

fund business.

ABOUT MASSOLUTION

ABOUT THIS RESEARCH

Introduction

CROWDSOURCING, INC

Crowdsourcing, Inc operates two business units, massolution (Research and Advisory) and Crowdsourcing.org (Publishing and Events), and is headquartered in Los Angeles, California at:

11400 West Olympic Blvd.

Suite 200

Los Angeles, CA 90064

To reach a member

of the massolution or

Crowdsourcing.org team

please contact:

[email protected].

Media ContactJennifer Moebius

[email protected]

Twitter@Crowdsourcing_


DEFINITION AND TAXONOMY

Crowdfunders and Campaign Owners

Crowdfunding refers to any kind of capital formation where both funding needs

and funding purposes are communicated broadly, via an open call, in a forum

where the call can be evaluated by a large group of individuals, the crowd. The

outreach is referred to as a crowdfunding campaign and the person or company

who is in charge of the campaign is referred to as the campaign owner.

Open Calls

An open call in context of crowdfunding (and crowdsourcing in general)

is understood as a call-to-action; e.g. a call-for-support or capital, where

the message is not targeted at any specific intended recipient. This line

of communication serves as an indirect stakeholder screening since the

communication is established via the interested recipients feedback as opposed

to direct communication established by the sender.

Crowdfunding Platforms (CFPs)

In a crowdfunding context, the sender is the campaign owner, the recipient

is any member of the crowd that decides to support the campaign, and the

communication is predominantly established via a crowdfunding platform

(CFP) supported by the campaign owners personal means of communication

and outreach. In a modern context, the availability of personal communication

channels have accelerated rapidly, which has fundamentally changed the

nature of open calls, and thus the nature of crowdfunding. With the emergence

of Web 2.0, open calls transcend into open communication, and a request for

financial support or an investment proposal therefore turn into collaborative

social network activities. We have therefore included a separate chapter, Web

2.0 Financing, in this years report that will explore some of the implications that

the collaborative web has on crowdfunding.


Introduction

CROWDFUNDING

REFERS TO ANY

KIND OF CAPITAL

FORMATION WHERE

BOTH FUNDING

NEEDS AND FUNDING

PURPOSES ARE

COMMUNICATED

BROADLY VIA AN

OPEN CALL IN A

FORUM WHERE

THE CALL CAN BE

EVALUATED BY A

LARGE GROUP OF

INDIVIDUALS, THE

CROWD.


CROWDFUNDING MODELS

There are four well established crowdfunding models: donation-based, reward-

based, lending-based, and equity-based crowdfunding, and one emerging

model royalty-based crowdfunding. Each of these have different features to

match the different needs of campaign owners.

Massolutions taxonomy is thus determined by the proposed exchange between

campaign owner and crowdfunder. Other taxonomies attempt to analyze the

crowdfunding market based on the variety in types of campaign owners, the

different incentives the crowdfunders may have to support a project, and even

a raw division into which regions the crowdfunding activity takes place in.

Although these approaches may be well-motivated, the aggregation of

fundamentally different exchanges makes for a myopic analysis and renders

the reader uninformed about the economic reality underlying the aggregation,

as well as the incentives for crowdfunders to engage and campaign owners to

propose specific exchanges.

One immediate benefit of the exchange-based taxonomy is that it allows the

researcher to investigate how the different crowdfunding models apply to

different funding scenarios; e.g. based on a categorization of campaign owners,

the maturity of the campaign owner (or crowdfunder), the economic outlook of

the campaign owner, etc. The definition of each crowdfunding model is provided

in the margin.


Introduction

DONATIONSCrowdfunders donate money

to campaign owners and

do not expect to receive a

tangible benefit from the

transaction.

REWARDSCrowdfunders support

campaign owners and receive

some kind of reward in return

for their contribution.

EQUITYCrowdfunders invest in


equity or equity-like shares in

return for their investment.

LENDINGCrowdfunders lend money

to campaign owners and

expect the future repayment

of a principal with or without

interest.

ROYALTYCrowdfunders invest in


a share of revenue earned in

return for their investment.


Threshold-Pledge Systems (TPS)

Across the various crowdfunding models, one of the most common

characteristics is the campaign owners communication of funding need and

purpose. Unless the campaign seeks support for an ongoing project (often

social and/or philanthropic), the aggregate funding goal will almost always

be communicated as a part of the open call. CFPs divide into three categories

as to whether the announced funding goal must be reached in order for the

campaign owner to be able to collect the funds. When a campaign owner has

to reach the funding goal, the CFP is said to use a Threshold-Pledge System

(TPS). The TPS feature is frequently considered synonymous with crowdfunding.

However, this is inaccurate; only 54% of the CFPs worldwide use this model. 28%

of the CFPs will pay out any amount raised to the campaign owner, regardless

of whether the funding goal was reached or not. A TPS is especially applicable

when the campaign owner seeks capital for a project that does not scale down.

Some platforms target campaign owners of both kinds, and the TPS decision is

given to the campaign owner when the campaign is launched; 18% of the CFPs

worldwide have an optional TPS.


Introduction

Figure: Threshold-Pledge Systems availability.

Threshold-PledgeSystem

54%

No Threshold-PledgeSystem

28%

Optional

18%

CROWDFUNDING MODELS (CONT.)

21

MARKET GROWTH AND COMPOSITION

CAMPAIGN STATISTICS

SUCCESS RATES

MOST ACTIVE CATEGORIES

THE 2012CROWDFUNDING MARKET


The 2012 Crowdfunding Market


Introduction

Data on crowdfunding is scarce, but extremely important for all market

constituents to inform market strategies and have a clear understanding of

which crowdfunding sectors are expanding rapidly.

