Enterprise Equity Crowdfunding:
The impact of Investor Attitude on Network Effects in Denmark
Master Thesis, MSc in Economics and Business Administration Copenhagen Business School
Submission date: May 15, 2020
Supervisor: Thomas Michael Brinch-Pedersen
Mie Boye Rasmussen Freja Ruiya Vulff
MSc in Economics and Business Administration - Management of Innovation and Business Development
MSc in Economics and Business Administration - Customer and
Commercial Development
Student no. 100984 Student no. 101240
No. of characters: 261.944 No. of pages: 115
Abstract
The scope of this paper is to answer the research question How can platforms for social enterprise equity crowdfunding be constructed to enhance scalability? It is argued that social enterprises have the potential to address social and environmental issues and might even do so better than purely social alternatives. However, many social enterprises face lack of funding and are experiencing a funding gap. To overcome this issue, equity crowdfunding has been identified as a potential solution. To meet the increasing demand for funding, the supply of equity crowdfunding and thus the platforms enabling this must scale. By applying a combined framework consisting of platform business model theory and customer value propositions, network effects were identified. The network effects arising from the application of customer value propositions led to a discussion of how network effects enhance the conditions for scalability of the platform. In conclusion same-sided and cross-sided network effects are enabled by the integration of the identified value propositions which may influence the construction of an equity crowdfunding for social enterprise platform.
Table of Contents
List of figures: ... 6
1. Introduction ... 7
1.1. Problem Formulation ... 8
1. 2. Structure ... 10
1. 3. Background Information ... 10
1. 3. 1. Equity Crowdfunding ... 10
1. 3. 2. Crowdfunding in Denmark ... 11
1. 3. 3. Equity Crowdfunding in Denmark ... 11
1. 3. 4. Equity Crowdfunding for Social Enterprises ... 12
1. 3. 5. Delimitation ... 13
2. Theoretical Framework Guiding the Research ... 14
2. 1. Framework for Identifying Customer Value Propositions ... 14
2. 2. Platform Business Model ... 17
2. 3. Consumer Value Platform Synergies Framework ... 19
3. Key Definitions ... 21
4. Literature Review ... 23
4. 1. Social Entrepreneurship ... 23
4. 1. 1. For-profit Social Enterprises ... 24
4. 2. Financing Social Enterprises ... 27
4. 2. 1. Traditional Financing Sources ... 28
4. 2. 2. Crowdfunding as a New Type of Financing ... 30
4. 3. Inner Workings of a Platform ... 39
4. 3. 1. Network Effects ... 40
4. 3. 2. Architecture ... 40
4. 3. 3. Encapturement of Value ... 41
4. 3. 4. Governance (Regulations and Metrics) ... 43
4. 4. Platforms for equity crowdfunding ... 46
5. Methodology ... 48
5. 1. Research Philosophy ... 48
5.1.1. Research Assumptions ... 49
5.1.2. Research Philosophy ... 51
5. 2. Research Approach ... 52
5. 3. Research Strategy ... 53
5.3.1 Case Study ... 53
5. 4. Research Choices ... 54
5. 5. Time Horizon ... 55
5. 6. Techniques and Procedures ... 56
5. 6. 1. Collection of Primary Data ... 56
5. 6. 2. Collection of Secondary Data ... 62
5. 7. Research Quality ... 62
5. 7. 1. Validity ... 63
5. 7. 2. Reliability ... 64
6. Empirical Data Collection ... 65
6. 1. Survey ... 65
6. 1. 1. Regression ... 66
6. 1. 2. Other Statistical Measures ... 69
6. 2. Interviews ... 69
6. 2. 1. Preparation of Data ... 71
6. 2. 2. Method of Analysis and Presentation of Results ... 72
7. Analysis ... 77
7. 1. Analysis of Platform ... 77
7. 1. 1. Architecture and Design: Establishing the Core Interaction ... 77
7. 1. 2. Governance: Regulations and Metrics ... 80
7. 1. 3. Encapturement of Value ... 82
7. 2. Analysis of Investor Value Propositions ... 89
7. 2. 1. Key Dimensions of Investor Value ... 90
7. 2. 3. Competitive Advantage ... 107
8. Discussion ... 107
8. 1. Network Effects and Scalability ... 107
8. 1. 1. Same-sided Network Effects ... 107
8. 1. 2. Cross-sided Network Effects ... 109
8. 1. 3. Network Effects for Scalability ... 110
8. 2. Implications for Business Practice ... 110
9. Conclusion ... 111
9. 1. Limitations ... 114
9. 2. Future Research ... 115
10. Bibliography ... 117
11. Appendix ... 133
List of Appendices: ... 133
List of tables:
Table 1: Definitions of crowdfunding models Table 2: Regression Statistics
Table 3: Types of investments Table 4: Time spent on investments Table 5: Percentage agree/strongly agree Table 6: Average on the 1-5 scale
Table 7: Interview 1 - theme and code quote examples Table 8: Interview 2 - theme and code quote examples
List of figures:
Figure 1: Framework for identifying customer value propositions Figure 2: ”Pillars” of a platform
Figure 3: Consumer Value Platform Synergies Framework Figure 4: Social Enterprise Spectrum
Figure 5: Funding Gap for start-ups
Figure 6: Crowdfunding and Funding Gap Sources Figure 7: The Research Onion
Figure 8: Business Model Radar: Investment as Value-In-Use Figure 9: Business Model Radar: Investment Exchange Flows
1. Introduction
Some authors in the academic literature argue that aid and philanthropy in general is not the most effective solution for fighting the problems in the world today (Griffith & Tan, 2007;
Brandstetter & Lehner, 2015; Porter & Kramer, 2011). As a result of inefficiencies of aid strategies, social entrepreneurship has emerged as a way to tackle both social and environmental challenges. However, for social enterprises to reach their full potential to tackle the world’s social and environmental challenges, the access to funding is crucial. There are many difficulties in funding business activities for social enterprises using traditional investment sources and while acquiring capital is a well-known obstacle for most new businesses, this is an even greater challenge for social enterprises due to the challenge of balancing profit and impact. As a solution to the funding challenge, equity crowdfunding has emerged but is still in its early stage. To unfold of the potential impact of social enterprises, a stronger foundation for funding is necessary and thus the scaling of equity crowdfunding is crucial.
