In the internet era, entrepreneursare likely to use crowdfunding mostly for ‘cost-reduction reasons.’ (Schwienbacher & Larralde, 2010). Although reducing costs might seem to be one of the most obviousones, other key reasons come from the free attention they could receive, inaddition to support from backers for their project before launching a productor service. The internet allows entrepreneurs to promote their ideas freely andit also allows them to communicate with their customers through the use ofsocial media.
(Schwienbacher& Larralde, 2010). There are different crowdfunding models whichwill each suit different backers. The reward model of crowdfunding allows ‘thebacker to pledge an amount of money for a reward, with structures tiered toreward the largest backers to receive the highest value or most unique reward.'(Wilkinson, 2017). The donation-based model of crowdfunding isstructured in a similar way to the reward model of crowdfunding, with one key difference,the philanthropic element.
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People who are donating, don’texpect to receive a reward in return. (Wilkinson, 2017). This model doesn’t fitthe ‘Pebble: E-Paper Watch for iPhone andAndroid’ as backers will want a reward in return. The equity model of crowdfunding allows backers of a venture tobecome a shareholder.
With this model, ‘the potential returns aresignificantly higher …
but so are the risks.’ (Wilkinson, 2017). Tung (2015) argues that although the rewardmodel of crowdfunding might seem tobe an ideal platform for start-up ventures, particularly those offeringtangible goods (such as, Pebble), ‘there are several drawbacks to this system,especially to its backers.’ (Tung, 2015). Pointing mainly to the fact thatalthough backers of a venture are rewarded after it is successful in reachingits target, backers ‘have no say in the company’s trajectory nor would theyshare in the company’s future profits despite effectively laying thefoundations of its success.’ (Tung, 2015).
This is one clear challenge of thereward model of crowdfunding for backers. An equity model, used by platformssuch as Crowdcube, could be seen as a better option by the backers of aventure. The reason being that ‘instead of fixed instantrewards, backers are given a share of the company in return for theircontribution, effectively becoming investors.'(Tung, 2015). If a company goes on to do well,backers who invest in companies (e.g. Pebble) through platforms such asKickstarter, who use a reward model of crowdfunding may want more in return.They might want a share of the profits as they could feel that their investmentin the early stages was vital to the company’s success.
In Short et al.’s (2017) research oncrowdfunding, they explain that although ‘crowdfunding’s contribution toentrepreneurial fundraising has resulted in increasing popularity over the last10 years, crowdfunding is far from a new phenomenon.’ (Short et al., 2017).Using Joseph Pulitzer as an example, they describe how, in 1885, he was able tofund the completion of the Statue of Liberty’s pedestal. He wrote an article inhis New York World Newspaper to get the readers to fund the project after ‘theAmerican Committee for the Statue of Liberty ran out of funds.’ (National ParkService, 2016). He was able to raise ‘over$100,000 in six months .
.. to ensure the pedestal’s completion.’ (National Park Service, 2016).
As a reward, the newspaper published the names of everyone whodonated; similar to the reward model of crowdfunding we see today. (Short etal., 2017; National Park Service, 2016).In the earlier days, entrepreneurswouldn’t have had ‘ready access to a large “crowd” from which to solicit funds’as Pulitzer did. (Short et al., 2017). This hurdle was removed by the introduction of theinternet and the various crowdfunding platforms that are available toentrepreneurs.
Drake (2015) predicted that ‘In 2016, thenumber of crowdfunding platforms was likely to hit the 2000 mark’. This clearlyshows that entrepreneurs today have much more opportunity and don’t have toface the same challenges because of the internet. Crowdfunding transactions are expected to exceed $300 billion by2025. (Meyskens & Bird, 2015). One of the major factors which has contributed tothe funding success of the ‘Pebble: E-Paper Watch for iPhone andAndroid’ is the uniquevalue proposition offered. The Pebble watch was a new product that offeredcustomers with new features that may not have beenidentified as a necessity beforehand which made the product unique.
It offeredsomething different and customers wanted to back the product. Those who did,were rewarded.Backers were told that they would receive one of the watches as reward forpledging just $99 to the venture and that the watch would retail for $150. Thiswould have given them extra motivation to get the product at lower price, as anearly adopter. The venture was very successful and became one of the mostfunded projects on Kickstarter. This led to Pebble launching other productsthrough Kickstarter which were also very successful. The main attraction wasthe actual product.
As mentioned earlier, most of the backers pledged $115 orless and in return received the watch which was sold at a higher price afterlaunching. (Kickstarter, 2012). Although they were able to successfully fund otherproducts through Kickstarter, Pebble closed down after it was sold to Fitbit inDecember 2016. The reasons for this, is likely to be the increase incompetition from the likes of Apple and Fitbit, who have their own smartwatcheswith similar features. Over time, brands such as Apple, have launched their ownsmartwatches offering their own unique value propositions.
Although the ownersof Pebble may have wanted to keep full ownership of the business, I think thatthey could have survived had they used an equity model of crowdfunding. Thereason being that this would’ve give backers extra motivation to invest moreinto the business and become shareholders. The internet has made all of thisvery simple and entrepreneurs are now able to use crowdfunding platforms, suchas Kickstarter to help fund their ventures. People are able to back the ventureif they feel if the rewards are adequate.