Crowdfunding: a new stimulus to accelerate innovation

Insights

Crowdfunding: a new stimulus to accelerate innovation

October 28, 2020

Authors

  • Ezio Marinato

    Innovation Consultant - Ars et Inventio

Equity crowdfunding, a rapidly maturing tool that offers opportunities to support open innovation and reduce costs for the corporate in the experimentation and the launch of new products.

A CAGR of +46% from 2015 to today. € 442,684,694 funds raised up to 2019. An average success rate of the initiatives of about 70%. These are the crowdfunding numbers in Italy, a growing phenomenon that is changing the way of supporting people's creativity and entrepreneurship.

For those unfamiliar with Crowdfunding, it is «the process by which several people (crowd) pay sums of money, even small amounts, to finance a specific business project or initiative using websites and sometimes receiving a reward in exchange.» (CE, 2015). A process capable of having a positive impact on innovation, and in particular Open Innovation processes.

The origins of crowdfunding are not that recent. Without going into Jonathan Swift's Irish Loan Fund, the inception of crowdfunding dates back to around the year 2000, when the "net" changed the way of raising funds to support artistic and musical projects. The phenomenon has evolved rapidly, driven both by the success of Indiegogo and Kickstarter and by the diffusion of the concept of crowdsourcing, and has generated different models through which it is possible to finance artistic projects, businesses and social initiatives. There are four main ones: donation based, reward based, P2P lending and equity based.

The Crowd-investing Observatory report (2020) provides a general overview of the phenomenon, looking at demographic factors, income and the physical or legal nature of the investor. However, there is still a need to segment the crowd more deeply, exploring their behavioural differences in order to understand what influences their choices.

An Italian study (Feola et al., 2019), on the other hand, carried out a marketing segmentation in the crowdfunding market in Italy, comparing the financial motivations with the non-financial ones of those it defined as "digital investors". The aim is to understand what influences the choices of investing through crowdfunding and to suggest elements for establishing an effective common marketing strategy between entrepreneurs and platforms. Adopting a marketing perspective, five investment drivers were identified (confidence in the team and in the venture, size of the individual financial pledge, characteristics of the crowdfunding campaign and social and ethical motivations) that led to the identification of four segments of digital investors: “venture trustful”, “crowdfunding technicians”, “financial investors/talent scouters”, and, finally, “social dreamers”.

The venture trustful are young people under 40, skilled in the use of equity crowdfunding platforms. They have a medium-high tolerance to the risk of web-based investments and a strong intrinsic motivation to invest, dictated by personal reasons or linked to their surroundings. Their investment choices are influenced by trust in the venture and they have little interest in ethical or social drivers.

The crowdfunding technicians, aged between 40 and 60, are influenced by both financial information and financial pledges, as well as by the characteristics of the crowdfunding platform (access to the platform and the instrument, user interface, investment process, quantity/quality of the projects launched, project success rates, etc.).

The financial investors/talent scouters, mostly under 50, are interested in financial information and the entrepreneurial team. The segment brings together two subgroups that share the desire to place the company and team under a soft due diligence.

The social dreamers are under 30 or in the 40-50 range, are interested in ethical and social drivers, as well as confidence in the team and in the venture. They are quite unfamiliar with the use of the platforms and have a very low tolerance to investment risk through web tools.

The first two segments find it easier to invest via the crowdfunding platform, while the latter find it difficult to participate in crowdfunding campaigns. Despite this, it is precisely the financial investors/talent scouters who have a greater interest in repeating the investment through crowdfunding.

The venture trustful and the financial investors/talent scouters seem to behave similarly to the Venture Capitalists.

An analysis of this type has implications for the management of crowdfunding platforms and for seeking funds through equity crowdfunding. For Entrepreneurs and platform owners, the division of digital investors into homogeneous segments that, however, are differentiated by motivation and investment drivers, can be a useful support in developing a joint strategy aimed at maximising the funding potential.

Considering the understanding of the tool, together with the intrinsic motivations and the desire to generate new benefits for themselves, aiming to enhance the track record and trust in a company allows you to catch the venture trustful. They are very inclined to use crowdfunding and invest in solid business projects from the point of view of the organisation, which offer products superior to those on the market and with a low risk of competitive threats.

If you intend to involve the financial investors/talent scouters segment, it is preferable to remove obstacles by offering a fluid journey on the platform and work on confidence in the team and the venture. This means selecting projects where there is a team with a strong entrepreneurial attitude and high-level skills.

The same applies if you choose to attract the social dreamers, whose investment potential can be fully exploited by highlighting the link between the projects and the concept of humane entrepreneurship.

An analysis of crowdfunding provides important insights for corporate, if we consider them to made up of a community with characteristics similar to the sample observed by the study. Corporate, in fact, can use the insights of the research and crowdfunding reports to evaluate the opportunity to include crowdfunding in their portfolio of tools for carrying out experimentations or launch new projects, as well as make use of the results of the study for industrial uses.

This is the case of enterprise crowdfunding, which is already used by various companies, even if in its reward-based (IBM and General Electric to name but two) and non-equity form. It was applied according to two dynamics:

  • one aimed at external platforms to finance trials, understand consumer desires and validate the innovation;

  • the other aimed at enabling an internal community that wagers on the best ideas and innovative business solutions to launch.

General Electric and Honeywell have experimented with crowdfunding, reducing upfront costs for the rollout of a product by up to 20 times and engaging stakeholders to receive feedback on products in order to make a timely matching with consumer needs.

Through this solution, P&G and Bose took advantage of the possibility of a real-time and real market validation of the demand.

Wanting to engage internal communities, crowdfunding allows us to introduce a new mindset for innovation and the decision-making process, transforming creative ideas into high-impact businesses, strengthening the role of employees in the innovation process, enhancing expertise and creating a transparent process in corporate bodies.

One of the most evident implications is the role that crowdfunding can have in innovation, since it be an instrument at the service of innovation transfer processes, to allow companies to put innovation on the market.

Here are some benefits businesses could gain from the clever use of crowdfunding:

  • Being able to discover multiple innovations in parallel, reducing the costs and timing traditionally required by this activity;

  • Accelerate the corporate innovation process by focusing only on the most valuable and high-impact initiatives;

  • Enhance the role of employees in generating new business;

  • Identify new sources of financing for spin-off operations.

  • Establish new investment models and innovation initiatives

These results can be achieved by leveraging the results of the study in which four segments of digital investors were identified, and which are applicable only after working to converge equity crowdfunding with the enterprise form. Today, it is necessary to facilitate the access and application of crowdfunding by the corporate bodies, so as to give a boost both to the maturation of the phenomenon and to the innovation ecosystem.

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