Crowdfunding saw tremendous growth in 2012 in terms of dollars raised,

exceeding growth in 2011. In this section, we examine and analyze this

development, looking at specific regions and crowdfunding platform models.

Our forecasts for crowdfunding in 2013 are based on a two-period lagged

regression and also take into account model-specific and regional variation.

In this section we will be addressing which models and regions are seeing

greatest growth, and we will take a closer look at the level of activity within each

of the major categories.

CROWDFUNDING

SAW TREMENDOUS

GROWTH IN 2012 IN

TERMS OF DOLLARS

RAISED, EXCEEDING

GROWTH IN 2011.

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


NORTHAMERICA

ASIA

OCEANIA

Total funds raised during 2012 in USD

$1,606 million

$76 million

$33 million

AFRICA$0.065 million

EUROPE$945 million

SOUTHAMERICA$0.8 million

WORLDWIDE$2.7bn

23

The global crowdfunding market grew 81% in 2012 to a total funding volume of

$2.7bn. Compared with 64% growth in 2011, crowdfunding is accelerating.

CROWDFUNDING WORLD MAP: TOTAL FUNDS RAISED



Figure: Global crowdfunding volumes; the Crowdfunding World Map.

Crowdfundings increasing adoption across the world is providing access to a

new source of capital for entrepreneurs in many countries, however, North

American and European platforms are still overwhelmingly dominant, raising

significantly more capital than platforms in all other regions combined.

North American platforms raised in excess of $1.6bn, which is a 105% increase

compared to 2011. In 2011, the North American crowdfunding market grew at

the lesser rate of 86%.

European platforms raised close to $945m, which is a 65% increase compared

to 2011. In 2011, the European crowdfunding market grew at the lesser rate of

42%, and the global acceleration is thus driven by acceleration in both North

American and European crowdfunding markets.

North America and Europe still account for more than 95% of the total market.

Crowdfunding in Asia and Oceania is accelerating, however, the aggregate 2012

funding volumes are below $50m and $100m, respectively.

South American and African CFPs are also emerging and funding volumes

are accelerating from a zero base at a much higher rate than other regions,

where crowdfunding is more established. Crowdfunding markets outside North

America and Europe, accelerated from at 59% growth rate in 2011 to 125% in

2012.



24

CROWDFUNDING WORLD MAP (CONT.)THE GLOBAL

CROWDFUNDING

MARKET GREW 81%

IN 2012 TO A TOTAL

FUNDING VOLUME OF

$2.67BN.


SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


The growth in 2012 funding volumes was primarily driven by lending-based and

donation-based crowdfunding.

Lending grew 111% to a total volume of $1.2bn, while donation-based

crowdfunding grew 45% to a total volume of $979m. The growth in lending

volumes mainly stems from crowdfunded micro-loans and from local SME loans.

In the aggregate, crowdfunding without financial return, donation- and reward-

based, grew 85% to a total close to $1.4bn. Therefore, the additional growth

(85% compared with the 45% growth in donations) stems from campaigns where

rewards are offered in return for fundingeither combined with an option to

donate or as a pure reward-based crowdfunding campaign.

GROWTH BY CROWDFUNDING MODEL



Figure: Growth by crowdfunding model.

0

1000

2000

3000

EquityDonation Lending Reward Mixed others

2010 2011 2012

460.4

49.9

316.5

15.7

675.7

88.9

554.9

61.5

979.3

115.7

1169.7

383.3

12.4

Mill

ions

of U

SD $

This growth can best be explained by start-ups and SMEs adaptation of reward-

based crowdfunding. The path from prototype to marketplace drastically

shortens for products and services that can appeal to the crowd.

In many juristictions equity-based crowdfunding is still pending regulators

acceptance, which means that growth on a global scale is limited. In 2012, the

market grew 30% to 115.7m. [1]

Lending- and reward-based crowdfunding accelerated 35% and 232%,

respectively (change in growth rates), while the growth in donations-based

crowdfunding is stable at 45% growth compared to 47% in 2011. Equity-based

crowdfunding grew slower in 2012 at 30% growth than in 2011 when the growth

was 78%.

An analysis of funding activity by category for each crowdfunding model is

provided later in this chapter.



26

GROWTH BY CROWDFUNDING MODEL (CONT.)


[1] Against revised numbers for 2010/2011. See Appendix for further information.

LENDING- AND

REWARD-BASED

CROWDFUNDING

ACCELERATED

35% AND 232%

RESPECTIVELY.

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


The predictions in this section are derived from a two-period lagged regression

of total funding volumes using subsamples of all combinations of region and

crowdfunding model.

Extrapolations were made based on 204 survey responses from our 2013CF

survey and 135 survey responses from 2012CF survey supplemented by data

collected by massolutions on-going tracking of the crowdfunding market. On

this basis we predict that crowdfunding volumes in 2013 will be $5.1bn.

PREDICTIONS; REGIONS



Figure: Growth in funding volume worldwide in millions of USD

(research based estimate for 2013).

WE PREDICT THAT

CROWDFUNDING

VOLUMES IN 2013

WILL BE $5.1BN.

0

2000

4000

6000

EuropeNorth America Other Regions

2010 2011 2012

3698.2

1330.0

109.7

Mill

ions

of U

SD $

2013 (est.)

