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This case study deals with the basis of crowdfunding and how crowdfunding is generated and how in total the crowdfunding gives an idea about the startup of a business and how the business is done and how the crowdfunding emerges as an opportunity to start your business in a boost way. It also deals about the impact that crowdfunding leaves on us the pros and cons of crowdfunding and the impact on crowdfunding on business we will be dealing out this in each and every aspect. So, crowdfunding has a deep impact on the business ideas which we will be stating out.
Crowdfunding is the use of minimal amounts of moneycollected from a large number of people to start setup. Generally, crowdfunding has widerutilization of social media to reach a vast number of people, and there are also many crowdfunding websites which help a number ofa startup business to help with crowdfunding which helps them to raise the money and give the startup a boost which is needed. (Kenton W.K., 2019)
There are quite a number of crowdfunding processes are available which we will be discussing here:
• Donation-based Crowdfunding: - The aid-based crowdfunding can be regarded as a type of funding where there are no returns to the capitalist or the contributors. Examples of aid-based crowdfunding areraising funds for emergency relief, charities etc.
• Reward-based Crowdfunding: - gift-based crowdfunding is one of the popular ways of crowdfunding. In the gift-based crowdfunding, it implies that an individual is contributing to your business in exchange for any reward that can be any form of gifts or services which your company provides. This method is generallytaken as a subdivision of aid-based crowdfunding as it doesn't involve any financial return. This type of funding is popular on many websites such as Kickstarter and Indiegogo.
• Equity-based Crowdfunding: - In equity-based crowdfunding, we can see that the investors or the contributors become half-owner of your campaign by lending money for equity shares. Being an equity owner, your contributor gets a monetary return on their contribution and ultimately receive their margin of profit in the way of allowance
So, crowdfunding in one or the other way is a great tool for helping people with innovative ideas to start a business withthe help of a number of people (Fundable,(N.D.))
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Q1. What are the factors that may lead to success and failure of a crowdfunding campaign?Explain.
As we have already come to know about crowdfunding and their many types of crowdfunding and how the crowdfunding is done. So as we have already known the factors here, we will be discussing the factors which are being responsible for the success and failure of a crowdfunding business.
The factors which are responsible for the success of crowdfunding is being discussed over here:
• Research: - Doing research is one of the major factors for any startup and doing research will help you to know about how the whole crowdfunding process is done, and you also know about how the whole crowdfunding campaign is done, and you have to be very precise to know about all the rules and regulation.
• Choose the right platform: - Choosing the right platform is a big factor in crowdfunding business because many crowdfunding platforms are there. We have to choose the right platform because as many crowdfunding platforms are there. There are some which specify some purposes only. So, choosing the right platform will be a good decision
• Give something more with your ideas: - When you are ready with your campaign to have more than just an idea in hand. If your project involves a physical product, then show them some designs of your product. Because this will help to establish your products in a better and more organized way.
• Choosing your target audience: - Planning is a great factor in investing business. So for that, we have to choose our target audience. Choosing a target audience is a big factor as you have to be familiar with the audience you cater and also you have to devise some strategy to reach out to them widely.
• Creating marketing materials: - As we have already known who is our audience so now we have to reach them, we can do by creating high-quality print and web materials.
• Goal setting: - An important aspect of any business is setting up the goals which you want to achieve. In crowdfunding campaign set goals such as your total fundraising, the deadline of reaching that goal, and production goals or any other goals so that your project keeps going.
• Making reward nice: - It is not necessary to reward anything to the contributor but giving back something will make them motivated. You can reward them with any sort of gadgets or any accessories which will make them motivated, and they will also be happy.
• Get Personal: - Whether you are using crowdfunding for personal use or for business purpose, you should be directly sending messages to your contributors so that they feel good about you and they will trust about you. Once you interact with the customers, it will lead to a great boost for your campaign.
