Crowdfunding as a new approach to improving innovative startups activity

This article focuses on a new economic phenomenon of crowdfunding which is a major source for innovative startups funding. The article illustrates why people venture to invest in these startups. Classification of crowdfunding models is described. The author also touches upon the psychology of collective financing. Legal aspects of crowdfunding are briefly described. The article reviews Russian crowdfunding platforms Planeta.ru and Boomstarter.ru.

Key words: Crowdfunding, Financing, Entrepreneur, Startup, Innovation, Projects, Planeta.ru, Boomstarter.ru.

В статье рассмотрен новый подход к совершенствованию деятельности инновационных стартапов — краудфандинг. Представлена классификация краудфандинговых моделей. Описаны психологические и правовые аспекты краудфандинга. Проанализированы ведущие российские площадки для краудфандинга Planeta.ru и Boomstarter.ru.

Ключевые слова: краудфандинг, финансирование, стартапы, инновации, проекты, Planeta.ru, Boomstarter.ru

Fast development of modern technologies has opened new possibilities for modern investors. Being an effective instrument of financial investments, crowdfunding is getting extremely popular.

The name of the crowdfunding speaks for itself and means public financing of creative projects, business start-ups and charity events. In most cases financing is provided with the help of the internet platforms. For example, kickstarter.com, boomstarter.ru, indiegogo.com, crowcube.com, planeta.ru, smartmarket.net, they have been the most successful ones so far.

How does crowdfunding work

Crowdfunding is unique because it is the financial instrument that uses internet technologies allowing to raise small investments from a large number of people in order to support a project, usually for the entrepreneurs and small businesses.

Technologic startup of a young engineer Palmer Lucky «Oculus» (eye from Latin) is a virtual reality helmet, which is a budget-friendly option for customers. Similar products existed at the market before «Oculus». However, the fact that some money for production and promotion of the product has been raised via crowdfunding business makes the project special. More than 2.5 million USA dollars have been raised for a month [3]. More than 9.5 thousand people have become bakers. The project was warmly welcomed by the target customers, mostly the fans of the video games, and became commercially successful. In 2014, Facebook announced its decision to buy «Oculus VR» for 2 billion USA dollars [6]. Such success is due both to the engineering talent of Palmer Lucky and the crowdfunding campaign. Apart from bright and innovative product, «Oculus» have shown to the world that crowdfunding could be considered as a serious way of financing projects. As a result, several models of crowd financing are now available.

Classification of crowdfunding models

There are three categories of Crowdfunding subdivided according to the promise of the reward to the backers: reward-based crowdfunding, debt-based crowdfunding and donation-based crowdfunding.

1. Reward-based crowdfunding offers to their backers a reward which could be given in a number of ways such as mentioning the name of the former on the cover of the product; or a chance to take part in the production, for example, in making a movie; or just a promise of an autograph.
2. Debt-based/ all-or-nothing crowdfunding means that the funders are promised to be granted ready product. For instance, it could be an electronic version of the book or video or audio product.
3. Donation-based or financial crowdfunding means that the investor will get as a reward the company’s equities, interests on revenues or the right to vote at the board of investors/shareholders meetings.

Fast development of the public financing system supports crowdfunding platforms and social networks such as Twitter, Facebook, В контакте, which are capable to popularize raising investments in a short period of time for an existing project. This is a unique phenomenon of transformation of the social capital, created by the social networks, into the financial capital.

Another important feature of crowdfunding is the absence of traditional intermediaries in financing. Banks, stock exchange, venture funds are excluded from the financial process. Consequently, the investor deals with the recipient directly. This is negative for the classical financial institutions as they are being forced out from their markets. However, wise use of the information available at the crowdfunding platforms helps in forecasting commodity markets and in making decisions about financing projects considering the choice of a large number of people. As a result, valuable business prediction information is now available in free access.

Psychology that underlies public financing

Motives that make people invest in non-profit or nearly non-profit projects make crowdfunding a unique social phenomenon. Philosophers and sociologies claim that this is an example of human solidarity, friendship and civil bonds or even fraternal love. According to one of the founders of the social science, M.Webber [2], ethics of the fraternal love, as it was interpreted by the first communities of the universal world religions, has not disappeared, on the contrary it has opened unknown before social realities.

American sociologist, George Alexander, believes that solidarity forms the basis for justice; this is a feeling of belonging to a wider group, to a community where an individual has on the one hand responsibilities and on the other hand rights to share feelings with others and the ability to contribute to the community’s business [2].