3000

5000

1000

North American crowdfunding is expected to reaffirm its solid lead in terms

of aggregate funding volume in 2013. Close to $3.7bn will be crowdfunded in

North America. This market is expected to evolve faster due to the growth in

lending-based crowdfunding.

Although equity-based crowdfunding is increasing in scale in Europe, the size

of the market is still small in comparison to the size of the the current lending

market in North America. This difference is of such magnitude that we predict

that North America will remain ahead of Europe in 2013. Even accounting for

accelerated growth in Europe, the funding volume gap will not be bridged during

2013. We predict, largely due to the popularity of lending-based crowdfunding in

North America, that this region will account for 72% of the total funding volume

in 2013, compared to 60% in 2012.

Outside North America and Europe, crowdfunding is a relatively new concept and

for this reason, we will see rapid growth outside the established crowdfunding

markets within three years. Asia and Oceania account for most of the growth

outside North America and Europe.



28

PREDICTIONS; REGIONS (CONT.)


NORTH AMERICAN

CROWDFUNDING

IS EXPECTED TO

REAFFIRM ITS SOLID

LEAD IN TERMS

OF AGGREGATE

FUNDING VOLUME

IN 2013. CLOSE TO

$3.7BN WILL BE

CROWDFUNDED IN

NORTH AMERICA.

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


0

2000

4000

6000

EquityDonation Lending Reward Mixed others

2010 2011 2012

1430.3

165.9

2123.4

1344.2

74.1

Mill

ions

of U

SD $

2013 (est.)

3000

5000

1000

29

Lending- and donation-based crowdfunding are expected to remain the most

popular crowdfunding models, but we predict that in 2013, total funding

volumes for reward-based models will be close in comparison.

Lending-based crowdfunding is expected to grow 82% to a total above $2bn,

accounting for more than 40% of the total 2013 funding volume. This model

will continue to grow in popularity for crowdfunded micro-loans (personal and

commercial) and for SME loans.

PREDICTIONS; CROWDFUNDING MODELS



Figure: Growth in funding volume by crowdfunding model in

millions of USD (research based estimate for 2013).

LENDING- AND

DONATION-BASED

CROWDFUNDING ARE

EXPECTED TO REMAIN

THE MOST POPULAR

CROWDFUNDING

MODELS.

Donation-based crowdfunding is expected to grow 46% to a total of $1.4bn,

accounting for 28% of the total 2013 funding volume. Donations will continue

to be popular for social and personal causes, but will gain less traction for

commercial ventures.

Reward-based crowdfunding has gained tremendous popularity, and in many

cases, has been combined with other models, in particular donation-based

crowdfunding. We predict that as reward structures keep evolving and as the

market gains further trust in reward-based models, 2013 will be the year where

more than $1bn is raised via reward-based crowdfunding.



30

PREDICTIONS; CROWDFUNDING MODELS (CONT.)


2013 WILL BE THE

YEAR WHERE MORE

THAN $1BN IS RAISED

VIA REWARD-BASED

CROWDFUNDING.



CAMPAIGN STATISTICS

Introduction

In this section, we take a closer look at crowdfunding campaign statistics. Our

research shows that over 1 million crowdfunding campaigns (of all kinds) were

successfully funded in 2012.

The majority of the campaigns were conducted on donation-based platforms,

followed by lending-based, the two most established crowdfunding models.

Median campaign sizes across lending-, reward-, and donation-based

crowdfunding models were all under $5,000. While the median size of equity-

based campaigns were significantly higher at $190,000, over twice the median

size of equity-based campaigns in 2011.

This information serves as a great starting point for entrepreneurs looking

to crowdfund an idea. The section provides details of typical crowdfunding

campaign sizes of successful campaigns across each model of the most popular

models.

THE MEDIAN SIZE

OF EQUITY-BASED

CAMPAIGNS IN 2012

WAS $190,000, OVER

DOUBLE THE 2011

MEDIAN.

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


Figure: Number of crowdfunding campaigns; Crowdfunding World Map.

32

Consistent with the distribution of global crowdfunding volumes, the majority of

campaigns were hosted on North American or European CFPs.

More than 1.1 million crowdfunding campaigns received funding during 2012.

680,000 campaigns were donation-based and close to 250,000 were lending-

based. 625,000 campaigns were hosted on North American CFPs and 470,000

hosted on European CFPs.

CAMPAIGNS WORLDWIDE

CAMPAIGN STATISTICS


NORTHAMERICA

Total numbers of crowdfunding campaigns in 2012

625 thousand

EUROPE470 thousand

WORLDWIDE1.1 million

OTHERREGIONS8 thousand

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


Figure: Number of crowdfunding campaigns by model.

33

Donation-based crowdfunding has a very different appeal than the other

models. Its application is therefore also very different.

Donation-based campaigns typically have smaller funding goals, and therefore

a high volume of campaigns account for the large contribution to total funding

volume from this model.

62% of all successful campaigns in 2012 were donation-based, while lending-

based crowdfunding accounted for 22%.

CROWDFUNDING MODELS

CAMPAIGN STATISTICS


62% OF ALL

SUCCESSFUL

CAMPAIGNS IN 2012

WERE DONATION-

BASED, WHILE

LENDING-BASED

CROWDFUNDING

ACCOUNTED FOR

22%.

0

400

800

Donation Others

2009 2010 2011

62%

22%

15%

Num

ber

of c

ampa

igns

(tho

usan

ds)

2012

600

1000

200

Debt Donations-Reward Mix

1200

1%

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


Figure: Median campaign sizes in USD across crowdfunding models.