• Spreading the word: - The moment you have started your campaign you should share your campaign in social network sites and share with your family and friends and try to reach out a maximum number of people. The wider you reach your campaign gets promoted.
• Communicate openly: - Try to communicate with the investors so it will be helping them to have trust in you. Try to be open and transparent to them and don't ever try to sell your ideas
• Accept Feedback: - Always try to accept feedbacks because it is extremely important for you to make progress
• Always Follow your Promises: - The promises which you have made during the starting of the campaign you should follow them as it will not disappoint your investors and you will have goodwill for your next campaign. (Agarwal, A.A., 2018)
So these are the factor which makes crowdfunding successful. But as we know if there are pros, then there will be cons. So now we will be discussing the effects which lead to failure of crowdfunding.
• Crowdfunding is not so easy as it looks: - The crowdfunding is being not so easy as it looks out because it takes a lot of planning and a lot of work. Many top companies use a PR agency to promote their campaign through various social media. So, it's better to take off time and then plan about the crowdfunding campaign
• The campaign fails to get early traction: - If crowdfunding requires attention to marketing, then you have to plan and execute well which should be at the beginning of the campaign. Some records show that if a company builds out a momentum at the start of the campaign, then they can reach till the end of their goals. According to Kickstarter, 79% of the projects which raised more than 20% of the goals are likely to finish the project
• Having lacklustre reward programs: - As the campaign starts the contributors in return want something which will be a reward. So the organizer should give some reward to the contributor who in turn will help them, and they would also be motivated, and they can also help to increase the number of contributor by telling them about the reward
• Not being ready to act as the help of service desk: One of the major factors for the downfall of the campaign is not being able to reach the number of people. When we launch any campaign there might be thousands of emails; calls want to know about the products. So they should have a good communication process where they can connect with the customers nicely. (Miller Z.M. ,2018)
So, these factors are there of the downfall of the crowdfunding campaign.
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Q2. Do you think the emergence of crowdfunding is a threat or opportunity (or both) for an MNE? Explain.
Ans. Crowdfunding as we have already seen the factors and the crowdfunding is growing out day by day, and there are more startups which are increasing day by day. So as we gradually see the increase rate of the small business which is being more interested in crowdfunding? So we can say that the emergence of crowdfunding is a threat to multinational companies. There are several factors which are the consequences of this threat. (Razavi, L.R., 2018)
According to the World Bank in the year 2016, there was more capitalcame from crowdfunding than investment money. This led to a worse impact on the investment managers because many high-profile investors are planning to remove the middleman and connectstraight with the companies they feel best to align with their interests. The investors decided to cut off the investment managers due to their costly legal payment. As manyplatforms choose to serve to definitecompany, investors are makingthe decision for themselves, instead of dependent on economicspecialists who charge remuneration for their knowledge.(Razavi, L.R., 2018)
The undistributed nature of crowdfunding industry is a cause for the concern. In Europe,companies have been struggling to harmonies the challenges that crowdfunding brings with existing financial practices. For example, in Finland, the crowdfunding organization don't need a MiFID license that means the sectors who have taken a license are more strictly watched than the ones who don't have a license. Other nation like UK and France adapted quickly, and they are very compatible with crowdfunding.(Razavi, L.R., 2018)
The other threats that we can see are that many companies are running out in loss and as we can see that the crowdfunding companies are being contributed by many companies. So the economic return tends to return low, and as many venture capitalists are investing in crowdfunding business. So they aren't investing in big companies. The crowdfunding companies don't need any type of license or any regulations they need to follow in some of the countries. So in these countries, the crowdfunding poses as a major threat to multinational companies.(Razavi, L.R., 2018)
Some multinational companies also tend to be contributing to any crowdfunding campaign but as crowdfunding campaign tends to be on loss. So, in that case, the multinational company faces a loss. So, this thing of the crowdfunding companies poses out a massive threat to the multinational companies which are there in the business.(Razavi, L.R., 2018)
So these factors pose out as a massive threat to the Multinational Companies in recent years.