In many ways, Denmark is leading the way with green initiatives, and is described as a
“pioneer in promoting sustainability” (Denmark.dk, 2020). While social entrepreneurship shows great potential for developing effective and innovative solutions to social and environmental problems (Porter & Kramer, 2011), even in a “green” country like Denmark, securing funds for these types of enterprises is difficult. There are not many sources of funding available for these enterprises, why equity crowdfunding could serve as a well-needed solution to this. However, the legal and regulatory barriers to equity crowdfunding in Denmark makes it almost impossible for smaller businesses to raise funding capital through equity crowdfunding (Roed Nielsen, 2019). Therefore, equity crowdfunding for social enterprises is not yet a reality in Denmark (Keystones, 2019b).
Crowdfunding for social enterprises is relatively unexplored in academia and whether it is a suitable source of capital is unclear. Equity crowdfunding is found to be particularly useful for social enterprises (Bergamini et al., 2015). Equity crowdfunding for social enterprises is not only a new research field, in practice it is also a relatively new phenomenon, with few specialised platforms for social enterprises.
Generally, in equity crowdfunding, there are, apart from regulators, three primary actors involved: 1) the enterprises seeking to raise funds, 2) the investors and 3) the online platform serving as an orchestrator (Kortleben & Vollmar, 2012). Crowdfunding platforms generally operate in two-sided markets, and the engagement and motivation to participate need to be present from both sides (Rysman, 2009). While the motivations of the social enterprises to participate in equity crowdfunding is driven by the need to raise capital to start up or grow, the motives from the investor side seem to be more complex (Belleflamme et al., 2011;
Lambert & Schwienbacher, 2010). Hence, this thesis focuses firstly on what drives the investors to invest in social enterprises, and secondly how the platform can integrate these drivers into the underlying mechanisms of the platform to create positive network effects and thus create a better environment for scaling the platform.
1.1. Problem Formulation
This thesis investigates what drives investors to engage in equity crowdfunding for social enterprises, and how a platform can be designed to enhance the growth of network effects.
There has for the past decades been a call for sustainable development. Yet, while social enterprises might have the potential to solve issues that other organisations and governments have not yet solved, they are facing tremendous challenges in securing funds from traditional sources. As a result of start-ups generally facing problems with securing funding, equity crowdfunding has arisen in recent years, allowing for private investors to invest in non-listed businesses, and there are indications that this can help facilitate the development of social enterprises. As the investor side seems to be the more complex side, and the one more challenging to attract to equity crowdfunding for social enterprises, focusing on optimising the platform to attract investors is the focus of this thesis. To scale the platform and thus enable more social enterprises to be funded, the platform can integrate the conditions that optimise the network effect from the investor perspective into an optimal design.
The considerations above have led to the following research question:
How can platforms for social enterprise equity crowdfunding be constructed to enhance scalability?
The research question is designed to investigate the problem of securing funds for social enterprises by looking into how funding can be stimulated in equity crowdfunding. If an equity crowdfunding platform successfully scales, more enterprises can seek funding on the platform.
According to platform theory, its success and scalability depends on the network effects. Thus, by investigating how the underlying mechanisms of a platform should be constructed to increase the growth of network effects, the first step towards securing funds is taken.
Furthermore, to answer the problem formulation, this thesis seeks to uncover how the construction of the platform should accommodate potential altering which are particular to equity crowdfunding for social enterprises. The research question will be answered by investigating the resources from existing literature combined with collected empirical data.
Though both social enterprises and platforms have been extensively covered in the academic literature, a shortcoming regarding the investor attitude and its role in the core interaction has been identified. It can therefore be argued that new information and understanding of the investor side of the platform is required to construct the equity crowdfunding platform.
Thus, to answer the research question presented above, following sub-questions have been developed:
1) What aspects do investors value when engaging in equity crowdfunding for social enterprises?
2) What should be taken into account in the construction of an equity crowdfunding platform?
3) How can the integration of investor value propositions contribute to the growth of network effects?
The purpose of the first sub-question is to identify unique value propositions for social enterprise equity crowdfunding that the platform must consider in the design and governance structure. The purpose of the second sub-question is to identify the applicable value propositions and apply them to the platform mechanisms. In the third sub-question it is investigated how the alterations of equity crowdfunding platforms for social enterprises can
and enhance the attraction of investors to the platform and thus impact network effects and ultimately scalability.