34

The typical campaign sizes across the different crowdfunding models are: $1,400

for donation-based campaigns, $2,300 (donation-reward mix), $2,300 (rewards),

$4,700 (lending), and $190,000 (equity).

The number of successful campaigns was almost unchanged compared to 2011,

while the funding volume in the same period grew by 81%. This is due to the

fact that donation-based campaigns accounted for almost half of the aggregate

funding volume and that the typical funding volume per campaign more than

doubled in 2012.

CROWDFUNDING MODELS (CONT.)

CAMPAIGN STATISTICS


LENDING$4.7 thousand

MIXED OTHERS$4.3 thousand

REWARD$2.3 thousand

DONATION-REWARD MIX$2.3 thousand

DONATIONS$1.4 thousand

EQUITY$190 thousand



SUCCESS RATES

Introduction

One of the most important data points to analyze when it comes to crowdfunding

are the actual success rates of crowdfunding campaigns. Success rates are

analyzed via funding probabilities and pay out vs. pledge ratios.

In order to understand a campaigns likely success rate, one must first become

familiar with the Threshold-Pledge System (TPS). This section looks at the use of

TPS across the different crowdfunding models.

We examine funding probabilities by both crowdfunding model and region. From

a model perspective, lending-based campaigns have the highest probability of

succeeding, largely due to the popularity of micro-loans which have the highest

funding probability across all types of campaigns. From a regional perspective,

campaigns in North America succeed more frequently that all other regions.

We finish the section by evaluating the pledge vs. pay out ratio, which is a partial

measure of crowdfundings efficiency; if the ratio is high, individual pledges are

more likely to be allocated to the campaign owners as intended, rather than

being returned to the crowdfunder. Again, we categorize the data by both

crowdfunding model and region.

SUCCESS RATES

ARE ANALYZED

VIA TWO KEY

METRICS: FUNDING

PROBABILITIES AND

PLEDGE VS. PAY OUT

RATIOS.

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


Figure: Availability of Threshold-Pledge Systems across crowdfunding models.

36

In order to understand why funding probabilities are relevant for crowdfunding

campaigns, it is crucial to realize that besides the five basic crowdfunding

models (donations, rewards, lending, equity, and royalty), CFPs differ in their

use of the Threshold-Pledge System (TPS).

When a campaign owner has to reach the funding goal to receive funding, the

CFP is said to use a TPS; 54% of the CFPs worldwide use this model. 28% of

the CFPs will pay out any amount raised to the campaign owner, regardless

of whether the funding goal was reached or not. A TPS is especially applicable

THRESHOLD-PLEDGE SYSTEMS

SUCCESS RATES


0

60%

40%

80%

20%

100%

Threshold-Pledge System

No Threshold-Pledge System

Optional

Rewa

rd

Equit

y

Lend

ing

Dona

tion-R

ewar

d Mix

Dona

tions

Mixe

d Oth

ers

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


Figure: Threshold-Pledge Systems availability.

37

when the campaign owner seeks capital for a project that does not scale down.

Some platforms target campaign owners of both kinds, and the TPS decision

is given to the campaign owner when the campaign is launched; 18% of the

CFPs worldwide have an optional TPS. When a campaign owner elects not to

use a TPS, they are assured of receiving any contribution of funds made to their

campaign. Campaigns that serve a social or personal (noncommercial) cause

are less likely to use a TPS and many CFPs that specialize in donation-based

crowdfunding will therefore not offer a TPS option.

A TPS reduces the execution/delivery risk if the campaign owner sets the

funding goal at the funding level required to get a product from prototype to

market. If the funding goal is not reached, additional funding will be needed

to complete the process. If these funds cannot be raised, the product is less

likely to reach production. In this situation, a TPS will lower the risk of a product

experiencing delays or being canceled due to a lack of funding, and hence the

TPS has mitigated the delivery risk. For this reason, reward-based crowdfunding

often makes use of a TPS.

THRESHOLD-PLEDGE SYSTEMS (CONT.)

SUCCESS RATES


Threshold-PledgeSystem

54%

No Threshold-PledgeSystem

28%

Optional

18%

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


Figure: Funding probabilities for crowdfunding campaigns by model (left) and by region (right).

38

We can estimate the funding probabilities for each crowdfunding model by

comparing the number of successful campaign to the total amount of campaigns

posted.

This reveals that most models funding probabilities are aligned around a 50/50

chance of reaching the goal.

Lendingbased crowdfunding is the exception with a 91% funding probability.

This relatively high figure stems primarily from crowdfunded micro-loans.

As lending-based crowdfunding is more popular than other models in North

America, this draws the funding probability across all models for this region to

90%.

FUNDING PROBABILITIES

SUCCESS RATES


Successful Unsuccessful

0%

20%

40%

60%

80%

100%

Dona

tion-R

ewar

d Mix

Equit

y

Dona

tions

Rewa

rd

Mixe

d Oth

ers

Lend

ing0%

20%

40%

60%

80%

100%

Asia

Euro

pe

Ocea

nia

Othe

r Reg

ions

Sout

h Ame

rica

North

Amer

ica

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


Figure: The pledge vs. pay out ratio for crowdfunding campaigns by model (left) and by region (right).

39

Besides funding probabilities, the pledge vs. pay out ratio informs us about

what percentage of funds pledged on a crowdfunding campaign was paid out to

campaign owners. Funds that are not paid out to a campaign owner are simply

returned to the crowdfunder, having not created any economic value, and thus

the pledge vs. pay out ratio is a partial measure of crowdfundings efficiency in

terms of individuals investment preferences.