The history of the development of crowdfunding in America and Europe proves the theory of solidarity. The logical result of this process is the phenomenon of the public financing, which has developed due to the projects that did not offer their investors any bonds or equities or any interest on the revenues in the future. Instead, investors were offered intangible rewards such as the real product or just public mentioning. Unbelievable success of the non-profit cultural and social projects has made crowdfunding a popular trend in business start-ups financing.

It is believed that crowdfunding is the right solution to this kind of projects because the future consumers of the product will be able to become the stockholders and offer the sales success. Isn’t it the future which the socialists of the past century dreamed of, trying to build utopian systems of the production and distribution of goods? It could become that this way of the industrial development, when plants and factories work on the individual orders of particular groups, can help modern industries to avoid the crisis of overproduction.

The history of the legal regulation of the crowdfunding investment began on the 5^th of April2012, when President Barak Obama signed the JOBS Act Law (see [4]). The objective of the law is to create extra workplaces and to stimulate the economic growth by easier access to the public monetary/capital markets for new companies.

The law provides the right to form a simplified system to raise capital for small companies, the so called start-ups, without carrying out the obligatory now IPO. In fact, the law offers legal basis for the most advanced form of crowdfunding. Now the investor receives part of the property, dividend shares or the right to vote at the shareholders meeting as a counteroffer. The law allows to raise up to $1 000 000 on — line with the maximum number of 2 thousand investors. Moreover, the law lifts the ban on the limitation of attracting non-credited investors. The maximum sum from one investor makes up $10 000.

The development of the crowdfunding in Russia.

In Russia the history of crowdfunding began in 2012, when platforms boom-starter.ru and planeta.ru appeared. Both grounds are developing very successfully at the moment. Despite the fact that firstly both projects were copied from the American ones, they have their own peculiarities, getting used to the new realia. Russian platforms have demonstrated promising results for the past three years.

«Planeta»

Portal planeta.ru is considered to be one of the main crowdfunding platforms in Russia. It was founded 3 years ago and since that time the company has helped to finance projects to the value of 160 million rubles in the spheres of movie and video production, music, charity, art and others. «Planeta» is popular among advanced young people of big Russian cities. Projects that cooperate with the major brands are also quickly developing. Portal shows a steady growth in the volume of financing [5].

«Boomstarter»

Boomstarter is the second Russian biggest portal for crowdfunding. It puts emphasis on technical startups (its business is similar to the western leading model of «Kickstarter»). Noteworthy is that «Boomstarter» became a laureate of the award “Startup 2012” established by the business incubator of the National Research University — Higher School of Economics in the nomination of the best social oriented startup. «Boomstarter» raised 100 million rubles since its foundation till 2014 [5].

Both these platforms work with reward-based crowdfunding. According to this schema, the investor or donor, gives the recipient money as a gift, free of charge/uncompensated.

Crowdfunding is a new economic phenomenon. According to the leading world organizations that deal with the economic analysis it has a high potential for development. For example, the World Bank forecasts that the market size for crowdfunding will amount up to 90 billion USA dollars in 2020, which will exceed the size of the venture investment market [1]. It means that the global prospects of crowdfunding as a financial instrument for startups is large. In Russia, the development of crowdfunding follows the so-called catch up scenario. Firstly, there are no legislative regulations like A JOBS ACT in America. Secondly, debt based and donation based models, which are two main types of crowdfunding, do not exist. Next, the popularity of Russian crowdfunding platforms is much lower than abroad. Consequently, the future of crowdfunding largely depends on legal regulation and public attention to the phenomenon.

References:

1. Best, J. et al. 2013. Scaling innovation: Crowdfunding’s potential for the developing world. Information for Development Program (infoDev), The World Bank. (2013).
2. Filippov, A. 2012. Mobility and Solidarity. Paper 2. The Russian Sociological Review. 11, 1 (2012), 19–39.
3. Oculus 2015. Oculus Rift: Step Into the Game. ww.kickstarter.com/projects/1523379957/oculus-rift-step-into-the-game (режим доступа 20.10.2015)
4. Securities, U.S. and Commission, E. 2013. Jumpstart Our Business Startups (JOBS) Act.
5. stk11 2014. Краудфандинг в России: Итоги-2014. http://crowdhunters.ru/crowd2014/ (режим доступа 21.10.2015)
6. Zuckerberg, M. 2014. I’m excited to announce that we’ve agreed to acquire Oculus VR. https://www.facebook.com/zuck/posts/10101319050523971 (режим доступа 21.10.2015)