1. 2. Structure
The thesis is divided into 9 chapters. Chapter 1 contains an introduction to the research area, the problem formulation and background information on equity crowdfunding. The purpose of this section is to establish the context for the following chapters and to explain the relevance of the contribution to academia as well as practical usage. Chapter 2 presents the framework guiding the research, where the applied theoretical models are presented and adapted into a collected framework. Chapter 3 presents key definitions. Chapter 4 contains the literature review where the critical literature on social enterprises, crowdfunding and platforms is accounted for. Chapter 5 goes through the methodology, including the research philosophy, research choices and strategy, and considerations about the empirical data collection. Chapter 6 presents the process and results of the empirical data collection. Chapter 7 is the analysis according to the platform theory and the goals and value propositions of the investors. In chapter 8 it is discussed how the findings from the analysis create network effects on the platform. In chapter 9, the conclusions are drawn, limitations of the study are established and recommendations for future research are presented.
1. 3. Background Information 1. 3. 1. Equity Crowdfunding
The first equity crowdfunding platforms emerged in the late 2000’s and early 2010’s. Today, equity crowdfunding is represented by approximately 600+ platforms worldwide and still on the rise (Sandoval, 2019). In Europe, the top three countries in equity crowdfunding are Finland, France and Sweden, with €51 million, €48 million and €34 million raised in 2017 respectively (Ziegler et al., 2017). Platforms operating in Europe include UK-founded Seedrs, Swedish-founded FundedByMe, Finnish-founded Invesdor, Estonian-founded Funderbeam, and UK-founded Crowdcube (EU-Startups, 2017).
In the Nordics, the regulatory uncertainty and high formal entry barriers on equity crowdfunding have been the main determinants of the success of this type of financing.
Overall, equity crowdfunding grew 14.3% in 2017 in the region (Ziegler et al., 2017). However,
the growth and the volume of the markets differ largely, with Finland having a volume of €51 million, Sweden having a volume of €34 million, Norway having a volume of €1.2 million and Denmark not being present in the market until 2018 (Ziegler et al., 2017).
1. 3. 2. Crowdfunding in Denmark
Globally, crowdfunding has grown as a funding method in the last decade. In Denmark, the funds raised using crowdfunding have grown more than 48% per year from 2011 to 2018.
While donation-based crowdfunding has decreased in the period, loan-based and reward- based crowdfunding have grown, before stagnating around 2018. Equity crowdfunding arose in 2018, but still a very limited amount of the funding goes into equity. (Roed Nielsen, 2019).
Examples of crowdfunding platforms operating in Denmark include; the donation-based crowdfunding BetterNow, the reward-based crowdfunding sites IndieGoGo and Kickstarter, the loan-based crowdfunding sites Kameo, Coop Crowdfunding and Lendino, and finally the equity crowdfunding sites Invesdor and Funderbeam (Roed Nielsen, 2019).
1. 3. 3. Equity Crowdfunding in Denmark
Equity crowdfunding is largely underrepresented in Denmark compared to similar countries, such as Sweden and Finland (Roed Nielsen, 2019). In other European countries that Denmark also is comparable with, equity crowdfunding platforms are rising. These countries experience significant growth in the number of platforms offering these services and the number of entrepreneurs seeking and receiving funds, whereas it in Denmark continues to be limited (Roed Nielsen, 2019).
There are currently no Danish equity crowdfunding platforms (Keystones, 2019b), and there are only two platforms making equity crowdfunding available in Denmark; the Estonian- founded platform Funderbeam and Finnish-founded platform Invesdor. In total, there has only been eight equity crowdfunding campaigns on these two platforms in Denmark from 2012 to 2019, only four of them being successfully funded (Roed Nielsen, 2019).
One reason for equity crowdfunding lagging behind in Denmark is the political environment.
Where other countries have tax incentives for investing in crowdfunding, Denmark did not have this until February 2019. The Keystones analysis of what this new law about tax
incentives means to Danish private investors found that investors who are already active as start-up investors are relatively sceptical about this new law. They find it too complicated, not ambitious enough compared to other countries like England and Sweden, and the extra profit generated is too little. (Keystones, 2019a)
Another reason for equity crowdfunding in Denmark lagging behind is the regulations on the area, dictating that entrepreneurs cannot offer shares to the public. While this is a law made on an EU level, the Danish interpretation and resulting regulation is very different from other countries where equity crowdfunding is more prominent (Roed Nielsen, 2019). Most Danish entrepreneurs found companies of the form IvS or ApS, but according to the Danish regulations, companies need to be of the form A/S, a limited company, in order to offer shares to the public and thus make use of equity crowdfunding (Keystones, 2019a). As the capital required for funding and registering a limited company in Denmark is 400,000 DKK, few companies are able to utilise crowdfunding, especially not in the start-up phase (Roed Nielsen, 2019).
Two other reasons that might, according to Frederik Ploug Søgaard, founder of Danish Crowdfunding Association, affect the equity crowdfunding market in Denmark are related to the size of the market and the investment culture (Keystones, 2019b). Søgaard states that the Danish market is simply too small for a volume-based business model for a Danish equity crowdfunding platform to succeed (Keystones, 2019b). Furthermore, he states that, in his opinion, Danes do not have a culture of private investments, and there is a lack of success stories to engage the average private investor and entrepreneur in this type of funding.
