Monday, June 17, 2013

Crowd Based Funding Economies

1.0 Introduction The financial crisis that rocked the most parts of the world, particularly Europe, in the last few years has had a number of adverse effects on commercial ventures globally. As a result of this crises and the impacts it had on the economic systems and monetary sectors all over Europe many business executives found it very difficult to access credit to be used in the setting up or expansion of existing business ventures. According to Buysere et al (2012, p. 5) it is not only the small and medium sized business organizations that have had to suffer the brunt of declined access to credit; a number of non governmental organizations and public organizations have also encountered great financial restraints. In order to respond to the problem of financial constraints and impediments blocking the way of many individuals or organizations with innovative initiatives in accessing loans, the practice of crowd funding was initiated. Crowd funding is defined as the grouping of individuals in order to engage in a cooperative and joint collection of their monetary resources so as to offer assistance to organizations or individuals with important initiatives in the society. More often than not crowd funding activities are carried out via the internet. There have been many commercial industries in the United States of America, for instance ArtistShare Music Company, which have engaged in crowd funding 2.0 Crowd Funding Crowd funding is also commonly referred to as equity crowd funding, crowd financing or hyper funding. According to Ordanini et al (2011) the phenomenon of crowd funding has its genesis from the phenomenon of crowd sourcing. Crowd sourcing refers to the practice of individuals obtaining and managing small monetary input from a number of different actors so as to implement their initiatives or projects. There are a number of actors that are involved in the crowd funding process. The first category of actors is the crowd; the crowd refers to the group of people who support the different initiatives or projects by offering their monetary support. The second group of actors in crowd funding endeavors is the individuals, commercial or non-commercial organizations and public institutions that require funding for their projects. The last actor who is very significant for the success of crowd funding is the platform; the platform refers to the institute which assumes the responsibility of bringing together the crowd and the initiators of projects (Buysere et al, 2012). The history of crowd sourcing can be traced back to the 17th century when the subscription business model was used in the financing of printing of books. The people who were engaged in the making of the donations were offered a number of benefits for instance the access to the books before such books could be offered to the other consumers in the market as well as the people being mentioned in the title pages of the books. The other early incidence when crowd funding was used was in the construction of the Statue of Liberty where the American Committee for the Statue of Liberty were out of the funds, the American public was urged by Joseph Pulitzer, a newspaper publisher, to donate money so that the pedestal of the statue could be completed. Over $100,000 was raised through the appeals by Pulitzer that was carried in the New York World. Over 125,000 people from the American public were engaged in the making of the donations that majorly ranged in the area of $1 and less. In the arts and music, crowd sourcing has been used by different bands and artists for instance in 1997, the US tor of Marillion, a British band that plays rock, was fully underwritten by the fans of the British rock band. The fan based internet campaigns have played an instrumental role in ensuring that the different courses that are being explored by the different people can be achieved successfully. Following the success of the crowd sourcing by the British rock band, a platform, ArtistShare was developed in 2000 and thereafter there have been a number of crowd funding platforms that have been used in the different parts of the world so as to ensure that the different products are made in the market (Fundable, 2013). 3.0 Opportunities in Crowd Funding There are a number of prospects and opportunities that crowd funding presents the project initiators with. The most common applications of crowd funding are in the business, music, movie and journalism sectors. Through crowd funding start up commercial organizations can access the capital that they need to implement their initiatives. Kappel (n.d, p. 376) claims that many music labels in the present day have become non-profit making instates which allow the musicians’ fans to assume the classical financiering roles which were previously filled by record labels. Public institutions can also benefit from the opportunities offered by crowd funding; this is due to the fact that crowd funding does not discriminate between the governmental or non-governmental organizations but is ready to offer assistance to any innovative projects aimed at benefiting members of the society in question. Philanthropic projects that require a lot of monetary resources to carry out are also presented with a number of prospects for funding by Crowd funding. 4.0 Challenges and Benefits of Crowd Funding There are a number of benefits for the different stakeholders that are associated with crowd funding. According to Buysere et al, (2012, p. 6) the small and medium sized commercial institutes in Europe, comprising an estimated 99% of all business ventures in Europe, are responsible for most of the new jobs created. Consequently, the financial assistance offered to such commercial ventures by crowd funding is very significance in ensuring economic development and as well as enhancing the stability of affected financial systems. 