As noted earlier, donation-based crowdfunding platforms make less use

of TPS, which means that any funds that are pledged will also be paid out.

Donations therefore score relatively high with this measure (94%). Equity-based

crowdfunding has an average funding probability (45%), but a high pledge vs.

payout ratio (93%). This indicates that equity-based crowdfunding is an efficient

way to invest in terms of investment preferences.

THE PLEDGE VS. PAY OUT RATIO

SUCCESS RATES


Paid out Not paid out

0%

20%

40%

60%

80%

100%

Mixe

d Oth

ers

Rewa

rd

Dona

tions

-Rewa

rd M

ixDe

bt

Equit

y0%

20%

40%

60%

80%

100%

Afric

a

Euro

pe

North

Amer

ica

Ocea

nia

Sout

h Ame

rica

Asia

Dona

tions




Introduction

Just as the traditional capital formation industry has identifiable successes that

can guide investors, so too crowdfunding data, collected by massolution, allows

us to highlight what is working best in crowdfunding campaigns.

If you want to understand where success and failure lies, this data is essential. It

can tell us which categories of projects are rising, falling or emerging, and which

types of projects succeed per platform-type.

For example, we can observe that across all crowdfunding models, social causes

is a very active. But that is not the case with environmentally oriented campaigns,

a type you might imagine is close to social causes.

Unlike traditional capital formation multilayered reward structures are integral

to crowdfunding. So what works, and what does not? That is one of the key

questions for anybody approaching this sector.

UNLIKE TRADITIONAL

CAPITAL FORMATION

MULTILAYERED

REWARD

STRUCTURES

ARE INTEGRAL TO

CROWDFUNDING.

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


Social Causes

Business and Entrepreneurship

Films and Performing Arts

Music and Recording Arts

Energy and Environment

Fashion

Art (general)

Information and Communication Technology

Journalism, Books, Photo, and Publishing Arts

Science and Technology

27.4%

16.9%

11.9%

7.5%

5.9%

5.5%

4.8%

4.8%

3.5%

3.2%

41

Crowdfunding first gained popularity as a way to fund creative, philanthropic,

and social endeavors. This popularity prevails, but crowdfundings application

for entrepreneurial ventures has gained traction as well, especially crowdfunding

models with financial return.

Massolution measures platform activity across two parameters: the number

of successful campaigns and the funding volumes within individual categories.

From these parameters we derive comparable statistics across 15 categories

The 10 most popular are presented in the bar chart. The presentation and

analysis in this section is informed by comprehensive survey data from 49 CFPs.

ACROSS ALL MODELS



Figure: Crowdfunding Platform activity across the 10 most active categories.

Social Causes is still the most active category (27.4%), followed by Business &

Entrepreneurship (16.9%), and the two major art categories: Films & Performing

Arts (11.9%) and Music & Recording Arts (7.5%). Energy & Environment (5.9%)

is the emerging category among the five most active categories. Some of the

ventures in this category could be added to the Social Causes category while

others could be added to Business & Entrepreneurship, but because of an

increased focus on green technologies and visionary energy solutions and

due to their broad appeal, Energy & Environment has branched out as its own

category that is expected to grow rapidly in the years to come.



42

ACROSS ALL MODELS (CONT.)


ENERGY &

ENVIRONMENT

CAMPAIGNS ARE

EXPECTED TO GROW

RAPIDLY IN THE

YEARS TO COME.

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


Social Causes





Fashion

Art (general)


Journalism, Books, Photo, and Publishing Arts

Science and Technology

Donation and/or Rewards Financial Return

0% 5% 10% 15% 20% 25% 30%

43

If we inspect the most active categories to see which crowdfunding models are

driving activity, several interesting observations can be made.

The high level of activity in the Social Causes category is driven by all

crowdfunding models, which lends to the conclusion that crowdfunding in itself

has an engaging effect and an appeal to common or social challenges.

FINANCIAL VS. NON-FINANCIAL RETURN



Figure: Financial versus Non-Financial crowdfunding activities.

The activities in the Business & Entrepreneurship and in the Energy &

Environment categories are mainly driven by crowdfunding models that offer

some kind of financial return. This can be explained by the for-profit mindset

of the campaign owners in these categories and the fact that, especially for

campaigns in the Energy & Environment category, it is challenging to establish a

suitable reward structure. However, emerging CFPs within this niche might take

that particular challenge and create a crowdfunding model that does not rely on

financial return within the Energy & Environment category.

When we compare the two major art categories, it is interesting to see that Film

& Performing Arts make use of both financial and non-financial crowdfunding,

while the activity in the Music & Recording Arts category is mainly driven by

non-financial crowdfunding; reward-based crowdfunding is especially popular

in the latter category. The concentration on non-financial crowdfunding can be

explained by cultural biases among recording artists, or by the relatively low

funding requirements in this category.



44

FINANCIAL VS. NON-FINANCIAL RETURN (CONT.)


FILM & PERFORMING

ARTS MAKE USE OF

BOTH FINANCIAL

AND NON-FINANCIAL

CROWDFUNDING.

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


Non-financial crowdfunding is popular, especially the donation-based model.

It is applied across all the biggest categories except for Energy & Environment.

As expected, the Social Causes category has more activity on platforms using

this particular model.

Business & Entrepreneurship has less, which is explained by the for-profit

mindset of most of the campaign owners in this category.

This model is also very popular for creative projects that do not fall into one of

the two art categories we discuss above.

