In the past years the number of startups increased continuously. Often it is the case that a startup doesn’t have the financial power to realize a business and if an investor or a financial institute refuses to support the startup many good ideas can fail already at the beginning.
Therefore it is necessary for startups to find new ways for financing the business ideas. Crowdfunding is one method for financing and investing which nowadays reaches a high popularity and growth among innovative people, groups and companies.
To get a better understanding of the whole context this term paper investigates the different perspectives and actors of crowdfunding to give an answer to the actual aim. The aim is to analyze whether crowdfunding is an appropriate way of gaining funds for startups or not.
In the first part the theoretical information is provided. This includes definitions and differentiations of used basic terms like crowdfunding and crowdinvesting as well as the different forms of crowdfunding. Also in the same part the functionality and the historical development of crowdfunding will be shown.
In chapter 3 the actors of crowdfunding – the startups, the investors and the platforms – will be described. This part will focus on the different reasons, aims and other important aspects for each of the actors.
An overview of advantages and risks for startups and investors will be given in the fourth chapter.
To have a better impression about the different crowdfunding forms, levels and scales, the fifth chapter will show some examples of successful crowdfunding campaigns.
Based on all researched and derived information, the last chapter will give a summary and conclusion to the aim of this term paper.
Table of Contents
1 Introduction
1.1 Problem
1.2 Aim
1.3 Procedural method
2 Crowdfunding
2.1 Definitions: crowd, funding, crowdfunding, crowdinvesting
2.2 Forms of crowdfunding
2.3 Crowdfunding and Crowdinvesting
2.4 Functionality
2.5 Historical Development
3 Actors of crowdfunding
3.1 Capital-seeking companies (startups)
3.1.1 Reasons and aims
3.1.2 Selection of the form and conditions
3.1.3 Selection criteria of crowdfunding from the view of capital seeking companies (startups)
3.2 Investors
3.2.1 Who are the investors?
3.2.2 Reasons and aims – intrinsic
3.2.3 Participation in the profit and accretion – monetary
3.3 Financial intermediary (platforms)
3.3.1 Aims
3.3.2 Remuneration model
4 Advantages and risks
4.1 Overview
4.2 Startups – advantages
4.3 Startups – disadvantages and risks
4.4 Investors – advantages
4.5 Investors – disadvantages and risks
5 Current examples of successful Crowdfunding projects (practice examples)
5.1 Reward based
5.2 Equity based
5.3 Lending based
5.4 Donation based
6 Conclusion
Objectives and Research Focus
This paper investigates the viability of crowdfunding as a strategic financial instrument for startups. The primary objective is to analyze whether crowdfunding represents an appropriate and effective method for startups to secure necessary funding compared to traditional financial vehicles.
- The theoretical foundations and terminology of crowdfunding vs. crowdinvesting.
- The roles and motivations of the three primary actors: startups, investors, and platforms.
- A comparative analysis of the advantages and risks associated with crowdfunding for startups and investors.
- Evaluation of practical examples across various crowdfunding models (reward, equity, lending, and donation-based).
Excerpt from the Book
3.1.2 Selection of the form and conditions
The startup has to analyze if crowdfunding is the best method for financing. As written in the definition of a startup, it is an innovative company. Innovation is a must-be criterion when choosing crowdfunding as financial method. Innovation means developing something new and therefore existing business models have almost no chance to get financed by the crowd e.g. fitness center or a kiosk.
Venture capital is another funding method. Venture capital is a temporary equity investment in young, innovative, privately hold enterprises which have an average above growth potential. Venture capital associations require a high share of the startup`s equity capital to finance them. The risk is one reason why a high share needed. Another one is that the startups don’t have an alternative possibility of financing. Furthermore the investors often require rights to a say which mostly founders don’t want. The advantage of venture capital is the knowledge and contacts of the investors which can lead to more success.
If the startup is not innovative enough but doesn’t want to involve investors in the business, the bank credit could be an alternative method. The advantage is that the bank doesn’t have rights to a say, but the disadvantage is that the startup has to pay back the credit also in the case the enterprise has crashed.
Which financial method is the best for a company depends on many factors e.g. innovation power, amount of funding, type of products etc.
Summary of Chapters
1 Introduction: This chapter defines the problem of startup financing and outlines the paper's aim to evaluate crowdfunding as an appropriate funding method.
2 Crowdfunding: It provides clear definitions, distinguishes between various forms of crowdfunding, and traces its historical development and functional mechanics.
3 Actors of crowdfunding: This section describes the specific roles, motivations, and selection criteria for startups, investors, and financial intermediary platforms.
4 Advantages and risks: An analysis that maps out the benefits and potential downsides of the crowdfunding process for both the capital-seekers and the investors.
5 Current examples of successful Crowdfunding projects (practice examples): This chapter provides empirical evidence by showcasing successful campaigns across reward, equity, lending, and donation-based models.
6 Conclusion: The paper concludes by weighing the benefits against the risks and affirming that crowdfunding is an attractive and recommendable financing option for startups.
Keywords
Crowdfunding, Crowdinvesting, Startups, Financial Instrument, Equity-based, Reward-based, Lending-based, Donation-based, Venture Capital, Investors, Funding Volume, Business Models, Innovation, Capital-seeking, Platform Economics
Frequently Asked Questions
What is the core focus of this research paper?
The paper examines crowdfunding as a viable financial instrument for startups, analyzing its structure, benefits, and inherent risks within the modern financial landscape.
What are the central thematic areas covered in this work?
The work covers the definitions and mechanics of crowdfunding, the specific motivations of the participants, a risk-benefit analysis, and an overview of current international market trends.
What is the primary research question?
The primary research question is to determine whether crowdfunding is an appropriate and recommendable way for startups to gain necessary financial capital.
Which scientific methodology is employed?
The paper uses a descriptive and analytical approach, synthesizing existing literature, defining theoretical terms, and conducting a comparative study of different crowdfunding models supported by practice-based examples.
What topics are addressed in the main body?
The main body details the functions and historical development of the industry, the roles of startups, investors, and platforms, and provides a comparative risk-advantage matrix for stakeholders.
What are the characteristic keywords for this research?
Key terms include crowdfunding, crowdinvesting, startups, innovation, financial risk, and investment return.
How do platforms generate revenue from crowdfunding projects?
Platforms primarily generate revenue through provisions (usually 5-10% of the funded volume) and additional fees for listing, consulting, or specialized administrative services.
Why is "innovation" considered a critical criterion for success?
Innovation is essential because it distinguishes startups from established businesses, making them attractive to the crowd who are looking for unique, new, or disruptive ideas to support.
What are the specific liquidity risks for investors in equity-based models?
Investors face the risk that their equity cannot be easily converted into cash because there is typically no secondary market for the shares acquired through crowdfunding platforms.
- Quote paper
- Steven Wolf (Author), Eugen Kraemer (Author), 2015, Crowdfunding as a financial instrument for startups, Munich, GRIN Verlag, https://www.grin.com/document/305910