Q3. Chapter 4 in your book outlines the corporate governance implications for MNEs. What do you think are the corporate governance implications when a business adopts crowdfunding? Explain.
Ans. Investing in young, entrepreneurial firms, external investors are confronted with hidden information problems that may lead to adverse selection - the situation where they invest in low-quality projects that have been presented to them as high quality. Entrepreneurs may also have incentives to misinterpret information when they have their advantage of searching for finance. The information-disadvantaged investors may agree to buy shares on the discount. (CummingD.J.C.,Vanacker V.T., Zahra S.A.Z., (N.D.), p 09)
Drawing on the governance as well as broader management we propose a conceptual model of the multitude of the governing process that may operate in equity crowdfunding markets. This scheme will not only cover the crowd but also cover the Entrepreneurs, crowdfunding platforms and national institution. (CummingD.J.C.,Vanacker V.T., Zahra S.A.Z., (N.D.), p 12)
In equity crowdfunding campaign firms typically attract funding from several hundred small investors. This situation is quite different from the traditional finance model where the firms used to raise generally from one or more than one investors. The equity crowdfunding market, however, could rely on another, external and more informal governance aiming to minimize adverse selection risks. It is also said that the crowd have more diverse information and expertise than any other individual. Though there is noise making process while making out decision but that decision is considered to be the finest (European Commission (2015), p-5)
The wisdom of the crowd mechanism is equity crowdfunding relates to the idea that public equity markets are wise or efficient in "semi-strong form." The entrepreneurs are like the one ready to invest in the business.(Cumming D.J.C.,Vanacker V.T., Zahra S.A.Z., (N.D.), p 14)
The corporate governance implications stated that the company who are contributors in the small crowdfunding groups they have also to pay taxes and be directly implied through the government rules and regulations. Corporate governance also checks whether all the sectors of crowdfunding companies under a good vision or not. The recent development which we have seen is that the equity markets along with crowdfunding platform have started to experiment with the creation of secondary markets to increase liquidity. Some crowdfunding platform enables investors to trade share at fair value. There was significant heterogeneity among equity crowdfunding platforms, but currently, the situation has widely changed, and it relates to the success between the equity shareholders and crowdfunding campaign (CummingD.J.C.,Vanacker V.T., Zahra S.A.Z., (N.D.), p 23)
The venture capital funds had given a huge impact to the crowdfunding industry. It is being supported by the government. The main issue of venture capital is the moderate size of vehicles because large investors tend to expense in vehicles that have gained a certain size. The investors want their investment to be divided so that each investment represents only 10%. (European Commission (2015), p-5)
Equity crowdfunding raisesa number offair issues in relation to securityrules and the lawcoinciding to issuing of securities. Equity crowdfunding haspaved a path into the exception of EU prospectus rules and registration needs. The European Commission has given a new rules regulation to give the threshold to grant equity crowdfunding to riseas per the demands. National governments have taken their own decision to help the growth of equity crowdfunding.(European Commission (2015), p-5)
The crowdfunding as an aspect is good as it helps in establishing in many startup companies and it boosts them. The crowdfunding also gives us a good aspect of how the company can come up with new technologies and new development can be made. This crowdfunding campaign has opened up the door for quite a number of people, and this campaign enabled or rather opened a new phase, i.e. venture capitalism or equity shares. The crowdfunding also enabled many of them to be an equity shareholder with the company and tried to have a good profit.
But in some respect, the crowdfunding also gives us a negative concept about how the crowdfunding can turn out to be a fraud. There were many instances where there have been fraud cases. In some cases, a good venture turns out to be worst, and the people investing loses out their money. The crowdfunding also poses as a threat big companies who are there as they don't get that investment which small crowdfunding gets.
So, crowdfunding is a brighter and a greater prospect for small startup companies.
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