INDIVIDUAL MODELS: DONATIONS



Figure: Donation-based crowdfunding activity.

Social Causes

Films and Performing Art



Art (general)

32.6%

14.1%

12.8%

9.3%

7.9%

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


The crowdfunding model that, beyond any doubt, gets the most media attention

is the reward-based model. Activity within this model (where the crowdfunders

are offered a tangible non-financial return) is more evenly spread out, as artists,

entrepreneurs, and businesses adopt this funding model.

Social Causes is again the most active category. In fact, the activity across the

different categories using reward-based crowdfunding is more or less similar

to the overall picture except for the Energy & Environment category, where

reward-based crowdfunding is still nascent.

INDIVIDUAL MODELS: REWARDS



Figure: Reward-based crowdfunding activity.

Social Causes




Fashion

17.7%

17.7%

16.3%

11.1%

8.2%

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


The simplest financial agreement one can think of is a loan. These agreements

promise a pre-determined repayment schedule and, commonly, an interest

payment, as well. The expected total repayment is therefore capped at the

time lender and borrower agree on the terms of the agreement. Lending will

therefore not provide the high potential of other financial agreements, and for

this reason, lending-based crowdfunding is most used by small businesses.

The Business & Entrepreneurship category is therefore the most active category

on lending-based campaigns, followed by Energy & Environment campaigns.

Social Causes and creative ventures are less active in the use of this model

presumably because they cannot guarantee the required repayment.

INDIVIDUAL MODELS: LENDING



Figure: Lending-based crowdfunding activity.



Social Causes

Art (general)


54.2%

25.0%

12.5%

4.2%

4.2%

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


Not surprisingly, most of the activity within the equity-based crowdfunding

space relates to commercial enterprises.

The Business & Entrepreneurship category is the most active, followed by Social

Causes, which is less active on equity-based campaigns when compared to

other models.

Information & Communications Technology (ICT) campaigns have been

separated from the Business & Entrepreneurship category because campaigns

in this particular category are expected to be the front-runners of equity-based

crowdfunding. The reasons for this is not related to the particular risk structure

of campaigns in this category, but merely due to the fact that crowdfunding

is better recognized by both prospective campaign owners and crowdfunders

interested in this field.

INDIVIDUAL MODELS: EQUITY



Figure: Equity-based crowdfunding activity.


Social Causes


Film and Performing Arts


29.1%

23.3%

14.9%

14.6%

5.1%

SECTION OVERVIEW

ACROSS THE MODELS

FINANCIAL VS.

NON-FINANCIAL

CROWDFUNDING

MODELS

INDIVIDUAL MODELS


When a campaign owner offers a share of a revenue-stream without offering

a stake in the company driving the revenue, we refer to this as a royalty-based

crowdfunding campaign.

Since this is the youngest model, we expect it to evolve and change its activity

profile to reflect exactly what this model brings that the others do not.

As of today, the activity is mainly driven by the Business & Entrepreneurship

category, Social Causes, Energy & Environment, Films & Performing Arts, and

Fashion.

The model is especially applicable when the crowdfunder is only interested in

one of the campaign owners activities, which explains the relatively high activity

in the categories: Film & Performing Arts and Fashion.

INDIVIDUAL MODELS: ROYALTY



Figure: Royalty-based crowdfunding activity.


Social Causes


Film and Performing Arts

Fashion

32.3%

15.6%

12.5%

12.5%

10.4%

50

THE COLLABORATIVE WEB

CROWDFUNDING DYNAMICS

LEGAL FRAMEWORKS

DIRECT CROWDFUNDING

WEB 2.0 FINANCING


Web 2.0 Financing

THE COLLABORATIVE WEB

Modern (online) communication tools and networks have changed the nature

of open calls, and thus the nature of crowdfunding. With the emergence of the

collaborative web (Web 2.0), open calls transcend into open communication,

and a request for financial support or an investment proposal therefore turn

into collaborative social network activities.

Crowdfunding is still a relatively new phenomenon, yet an understanding of how

its dynamics facilitate powerful interactions between social and financial capital

has begun to emerge. Researchers around the world are asking important

questions, such as, what transforms early investors/supporters into advocates

and promoters? How does a campaign activate its network of friends and

family? And, most importantly, how does a second-level network (friends and

family) energize a third-level of outside supporters (i.e., complete strangers)?

This section, CROWDFUNDING DYNAMICS, will present perspectives about the

hidden, social dynamics of crowdfunding, with a special look at the phenomenon

of third-level acceleration. Sean Carr from the University of Virginia is the main

contributor to the section.

Given the many unknowns about the dynamics of crowdfunding, policy makers

and regulators have been struggling to assess the appropriate measures for

investor (and entrepreneurial) protection; in many jurisdictions, crowdfunding

has not even been considered yet. To give our readers an idea of the various

developments in crowdfunding regulation, the section LEGAL FRAMEWORKS

presents the needed overview. Kristof De Buysere from Tilburg University is the

main contributor to the section.

The final section, DIRECT CROWDFUNDING, takes a deeper dive into a relatively

new research subject, namely the emergence of crowdfunding campaigns that

are hosted outside and independent of any structured online platform. Dan

Marom from The Hebrew University is the main contributor to the section.

OPEN CALLS

TRANSCEND

INTO OPEN

COMMUNICATION ON

THE COLLABORATIVE

WEB.