1. 3. 4. Equity Crowdfunding for Social Enterprises
In Europe, the Netherlands are in many ways frontrunners in equity crowdfunding for social enterprises. Already back in 2014, the Dutch Authority for the Financial Markets published a report on the potential of crowdfunding for moving towards sustainability in the world (van Kranenburg, 2014). While literature suggests that equity crowdfunding could prove very beneficial for social enterprises and help solve some of the pressing issues, it is still a new area.
Equity crowdfunding is still a relatively new concept and has not proved as successful as other types of crowdfunding. Combining this with social enterprises, this becomes an even newer topic.
Platforms for equity crowdfunding in social enterprises in Europe include; Dutch-founded OnePlanetCrowd, Swedish-founded Trine, Dutch-founded Lendahand, and Italian-founded Assiteca Crowd.
In Denmark, social enterprises are facing obstacles that currently raises the barriers to participate in equity crowdfunding. The Danish definition of social enterprises,
“Socialøkonomisk virksomhed”, entails that these businesses can only pay out limited dividends to owners, and should handle their profits “socially” by re-investing it in the business, investing in other social enterprises or donating to charity (Law nr. 711, 25/06/2014).
While there is no requirement of businesses to register as a “socialøkonomisk virksomhed”, this is an obstacle for the implementation of equity crowdfunding for social enterprises in Denmark.
1. 3. 5. Delimitation
The purpose of this thesis is to investigate how platforms for social enterprise equity crowdfunding can be constructed to enhance scalability. The primary focus area is the investors on the crowdfunding platform and how the platform can be constructed to attract more investors. This is done through the collection of quantitative data in the form of a survey and qualitative data in the form of in-depth semi-structured interviews. The findings will be of an interpretive nature of what the investors value as important aspects of the investment experience.
Three major delimitations are identified.
1) The scope of this thesis is solely theoretical.
2) The focus is on Denmark and Danish investors.
3) The focus is on equity crowdfunding.
The reason for the first delimitation is that the current equity crowdfunding environment is still developing. There are very few platforms for equity crowdfunding for social enterprises globally and those that exist are still in their very early stages. In the beginning of this research process, it was attempted to conduct a practical case study of the Dutch equity crowdfunding for social enterprises platform, OnePlanetCrowd, and its scalability opportunities in the Danish market. However, due to their limited resources as a start-up, it was not possible.
Furthermore, due to legal barriers in Denmark and the Danish financial institutions in regard to equity crowdfunding and social enterprises, a practical approach leading to implementation of potential results was not deemed feasible with the resources and timeframe available.
The second delimitation was decided upon due to two factors. As mentioned in the introduction, Denmark is leading the way with green initiatives, and is described as a “pioneer in promoting sustainability”. However, while social entrepreneurship shows great potential for developing effective and innovative solutions to social and environmental problems even in a “green” country like Denmark, securing funding for social enterprises is difficult.
Furthermore, equity crowdfunding in Denmark is lagging behind other comparable countries such as Sweden, Finland and Holland.
The third delimitation is the focus on equity crowdfunding specifically, and not other types of crowdfunding. One reason for delimiting the topic to equity crowdfunding was that compared to other forms of crowdfunding, research on equity crowdfunding is limited, and the topic thus requires further explanation.
2. Theoretical Framework Guiding the Research
2. 1. Framework for Identifying Customer Value Propositions
The framework for identifying customer value propositions used in this thesis is developed by Rintamäki, Kuusela & Mitronen (2007) and consists of four value dimensions that are hierarchically organised and combined to form a customer value matrix. The value dimensions are organised hierarchically from more objective to more subjective, from more concrete to more abstract, from more utilitarian to more psychic, and from more transaction- based to more interaction-based.
The four value dimensions are used to develop value propositions that can be used as a source of competitive advantage for companies. There is no single definition of customer value propositions, however literature generally agree on customer value and competitive advantage being interrelated and something that can be leveraged through identifying successful customer value propositions. The definition of value propositions used in the framework by
Rintamäki, Kuusela & Mitronen (2007) is developed by Webster (1994), defining a value proposition as:
“. . . the verbal statement that matches up the firm’s distinctive competencies with the needs and preferences of a carefully defined set of potential customers. It’s a communication device that links the people in an organisation with its customers, concentrating employee efforts and customer expectations on things that the company does best in a system for delivering superior value. The value proposition creates a shared understanding needed to form a long- term relationship that meets the goals of both the company and its customers.” (Webster, 1994, p. 25)
The four propositions of value are; “economic value, “functional value”, “emotional value” and
“symbolic value”. The “economic value” and the “functional value” refer to objective and measurable dimensions of the customer perspective and reflect utilitarian value created by reducing prices, saving time and effort for customers. The value propositions “emotional value”
and “symbolic value” are more subjective and abstract and refer to providing customer value through stimulating senses and emotions. (Rintamäki et al., 2007).
