The following article has been written for Bloomio by Francisco Ferreira, author of the academic study “Success factors in a reward and equity based crowdfunding campaign”, presented at the 2018 IEEE International Conference on Engineering, Technology and Innovation (ICE/ITMC).
As the world changes, financial sector changes with it, and alternative finance emerge. Crowdfunding is part of this evolution and its use is becoming more widespread day by day. As more entrepreneurs and organizations seek crowdfunding to fund their ventures, the major issue is not the information available about how to create a successful campaign, but rather the dispersion of this information. Therefore, the main goal of the scientific paper that serves as basis for this text, was to gather information to create a framework that can serve as an important guide for all those who seek funding through crowdfunding, mainly equity crowdfunding. To accomplish the purposed goal, it is important to realize which are the deterrents for participation of potential investors in crowdfunding campaigns, to understand the underlying motivations of those investing in crowdfunding, in order to offer them what they seek and what motivates them and finally, it is crucial to understand the specific success factors for a successful crowdfunding campaign.
The main reason not to invest in crowdfunding or equity crowdfunding, is either the fact people don’t know the concept, regarding equity crowdfunding, or the fact that they don’t know enough about it, regarding crowdfunding in general. So, it can be concluded that the biggest barrier to persuade more investors to use crowdfunding is the lack of awareness. Another important aspect to take into account for equity crowdfunding, is the difficulty to access platforms. This is, very likely, due to the restrictions from some governments but also from platforms, which results in the existence of several equity crowdfunding platforms that are only open for accredited investors. Some other issues are the quality of the platforms and projects, the perception of risk and lack of money.
Apart from the motivation to have exclusive access to innovative products and expected financial returns, respectively for reward-based crowdfunding and equity crowdfunding, there are some intrinsic and extrinsic motivations that entrepreneurs should take into account when trying to create a successful campaign. The most important is that investors are keen to be part of the journey from its early beginning and that is one of the biggest motivations that start-ups looking for finance must attend and cannot neglect. To be successful, entrepreneurs looking for finance, should also have in mind and prepare a crowdfunding campaign that makes possible experience gains, personal satisfaction, possibilities for the investors to expand their networks and that makes them feel part of the entrepreneurial community.
Regarding the specific success factors the existence of a video and regular updates are essential, just like the inexistence of spelling mistakes. The most important is not the time available for investment but the project narrative and an effective communication, embracing the Web 2.0. The personal characteristics and network, together with the social contacts within the platform are also very important factors. For the specific case of equity crowdfunding, observable signals, displaying higher venture quality, mainly through the existence of qualified human capital and the reduced level of uncertainty, are fundamental for the success of an equity crowdfunding campaign. The reduction of uncertainty can be achieved by providing information to potential shareholders about the risks and the future projections on the performance of the venture. Important information are a proposed exit channel and a short time horizon until that exit, since this information increases the desirability of the venture for possible shareholders. Another way to reduce uncertainty is to show commitment to the venture by sharing the risks, investing personal money and directly holding shares. It is important to notice that high equity offerings, by the entrepreneur, are associated with lack of confidence in the venture and prejudicial to its success.
Crowdfunding democratized the access to investment but there is still a lot to be done and studied about it. Despite its growth and, consequently, use and publicity, almost half of the campaigns fail. I hope this work contributes to more successful campaigns.