Whoever you are, I have always depended on the kindness of strangers.

from A Streetcar Named Desire

Tennessee Williams (1947), American playwright

By now, we have seen that crowdfunding campaigns can be wildly, even

fantastically, successful, raising millions of dollars from many thousands

of contributors. Even moderately effective crowdfunding efforts can attract

hundreds of people willing to extend a loan, offer a donation, or make an

investment in some person or project. Since not all these supporters have a

personal connection with the project or person being funded, what are the

dynamics that enable a campaign to win support outside its inner circle of

friends and family? How much does the support of friends and family influence

ultimate success? How does a project make the leap from having a very close

network of familiar supporters to a broad group of complete strangers?

Crowdfunding platforms, enabled by Web 2.0 technologies that leverage social

medias greatest strengths, provide a structure that facilitates communication,

trust, and, ultimately, the kindness of strangers. But a clearer picture about how

this happens is beginning to emerge. While the phenomenon of crowdfunding is

still new, researchers have recently started to understand the mechanisms that

enable these powerful interactions between social and financial capital to occur.

What follows are a few perspectives from academia and elsewhere about the

hidden, social dynamics of crowdfunding.

Web 2.0 Financing



This section was contributed

by Sean Carr, University of

Virginia.

INTRODUCTION

SOCIAL TIES

Web 2.0 Financing



All economic transactions are, to one degree or another, embedded in networks

of personal and social relationships, and these relationships tend to affect

the allocation and cost of capital. For decades, many economists, sociologists,

psychologists, and historians have examined this phenomenon, asking the

question: How do the forces of financial and social capital intersect, and what

happens when they do?

The economic and financial historian Naomi Lamoreaux [1], for example,

studied the relationships between individual business enterprises and banks

in eighteenth- and nineteenth-century New England. She found that access

to capital was highly contingent upon personal alliances and kinship-based

social relations. That is, firm financing generally followed from blood relations

and marriage. Likewise, the economic sociologist Brian Uzzi [2] conducted

ethnographic field studies of commercial banks and small- to medium-sized

firms in the Chicago area in the 1990s. He, too, found that when bankers and

firm owners had pre-existing personal relationships with one another (not just

business relationships), the firms often experienced better access to capital on

more favorable terms.

More recently, social network-based research like this has blossomed in the

study of entrepreneurship, and much of it has examined the influence of

founders and firms personal networks on the development and performance

of new ventures. Scholars have found that an entrepreneurs social network

has the potential to influence every stage of the entrepreneurial process,

including the discovery of an opportunity, team formation, the acquisition and

assembly of resources, and the growth and performance of the venture itself.

The general finding from this line of research has been that entrepreneurs who

are embedded in rich social networks (i.e., they have very broad and diverse

networks of social ties) will be more successful at overcoming the obstacles to

resource mobilization than those whose networks are poor.

HOW DO THE FORCES

OF FINANCIAL AND

SOCIAL CAPITAL

INTERSECT?

SOCIAL TIES (CONT.)

Web 2.0 Financing



It should seem intuitive (or even obvious) that social ties also should matter in

crowdfunding, but little empirical work so far has explained the role of social

ties in this context. One notable exception is a recent working paper by Wharton

Business School professor Ethan Mollick [3], who conducted a cross-sectional

analysis of all projects financed on the popular reward-based crowdfunding site,

Kickstarter. Since Kickstarter enables project owners to link their project pages

to their Facebook accounts, he measured the number of Facebook friends for

each project sponsor. Mollick found that if the project sponsor from the Film

category had only ten friends on their Facebook account, then their probability

of getting their project fully funded on Kickstarter was about 9 percent. If the

project sponsor had 100 Facebook friends, then their funding probability rose

to 20 percent; if the sponsor had 1,000 Facebook friends, then their likelihood of

getting fully funded was 40 percent. While the number of virtual friends may

not be equivalent to a persons actual friends, it can serve as a rough proxy for

the extent of a project owners personal network. And even though the impact of

these virtual ties on funding may not be surprising, it does offer strong evidence

for the importance of social ties.

SOCIAL TIES

ARE IMPORTANT

COMPONENTS

TO DRIVE

CROWDFUNDING

SUCCESS.

SOCIAL PROOF

Web 2.0 Financing


55

So, we know that social ties matter in crowdfunding, but it is less clear exactly

how and why they matter. There are two related theories that may be instructive.

First, one theory suggests that social ties matter in economic exchanges because

they create expectations of trust and reciprocity among economic actors,

resulting in governance mechanisms and transfers of private information that

would not otherwise occur strictly through arms-length relationships. A second

theory suggests that social ties provide a signal to others that the person or

project is worthy of a commitment. The well-known psychologist Robert Cialdini

has referred to this phenomenon as social proof. [W]hen people are uncertain,

Cialdini said, they look to the actions of others to guide their actions [4].

Moving us toward a better understanding of how social ties matter and what

mechanism may be at work, a team of researchers from the University of

Arizona and the University of Maryland examined 56,584 loan requests from the

lending-based crowdfunding site Prosper.com [5]. They found that if a borrower

had one or more friends who were among their lenders, then their likelihood

of securing their full loan amount more than doubled. Interestingly they also

found that for 95% of all the loan requests that included loans from friends, only

4.4% of the total amount raised was provided by the friends. In other words,

the presence of even just a few friends in the borrowers network of lenders

provided a sufficient positive signal to other potential lenders. So, in this case, it

appears that a borrowers later-stage lenders may have been disproportionately

influenced by the initial commitments (i.e., social proof) of the borrowers early-

stage lenders. In a related study using Prosper listings, another team from the

University of Nebraska and Radford University also found that social capital was

even more influential when the borrower had poor credit history; the presence

of friends as lenders not only increased the probability of getting funded but

also resulted in their receiving more favorable interest rates [6].


