Manufactured Risks of Reward-Based Crowdfunding Platforms

Manufactured Risks of Reward-Based Crowdfunding Platforms

Selin Öner Kula (Independent Researcher, Austria)
Copyright: © 2020 |Pages: 21
DOI: 10.4018/978-1-5225-9928-9.ch007

Abstract

Without an equivalent conventional form, reward-based crowdfunding (RBCF) brings in new concepts that demand deeper awareness by all stakeholders, so that they can acknowledge corresponding responsibilities. Despite famous intermediaries' nearly decadelong operations, the digestion of risks seems still incomplete, also hindering a solid evolution. This qualitative study is a step toward a more holistic understanding of success and manufactured risks of RBCF that have been left out of sight in studies so far. Lack of efficient visibility on projects' post-funding completion and limitless overfunding create potential conflicts of interest which threaten platforms' neutrality and sustainability. RBCF platforms must afford higher transparency and richer tools for managing the risks to tap their true potential. This chapter presents an overview of the major pitfalls of Kickstarter (KS) and Indiegogo (IGG) that can throw light on RBCF's general shortcomings, also offering a glimpse on two successfully funded but failed projects.
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Background

With a surge in the means for sharing through the Internet, a new ecosystem encompassing different types of sharing (e.g., collaborative consumption, crowdfunding, and crowdsourcing) has shaped up, which is considered vital in many dimensions. Online collaborative platforms facilitate a shift from consumerism toward collaborative resource-sharing that feeds entrepreneurship, creation, and p2p collaboration. The sharing economy also carries the potential to revive a sense of “community” and “social cohesion” (Botsman & Rogers, 2010, p. 70), to similarly narrow the “widening gap between the rich and poor” (Siefkes, 2008, pp. 131-133) and to present a more ethical alternative to the market with “equality of access” (Stallman, 2002, pp. 59-64). Moreover, although its effectiveness is yet debated (Martin, 2016, pp. 149-159), this new ecosystem provides means for dealing with the concerns of “sustainability” (Heinrichs, 2013, p. 228).

Time will show whether these expectations of the sharing economy prove valid. On the downside, it may also “amplify worst excesses of the dominant economic model” (Morozov, 2013, para.10). Turning this ecosystem into its best form clearly requires systematic collaboration of stakeholders. Collective spaces distinctively mediated intentions of empowering the individual beyond the power centers of “organized capitalism,” which, as Horkheimer (1974) argues, put “personal initiative” into ever smaller conventional boxes so that participation “remains at best a hobby” (p. 94). However, with the Internet, peers created or found the means to share in a different dimension than traditional daily life allowed, with more autonomy for participation and cooperation. As Jenkins (2006) considers, the participatory nature of the Internet lets small inputs matter.

Key Terms in this Chapter

Due Diligence: A thorough investigation of a company and its commercial, financial, legal records, and prospects that is primarily used as a basis for a business transaction including financing, merger, or acquisitions.

Angel Investor: Typically, a high net-worth person or sophisticated investor who offers early-stage capital for a startup usually against equity shares.

Lehman Formula: A typically popular commission scheme for fund raising that lets an intermediary earn (success) fees in reverse proportion to size of funding (commission rate declining from 5% gradually by one basis points for each consecutive million raised, i.e., 3% of the third million).

Sophisticated/High Net-Worth Investor: A financially acknowledged investor type that carries enough wealth and knowledge to invest in risky assets.

Average Spending/Crowdfunding Per Backer: Total funding volume divided by number of backers in a crowdfunding project.

Repeat Backer: A backer who has contributed to more than one crowdfunding project on a platform.

Economies of Scale: The economic principle of achieving lower unit costs through production or purchase of larger volumes of business.

Traditional Finance: This chapter calls typical and renowned methods of finance that usually involves financial institutions as “traditional,” also interchangeably used with “conventional” finance.

Success Fee: A commission that ties the amount paid to an intermediary in a transaction through a specified percentage rate on deal size. This acts as an alignment mechanism between the middleman and the party that usually raises the funding (through equity or debt).

Backer: The user of a crowdfunding platform who crowdfunds a project, also called “supporter”, “contributor” or “crowdfunder”.

Campaigner: The user of a crowdfunding platform who creates a project for fund raising, also called “project creator” or “creator.”

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