“Economic value” is defined by Smith & Nagle (2005) as a “product’s objective monetary worth to a customer adjusted for the availability of competitive substitute products” (Smith &
Nagle, 2005, p. 41). This remains one of the “hard-to-beat” drivers of customer value. In regard to investments, the “economic value” refers to monetary value related to earning profits, earning dividends and investing cost-effectively (Puustinen et al., 2012). Some customers might devote a great deal of time and effort to finding the best bargains. “Functional value”
refers to the ease and convenience of investing (Puustinen et al., 2012). It can furthermore be defined as finding the right product or investment with as little time and as little physical and cognitive effort as possible. Considerations in this regard are related to the time used on finding the suitable investments. “Emotional value” can be defined as “perceived utility derived from an alternative’s capacity to arouse feelings or affective states” (Sheth et al., 1991, p. 161). In regard to investments, the focus on emotional value can mean that the customer becomes part of the transformation process rather than just being a recipient of its end results. “Symbolic value” of a product or customer experience can be defined as positive consumption meanings attached to the customer’s self or communicated to others (Smith &
Colgate, 2007). Symbols are defined as “special kinds of social objects that stand for something; they have meaning and when used are intended to convey a shared meaning to a receiver, who incidentally can be oneself” (Flint, 2006, p. 352). Symbolic value can be created from including more than the obvious function of the product, and “even products generally thought to be functional or utilitarian are frequently selected on the basis of their social value.”
(Sheth et al., 1991).
Rintamäki, Kuusela & Mitronen (2007) propose a process for identifying the competitive customer value propositions:
1. Identifying the key dimensions of customer value.
2. Developing the value propositions.
3. Evaluating the value proposition for its ability to create competitive advantage.
The below figure presents the framework in a comprehensive way, picturing the three steps of the process.
Figure 1: Framework for identifying customer value propositions (Rintamäki et al., 2007)
2. 2. Platform Business Model
Traditional businesses can be perceived as linear value chains or pipeline of step-by-step activities which, executed in the right order, will eventually lead to generation of value. Here the value flows in a straight line from producers to consumers. In a platform business model, value is instead created, exchanged and consumed across the entire platform as a result of its many connections (Parker et al., 2016). Platform theory is linked to scalability and simplified through the following four propositions by Parker, Van Alstyne, & Choudary (2016): 1) Platforms scale more efficiently by eliminating gatekeepers, 2) Platforms unlock new sources of value creation and supply, 3) Platforms uses data-based tools to create community feedback loops, 4) Platforms invert the firm.
The platform business model should be understood as a framework which explains the underlying architecture, synergies and mechanisms of “ecosystems which uses technology to connect people, organisations and resources to create and/or exchange value” (Parker et al., 2016). Network effects, introduced in “4. 3. 1. Network effects”, have been established as the source of value creation for users of the platform. As explained by Parker, Van Alstyne, &
Choudary (2016) “effective platforms are able to expand in size, quickly and easily thereby scaling the value that derives from network effects.” (Parker et al., 2016, p. 23). The source of network effects can be further elaborated as the product of demand economies of scale. In contrast to supply economies of scale, demand economies of scale are driven by phenomena which enlarge the network such as technical improvements on the demand side, efficiencies in social networks and demand aggregation (Parker et al., 2016).
The components necessary to create the optimal conditions for demand economies of scale and network effects, rely on the same basic elements, three “pillars” of platforms; design and architecture, encapturement of value and governance. The architecture is the blueprint which maps the structure of the underlying technical solution, the components of the system as well as the relationship among them (Tiwana, 2013). Encapturement of value describes how platforms conquer traditional industries, the challenge of successfully launching new platforms and how to monetise them (Parker et al., 2016). Governance describes the rules of the platform. The rules for platform orchestration involves the participants and their interactions, formal and informal regulations and performance metrics (Tiwana, 2013).
The three “pillars” of platforms are constituted by the fundamental theoretical literature on platforms, however, have not previously been formally proposed as pillars. We have decided to conceptualise the theory to visualise the underlying components which ultimately produces the network effects.
Figure 2: ”Pillars” of a platform
As visualised in the above figure, the network effects are represented by an overarching roof which is supported by the pillars that function as the foundation. Network effects can be described as the result of the platform mechanisms. It can be both positive and negative depending on the construction of the pillars. Platforms facilitate the interaction of a two-sided network, the two sides consisting of producers and consumers of content or services. These two groups are attracted to each other, as the value to users depends on the number of users on the opposite site. The total value of the platform increases as the platform successfully matches demand from both sides. In practise, this means that an increase of the producer side of the market leads to an increase of content or service which attracts consumers. And vice versa, an increase in consumers leads to a larger incentive to attempt to capture the customer group by increasing supply of goods and services (Kittilaksanawong, 2016; Eisenmann et al., 2006).
2. 3. Consumer Value Platform Synergies Framework
To investigate the relation between positive network effects and scalability of platforms for social enterprise equity crowdfunding, the two chosen theoretical approaches have been combined in one single framework, the consumer value platform synergies framework. As can be seen in the figure below, the platform framework functions as an overarching backbone, integrating two theoretical disciplines, framework for value propositions and network effects, to provide a holistic approach to the investigation of this thesis. Adding the two deeper levels complements the platform framework by offering insights and approaches to the analysis which otherwise would not capture factors with a potential impact on scalability. The upside- down pyramid and its three stages symbolise the progression from encapturement of value as one of the core pillars of the platform framework, to further investigating the value propositions for the consumers in accordance with the platform theory on network effects.
The third stage of the framework for value propositions on competitiveness enables a discussion of impact on network effects.