5.0 Alternatives of crowd sourcing There are a number of alternatives of crowd sourcing that can be used in the different industries. First, there is the crowd investing that has also been used as an element of crowd funding. Secondly, there is there is the peer to peer lending that has also been used as an alternative to crowd sourcing. (a) Crowd investing The JOBS Act of 2012 that was passed by the Congress and signed into law by President Obama allows people to invest as low as $100 in new entrepreneurial startup. Here different people can be able to access the websites of the different firms that have developed the investing platforms so that they can be able to invest in the different ventures that are being started by the entrepreneurs. In many cases, the investors just have the faith that the products or the services that the startup firms will offer will finally materialize (Bradley, Burhouse, Gratton, and Miller, 2009). There are great levels of risks that are involved although many numbers of people have accepted that the regulations that are in place will ensure that their investments will be protected. Startup firms have used crowd investing to the tunes of $100 million some cases. (b) Peer to Peer Lending According to Buysere et al (2012) P2P is the practice of lending money to people whom a person is not related to at all in a scenario where the traditional intermediaries are not used. P2P does not involve the use of intermediaries such as traditional banking institutions and banks. The P2P lending usually take place online using the platforms that are provided for the lending and the checking of the credit status of the different people. 6.0 Ingredients for ideal crowd funding environment The crowd funding is ideal for a number of demographics for instance the people who are engaged in the crowd funding must have interest in the activity that is being funded. This will ensure that they will be able to offer the funds that are required so that the goal of the entrepreneurs can be realized (Haichao, Dahui, and Wenhua, 2011). The people who have the interest will have a greater passion and motivation to be involved in the activity that is being undertaken by the entrepreneurs. Secondly, there is the consideration of the geographic locations of the people. It is ideal that the people who are involved in the funding activities come from the countries where the funding activities take place (Greiner and Wang, 2009). This will significantly remove the complexities that are faced in the market. 7.0 The Motivation factors for Crowd Funding Family relatives are always motivated to engage in crowd funding so that they can be able to support their family members or their friends. The above mostly occurs when the project or the idea that needs the funding is the brainchild of their friend or their family member. This has been the motivation of a number of people to engage in crowd funding as they want to be there for their friends or members of their families (Howe, 2008). The second motivation that can be noted is related to the consumption of the products as well as the services that are offered by the firms. The loyalty that the people have to the firms will be a motivation to engage in crowd funding so that they can be able to continue to offer the consumers with products of high quality as the ones that they have traditionally offered to the different people. The different people who engage in the crowd funding are also motivated by the passions, beliefs, the shared interests and the sense of identity that are all elements of affinity. The geographical interests i.e. the need to build a school in a particular area, the interest such as music or people who are focused on enhancing the healthy lifestyles all engage in the crowd funding so that they can be able to support the different activities that the people engage in (Buysere et al, 2012). 8.0 The Limitations of Crowd Funding There are a number of limitations that the crowd funding has to the different people who are involved in the practice. First, there is the issue of the protection of the investors. The JOBS Act that was signed by President Obama has not become fully operational thus the different investors may significantly lose their money in the cases where the different projects are not undertaken. The laws that were to be developed by the SEC have not become fully operational thus there are significant risks that are involved (Kaikati and Kaikati, 2013). Secondly, there are the threats and limitations that are associated with the exposure of the intellectual property. The different investors that are involved in the making of the donations usually have access to the ideas before they can be patented thus the people who have access to the new ideas of the entrepreneurs will be faced with a situation where the people who check out the idea can copy it and even go ahead and patent it before the actual owners can be able to implement them. The current laws that govern the crowd funding do not have provisions for the ideas and the stuff that the people put up (Howe, 2008). Threats also emanate from disputes with regards to the patents as some of the ideas that may be put up on the crowd funding platforms are not originally the ideas of the people. Finally, there is the issue of the low funding levels for the particular projects thus ensuring that the projects can be undertaken in the manner that was visualized by the developers of the different programs (Kaikati and Kaikati, 2013). This is a great problem as in many cases some of the investors have to return the money that has been collected from the crowd. 9.0 Ideal scenario for success of the crowd funding First there is the need to ensure that the people file for patents, copyrights and trademarks before they can be able to put the different products on the platforms. The ideal situation characterized by patent protection, the success will be achieved (Kaikati and Kaikati, 2013). Secondly, the funding must be enough; this will be achieved through the use of good publicity outlets as well as the clear communication of the benefits that the donors will be able to get. 10.0 Conclusion This paper has outlined the concept of crowd funding from a critical angle. After offering a brief history of crowd funding as well as alternatives to crowd finding, the elements of an ideal crowd funding environment as well as the prospects it holds for entrepreneurs, individuals, non governmental organizations or public institutes have been discussed in details. This paper has also analyzed the different limitations and benefits associated with the phenomenon of crowd funding. 11.0 References Buysere, K. D., Gajda, O., Kleverlaan, R. and Maron, D, (2012), A Framework For European Crowd Funding, pp. 5- Howe, J., (2008), Crowd Sourcing: Why the Power of the Crow is Driving the Future of Business, New York: Crown Publishing Kappel, T., (n.d), Ex Ante Crowdfunding and the Recording Industry: A Model for the U.S.? in Loyola of Los Angeles Entertainment Law Review, Vol.29, Issue 3, p.376 Kaikati, A, and Kaikati, J., (2013), Doing Business without Exchanging Money: The Scale and Creativity of Modern Barter, California Management Review, 55, 2, pp. 46-71 Ordanini, A., Miceli, L., Pizzetti, M. and Parasuraman, A., (2011), Crowd-funding: Transforming customers into investors through innovative service platforms, Journal of Service Management 22 (4), pp. 443