SOCIAL PROOF

EXPLAINED.

Web 2.0 Financing


56

THIRD-LEVEL ACCELERATION: STRONG TIES, WEAK TIES, AND BEYOND

Forty years ago, the economic sociologist Mark Granovetter wrote a seminal

paper (among the most influential in the social sciences), called The Strength of

Weak Ties [7]. This paper introduced the theory that, under certain conditions,

a persons weak social ties (such as friends-of-friends or acquaintances) will be

more important and more effective than their strong ones for diffusing an idea

across a social network. Returning for a moment to the work by Ethan Mollick,

1,000 Facebook friends should be, almost by definition, comprised of weak

ties. Given Mollicks finding that having more Facebook friends is a predictor

of funding success, it would appear then that there is indeed strength in these

weak ties.

However, we can still only say for certain that weak ties have strength in the

aggregate. The studies discussed in this article also suggest that strong ties may

have a very important role in the early phases of a crowdfunding effort. Early

strong ties may help build trust and norms of reciprocity, while also providing

signals (social proof) for later-stage supporters.

In general, then, we should expect that people with whom a project owner has

strong ties are more likely to be motivated to help them than those whose ties

are weak. The logic behind this is that strong ties matter during the first phase

of funding because they provide necessary signals of quality and legitimacy

(i.e., proof). Then, during the second stage of funding, these early signals will

influence commitments from weaker ties in the persons network. Finally,

having built upon the foundation of strong ties and working through a larger set

of weak ties, project owners have the potential to influence prospective lenders,

donors, or investors with whom they have no ties at all.

The evidence is still scant, but in essence, that is third-level acceleration

potentially the holy grail of crowdfunding.


THIRD-LEVEL

ACCELERATION IS

POTENTIALLY THE

HOLY GRAIL OF

CROWDFUNDING.

Web 2.0 Financing


57

References

[1] Lamoreaux, N.R., Banks, Kinship, and Economic Development: The New England Case. The Journal of Economic History, 1986. 46(3): p. 647-667.

[2] Uzzi, B., Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking Financing. American Sociological Review, 1999. 64(4): p. 481-505.

[3] Mollick, E., The Dynamics of Crowdfunding: Determinants of Success and Failure, in Working Papers Series. 2012, The Wharton School of the University of Pennsylvania: Philadelphia, PA. p. July

11, 2012.

[4] Cialdini, R.B., Influence: The Psychology of Persuasion. 1993, New York: William Morrow &

Company, Inc.

[5] Lin, M., N.R. Prabhala, and S. Viswanathan, Judging Borrowers by the Company They Keep:

Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending. 2011.

[6] Greiner, M.E. and H. Wang. The Role of Social Capital in People-to-People Lending Marketplaces.

in Thirtieth International Conference on Information Systems (ICIS). 2009. Phoenix, AZ: AIS

Electronic Library (AISeL).

[7] Granovetter, M.S., The Strength of Weak Ties. American Journal of Sociology, 1973. 78(6): p. 1360-1380.


This section is a synthesis of a global crowdfunding legal frameworks survey,

which sampled the strategic viewpoints of more than 20 industrial experts in

15 countries, and independent academic research in various key jurisdictions.

Web 2.0 Financing

LEGAL FRAMEWORKS

58

This section was contributed

by Kristof De Buysere,

Tilburg University.

GLOBAL OVERVIEW

Donation- and reward-based crowdfunding rarely face any legal barriers. These

models are therefore widely available in most jurisdictions, and they are also

offered without any complex transactional structures.

Investment crowdfunding, and especially equity-based crowdfunding, however,

may incur a substantial number of legal issues, as the general solicitation

of investment vehicles such as loan and equity is heavily regulated, even for

small investments. Platforms that facilitate these types of crowdfunding may

face substantial regulations, as they come close to resembling intermediated

investment services.

As a result, equity-based crowdfunding is never straightforward and currently

has limited availabilities in many key markets, as illistrated in the table below.

There are, however, a few exceptions, where platforms operate under the ceiling

of an existing promotion regime as broker-dealers for accredited investors.

For instance, regulatory roadblocks may prevent users from directly buying equity

in investees. As a workaround, CFPs can organize indirect investment routes via

special vehicles (crowdfunded funds) where it is simpler to purchase a unit

than to buy an equity unit in the underlying company. Another example is legal

constructions based on nominee shareholders. Such constructions concentrate

the control over the equity units in the hands of one entity (controlled by the

CFP) and also offer the advantage of simplifying the investor relationship for the

investee, as only one entity will serve as the underwriter and as the subsequent

voter. Besides these constructions, other models exist where transaction

engineered investment contract are offered instead of equity. Such structured


Web 2.0 Financing

LEGAL FRAMEWORKS

59

GLOBAL OVERVIEW (CONT.)

contracts can mimic equity by varying degrees. The cash-flow rights may be

virtually identical or may, for instance, rather be calculated on a percentage

of the revenue (eventually for a limited period of time). In turn, lending-based

crowdfunding and (quasi-)equity-based CFPs that use such a structured contract

approach share the property that crowdfunders obtain a contract and become

creditors, instead of security holders.

Countries Equity Rewards Lending Royalty Donations

USA Canada Mexico UK The Netherlands Spain France Austria Germany Australia China Hong Kong SAR Israel Russia Turkey

Table: Crowdfunding model availability by k

Documents

Crowdfunding Industry Report 2013