Figure 3: Consumer Value Platform Synergies Framework
The details of each theory are presented in the above sections, but their linkage has yet to be introduced. At the top level of the pyramid, the platform pillars are included to determine the ideal conditions for a scalable but generic platform. Platform theory investigates the inner workings of the platform and the synergies among the platform participants including itself in the role as orchestrator. However, as theory states, the success of a platform depends on network effects and network effects of the synergies between producers and consumers. Thus, in order to understand how to increase the growth conditions for network effects, the two platform participants must be further researched.
In the next step of the pyramid, the framework for value propositions is introduced as a complement to further explore the “encapturement of value” pillar. This pillar investigates the aforementioned synergies among platform participants. As stated in the introduction, the scope of this thesis focuses on the consumer side of the platform and how the platform can stimulate the consumers in order to foster the growth of network effects. The framework for value propositions provides a more nuanced view on what elements might lead to sources of value for the platform consumers and thus potentially be integrated into the construction of the platform. Finally, the value propositions identified are adapted to contribute to the discussion on network effects. We argue that the framework can be applied to evaluating the scalability and success of a platform equally to evaluating competitive advantage in traditional retail.
Lastly, as established, scalability of a platform largely depends on the positive network effect.
Hence as the final step of the pyramid, network effect is discussed based on the findings from the two aforementioned levels. The total value of the platform increases as the platform successfully matches demand from both sides, strengthening the user base and ultimately leading to scalability of the platform. Thus, the combined knowledge gathered from the platform analysis and value proposition will lead to greater understanding of how the platform might scale.
3. Key Definitions
Platform
The concept of platforms has been around for years though the meaning and association of the term has changed slightly. Earlier, platforms referred to technological solutions development (Gatautis, 2017) or “digital infrastructure (hardware and/or software) on which different applications can run” (Schwarz, 2017, p. 378). However, in the last decade the development of highly successful platform-based companies has emerged, changing the early meaning of platforms (Gatautis, 2017). Parker, Van Alstyne and Choudary (2016) describe platforms as business models characterised by interactive ecosystems which use technology to connect people, organisations and resources to create and/or exchange value. Furthermore, the platform can take an active role as a participant in the value exchange, in that stage, the platform is referred to as an orchestrator. Thus, we refer to platforms when it is in its capacity of a technology, and orchestrator in its capacity as an active platform participant.
Platform Participants: Producers and Consumers
The platform participants primarily concern the two-sided market for network effects, the producers and consumers. Producers, because they represent the side of the market which produces a value unit, and consumers because they consume the value unit. In the context of this thesis, focusing on investments in social enterprises, the two sides of the market are represented by the investors as the consumers and social enterprises as producers. Thus, consumers and investors, and producers and social enterprises can be used interchangeably when the context allows it.
Scalability
Existing literature defines scalability as “the process of significantly increasing the quality and quantity of value-creating interactions among platform actors, without equally increasing the costs, to result in increased value capture.” (Kohler, 2018, p. 100). Scalability has been defined and explained in the academic literature, however the definitions change depending on the industry or subject of scaling. Hence, scalability in this paper refers specifically to the scalability of platform business models. In accordance with the above definition of platform business models, we can further define scalability as the success of positive network effects, the relation between producers and consumers.
Private Investment
Investment, specifically in equity, means the acquisition of shares which makes the investor a part owner of the company that issues shares (Freedman & Nutting, 2015). Private investment should not be confused with private equity, though private equity is defined as the equity investment that is not publicly traded on an exchange, private equity investment includes both funds investing and direct investing in portfolio companies (Cendrowski et al., 2012). This paper seeks only to investigate the latter. In conclusion, private investment is defined as any direct investment leading to acquisition of shares in a non-listed company and can be done by anyone. Forward on, the private investment through digital platforms will be referred to as equity crowdfunding.
Private Investors
The scope of this paper is limited to investigate private investments in equity crowdfunding.
Thus, when referring to investors, it is implicitly understood that they are private investors.
Social Entrepreneurship/Social Enterprises
There is no universal conceptualisation of social entrepreneurship, however it is generally perceived as the ability to identify societal needs and find solutions to social problems, using scarce resources innovatively and create social change (Dees, 2001). Thus, social enterprises are businesses that apply commercial strategies to maximise improvements in financial, social and environmental well-being. Social entrepreneurship is not corporate social responsibility (CSR). While CSR is a form of self-regulation that businesses can embrace to monitor and control their activities’ impact on the environment and stakeholders, social enterprises have social impact built into their core activities.
Crowdfunding
Crowdfunding provides an alternative way for entrepreneurs to raise funds from a large audience through an online platform, without the traditional financial intermediaries (Belleflamme et al., 2014; Mollick, 2014). Crowdfunding thus enables entrepreneurs to raise smaller contributions from a larger number of individuals.
Equity Crowdfunding
Equity crowdfunding is a form of crowdfunding, in which individuals, the crowd, invest directly or indirectly in new or established businesses through buying shares and expect shares of future profits in return (Belleflamme et al., 2014).
