The Relevance of Crowdfunding

These days, it is difficult to not have heard about Crowdfunding. As a relatively new possibility of informal financing for creative founders, it provides new ways in which seed capital can be raised from the general public (Steinberg, 2012). What has recently brought it into the limelight is the blend of technology advancements and the impacts of the financial crisis that opened new opportunities to bring innovations to life. Various studies argue that financing the development of ideas has always been a major constraint for small entrepreneurial firms. Cosh et al. (2009) indicate that attracting external finance is difficult for new ventures at their pre-seed and seed stage: Firstly, the post-2008 financial crisis has drastically reduced the availability of bank lending due to tougher credit regulations and collateral requirements. Secondly, higher-volume early-stage equity in the form of Venture Capital or Angel investment is limited for new ventures due to unproven product viability and lack of value (Berger & Udell, 1998).

This chapter gives an introduction to Crowdfunding covering an explanation of the phenomenon, as well as an illustration of the key actors and common Crowdfunding variations along with an overview of the most common reward-based platforms (see Appendix B). With the aid of these essential characteristics, a working definition for Crowdfunding can be derived for a better understanding of this work.

In order to better comprehend the evolution of this ecosystem, it seems essential to develop an understanding of the nature of entrepreneurship. Joseph Schumpeter, one of the most influential scholars of entrepreneurship from the 20th century, describes it as an act where new innovative combinations replace old innovations through the process of 'creative destruction' (Schumpeter, 1962). Recent scholars see Entrepreneurship as more of an opportunity-driven way of thinking, reasoning and acting with the aim of sustainable value creation. Hence, the classical expression of entrepreneurship is the birth of a new firm, when an innovative idea is turned into a high-growth company (Timmons et al. 2010). The process that makes that happen is called the entrepreneurial innovation process.

Looking at the increasing number of Crowdfunding platforms in combination with the disproportional increase in global Crowdfunding volumes (see Appendix A), its significance for innovation seems unambiguous. However, the impacts of Crowdfunding on new product implementation and innovation adoption are not yet adequately researched. This stems from the novelty and diversity of the very young phenomenon as well as the few studies conducted on this topic.

This chapter presents the results of the conducted qualitative research in combination with a small quantitative study about the impacts of Crowdfunding on the entrepreneurial innovation process. While the main focus of this research involves interviews with successful hardware-Crowdfunding campaigns and experts in the field of Crowdfunding, statistical campaign performance data serves as a supplementary source of evidence. In order to illustrate the qualitative data in a meaningful way, the analysis is split into sub-themes according to the key issues derived from the literature review. These sub-themes allow reporting, analysing and synthesising the gathered empirical data, collected through the interviews within a set context of the Crowdfunding phenomenon (see chapter 2). This chapter is concluded by a brief summary of the main findings that serves as the foundation for the conclusions and discussion about Crowdfunding's wider economic implication in chapter six.

Crowdfunding is an evolving phenomenon and currently characterised by high dynamics as this research shows. While it has its roots in the analogue world where Beethoven or Mozart have financed their concerts through public subscription, the global digitalisation process allows this ecosystem of innovation and finance to flourish. Increasing numbers of projects of different natures are trying to acquire money from the internet public through Crowdfunding. At the same time, the number of Crowdfunding platforms is massively growing and has doubled between 2008-2012 (see Appendix A), providing various options for fundraisers to take their ideas forward.