Crowdfunding as a Financial Tool for Social Enterprises: The Funding Performance of Social and Environmental Projects in Crowdfunding

Introduction

Social entrepreneurs, disruptive innovators who are our champions, are trying to solve the world’s most pressing challenges and entering into markets where others have failed before. In the ongoing COVID-19 pandemic, we need social innovators more than ever before since the pandemic hit the vulnerable, excluded and employers in the informal economy the most in terms of health and economic effects (World Economic Forum, 2020). Humanity has surpassed the critical levels of environmental pollution (Steffen et al., 2015) and such environmental destruction may be increasing risks of current and future epidemics of pandemics (Brennan & Micklas, 2020). Incremental improvements are not sufficient to lighten the effects of threats facing our planet and more systematic change is necessary. Hence, supporting social entrepreneurs or sustainability oriented entrepreneurs who run for profit companies that pursue positive environmental or social objectives is of utmost importance. The main research question in this chapter is whether crowds favor them and crowdfunding platforms serve as an efficient funding mechanism for social entrepreneurs.

Access to finance has been a significant challenge for entrepreneurs and became even more difficult after the 2007 credit crisis (North et al., 2013). Raising capital through traditional financial sources can be difficult especially for social enterprises (Castellas et al., 2018; Emerson et al., 2007; Nicholls, 2010). Social enterprises seek out business solutions to solve social problems (Thompson & Doherty, 2006). They have dual missions of social purpose and financial stability (Doherty et al., 2014) and compared to for profit enterprises they face difficulties in mobilization of resources (Austin et al., 2006). Taking into account the unconventional business models and restrictions on profit sharing, raising capital from traditional capital providers is harder for social enterprises (Chertok et al., 2008; Choi & Gray, 2008).

Crowdfunding has emerged as a critical financing mechanism to fill especially the early stage funding gaps (Sorenson et al., 2016; World Bank, 2013). After the 2007 credit crisis, internet based crowdfunding has become a valuable method for entrepreneurs to solicit financial support online (Belleflamme et al., 2014; Bonini & Capizzi, 2019; Harrison, 2013; World Bank, 2013). It is an unconventional method of financing in which financial intermediaries are surpassed and crowds transfer funds to projects and enterprises (Lehner, 2014; Mollick, 2014; Schwienbacher & Larralde, 2010). The process of crowdfunding is described as the “successful interaction between a facilitating organization (or platform), a variety of campaign founders who seek financial support for their ideas and ventures, and a large dispersed “crowd” of individuals (“crowdfunders”) who are enticed to invest, pledge, lend, or donate money toward these ideas and ventures” (Nielsen, 2018, p.1). Crowdfunding platforms provide financing opportunity for social entrepreneurs who do not have a track record or collateral and cannot access bank loans, democratizing the financial services (Ordanini et al., 2011; Rey-Martí et al., 2019).

Crowdfunding not only serves for financing but for a number of business purposes. Entrepreneurs can run early market tests for product ideas and estimate demand for their products and services (Belleflamme et al., 2014). Moreover crowdfunding supports marketing of entrepreneurs and raises product/service awareness (Mollick, 2014). Crowdfunding has become a powerful fundraising tool in the world and according to Statistica Crowdfunding -Statistics and Facts (2020), crowdfunding transaction value totals 8,537.3 million dollars with an expected annual growth rate of 12% and average funding per campaign is 780 dollars in 2020. Crowdfunding comes in four types based on what the funder expects to receive in return. The four main types of crowdfunding are: 1) donation based 2) debt based 3) equity based and 4) reward based. What funders receive in return for their contributions at these platforms vary from a simple thank you letter/mention to interest return, equity stake or a reward, respectively.