4. Literature Review
4. 1. Social Entrepreneurship
As established in the definitions, there is no universal conceptualisation of social entrepreneurship yet, and there is no single way to characterise social enterprises (Roper &
Cheney, 2005; Dees et al., 2001). However, social entrepreneurship is generally perceived as the ability to identify societal needs and find unique solutions to these social problems through mobilising scarce resources innovatively, making them sustainable and creating social change (Dees et al., 2001). Social entrepreneurship is about applying business practices for social purposes and their initiatives often address needs that are not currently met by the private or the public sector. Social entrepreneurs identify, exploit and recombine the resources available, often in creative and risk-taking manners to create social change (Gundry et al., 2011). Social entrepreneurs are often mission-driven and have a strong urge to address unmet social or environmental needs. These entrepreneurs often operate in very challenging environments characterised by institutional failures, but are able to navigate through these barriers by seeing opportunities in them (Robinson, 2006).
The changing dynamics in the social and economic environment have created a sense of blurred boundaries between the private, public and civil society (Mair & Noboa, 2003). Social enterprises are often described as operating alongside but apart from the traditional market.
Social enterprises attempt to balance social values and social change with profitability (Dees
& Anderson, 2003). This makes the business models of social enterprises taking the shape of a “hybrid” organisational form, according to the spectrum presented by Dees et al. (2001) ranging from purely philanthropic organisations (non-profit) to hybrids (combination of social and economic value) and purely commercial organisations (for-profit), which are characterised through an assessment of their motives, methods, goals and stakeholders in operations (figure 4).
4. 1. 1. For-profit Social Enterprises
Looking at for-profit social enterprises, Hockerts (2006) describe these as hybrids with the main purpose of creating external social benefits. He states that this type of enterprise does not fit into either the for-profit business category or the social mission-driven non-profit organisations, but instead operate with a blended value creation. For-profit social enterprises have both business goals and social goals. As a result, their social goals are embedded in their objective, which differentiates them from other organisations and corporations. The main purpose of a social enterprise is to promote, encourage and make social change (Dees, 2001).
Without their intent to achieve positive social impact, specifically and directly, they would not exist. However, social enterprises are financially sustainable, and do not depend on philanthropy. Thus, they need to discover and exploit opportunities to create both social and financial value. These enterprises can be described as operating with dual objectives, as they strive to achieve both measurable social and financial outcomes (Emerson, 2003; Dees &
Anderson, 2003). It can be argued that all types of social enterprises essentially operate with both objectives, but some have more focus on one objective than the other (Young, 2012;
Emerson, 2003; Dees & Anderson, 2006).
4. 1. 1. 1. Social or Environmental Impact
Social enterprises have the core goal of improving social well-being, and social enterprises are created to meet needs for solutions of the social and environmental challenges posed to the world today. Griffiths and Tan (2007) argue that the traditional ways to fight poverty through traditional aid programs have proved inefficient. Furthermore, Porter & Kramer (2011) argue that “businesses acting as businesses, not as charitable donors, are the most powerful force for addressing the pressing issues we face.” (Porter & Kramer, 2011, p. 64). Brandstetter &
Lehner (2015) argue that charitable organisations have a focus on giving rather than actually achieving social outcomes, and as a result, charitable organisations alone cannot solve the social and environmental challenges faced today. One argument is that charitable organisations are too focused on the philanthropic act of giving and lack innovative behaviour, resulting in inefficiencies and lack of effectiveness in maximising social outcomes (Brandstetter & Lehner, 2015). Warwick & Polak (2013) emphasise that the unique characteristics and position of social entrepreneurs make them suited to solve these issues, and Griffiths & Tan (2007) supports this notion and argue that the talents and resources of social enterprises make them especially suitable. Porter & Kramer (2011) further points out
that due to the social entrepreneurs’ commitment to achieve positive impact, meaning that they are not locked in a traditional business thinking, they are particularly well suited to tackle environmental and social problems in the world.
4. 1. 1. 2. Financial Sustainability
Dees (2001) affirms that the mission is central for social entrepreneurs, and the mission- related impact is the central criterion for success, not wealth creation, which is often just means to an end for social entrepreneurs. However, Dees & Anderson (2003) state that even social enterprises who raise funds solely from socially oriented investors need to have a financial model that generates at least modest profits in order to be sustainable. While many social enterprises still rely, at least to some extent, on donations and public grants, most have a strong aim of financial independence (Ridley-Duff, 2009). For-profit social enterprises strategies to generate revenue from commercial activities such as trading goods and services and contracting for services, and thus share some characteristics with purely commercial organisations (Dees, 2001).
4. 1. 1. 3. Balancing Dual Objectives
It is vital to the growth and survival of for-profit social enterprises to be financially sustainable.
However, due to the nature of the company, financial sustainability has to be balanced with social objectives. Therefore, it is important to look at the dynamics between financial and social objectives. As the social objectives, as mentioned earlier, are at the core of the business model for most social enterprises, unlike other, pure commercial companies, social enterprises must operate with dual motives and mix both commercial and philanthropic methods. Companies in this sector thus have to balance themselves in the middle column in below “Social Enterprise Spectrum” developed by Dees (2001).
Figure 4: Social Enterprise Spectrum by Dees (2001)
While the traditional view is that social and economic value should be viewed separately, meaning that for-profit companies create economic value and non-profit organisations create social value, Emerson (2003) argue that the value for social enterprises should not be viewed separately, but as blended value. Blended value is defined by Emerson (2003) as “value is generated from the combined interplay between the component parts of economic, social and environmental performance.” (Emerson, 2003, p. 15). Emerson defines five different approaches to working with blended value propositions; social enterprises, corporate social responsibility, social investing, strategic/effective philanthropy and sustainable development.
Emerson (2003) further argues that of these approaches, social enterprises and corporate social responsibility are the ones practicing the balancing of dual objectives.
However, challenges might arise when balancing these dual objectives. Young (2012) states that “because all of the forms of social enterprise entail tension between the goals of social purpose and commercial success, they can all be subject to long run instability, despite various possible management strategies to ameliorate these tensions” (Young, 2012, p. 27). He argues that due to these difficulties in balancing the social and financial value creation, a form of instability will always be present. While Young (2012) argues that it is incredibly difficult to manage this complexity, Dees and Anderson (2003) argue that if companies succeed in thinking their social mission into the business early on, and succeed in creating an image and trustworthiness of the business, their social purpose can truly become a competitive
advantage. They assert that if a for-profit social enterprise can successfully develop a good reputation of its social performance and deliver goods or services at the same level of quality as competitors, some customers will prefer the social enterprise over others.
Another difficulty when balancing dual objectives is the balance in deciding how much profit to put back into serving the social cause. This pressure is a result of social and possibly political pressure as well as internal pressure on the social enterprise because of its social objectives.
Many have difficulties accepting that entrepreneurs and investors in social enterprises take out profits that could have been used to generate additional impact. Balancing these considerations means that there might be more difficulties in being a for-profit social enterprise compared to a non-profit social enterprise, and social objectives can thus be said to be harmful for profits in some ways. This occurs especially if the impact is not clear, and the company is not generating the above-mentioned competitive advantage from trustworthiness and image of social responsibility. (Dees and Anderson, 2003).
In conclusion, in order to be a successful social enterprise, a clearly stated social objective and measurable impact is necessary. Moreover, in order to be a for-profit venture, financial sustainability is necessary, and thus profit needs to be generated. These two aspects are essential to social ventures and unlike non-profit social ventures or solely commercial ventures, social enterprises face the difficulty of balancing these two objectives.
4. 2. Financing Social Enterprises
While the literature argues that social enterprises are increasingly important in solving the world’s environmental and social challenges, it will require a significant upscale of the environment surrounding social enterprises and their related activities. One of the most important components to succeed is access to capital for funding the social enterprises.
There are many different ways of securing funding, the traditional types include bootstrapping, bank loans, angel investors and venture capital firms (Kerr & Nanda, 2011). However, as the social mission is central for social entrepreneurs, and wealth creation is often described as means to an end for social entrepreneurs, they might perceive and assess opportunities differently than other entrepreneurs (Dees, 2001). The way social enterprises finance their projects thus might be different from the methods adopted by traditional for-profit business
entrepreneurs. This can be a result of two phenomena; the consideration that a standard project assessment in the traditional financial institutions might consider social projects as intrinsically less profitable than others, and the consideration that social enterprises may have a stronger preference for self-financing (Fedele & Miniaci, 2010).
4. 2. 1. Traditional Financing Sources
As established above, there are many different ways of securing funding, the traditional types being bootstrapping, bank loans, angel investors and venture capital firms (Kerr & Nanda, 2011). However, for many entrepreneurs, these types of funding are insufficient, and for social enterprises in particular, might not be available.
Like many other entrepreneurs, social entrepreneurs are generally facing the challenge of attracting external capital for their enterprise, especially in early stages. Various investors, such as venture capital firms and banks mainly invest higher amounts of capital, however entrepreneurial initiatives that require much smaller amounts of funding often face difficulties to raise the necessary capital (Cosh et al., 2009). While many entrepreneurs manage to fund the initial stage, proof of concept, either by internal bootstrapping or getting financing from family or friends, there is a gap between this stage and the start-up and early growth stage where most angel investors and especially venture capital firms invest (Belleflamme et al., 2010). This is commonly referred to as the funding gap.
Figure 5: Funding Gap for start-ups (adapted from World Bank, 2013)
While the funding gap is an obstacle in the journeys of many entrepreneurs, social entrepreneurs face additional difficulties. Social entrepreneurs are often, due to their social and environmental goals being at the core of the business, perceived as less attractive investments compared to traditional entrepreneurial ventures (Choi & Gray, 2008). Purely commercial ventures often have a higher attractiveness to investors in terms of generating cash flow, and therefore they have a greater chance of securing traditional bank loans or investments from venture capital firms (Lumpkin et al., 2013). Furthermore, the social entrepreneurs’ presentations to venture capitalist firms and angel investors primarily focus on the social vision, impact and outcome and less on cash-flow liquidity, long term financial return and financial planning and forecasting (Ridley-Duff 2009).
Alternative financing through social investment funds, special banks like Kiva and Grameen bank (micro-financing of socially desirable and sustainable investments) and social accelerators have recently emerged (Larralde & Schwienbacher, 2012; Yunus & Weber, 2007).
As social enterprises and businesses operating with social motives at the core is a relatively new concept, social investment funds are also relatively new in the financial landscape. Their volume of financial capital available is much less than the traditional venture capital market and is thus not an option for many social entrepreneurs (Nicholls, 2010).
As social enterprises are often left with a relatively narrow set of funding opportunities, crowdfunding is an option for filling in the funding gaps for social entrepreneurs (Belleflamme et al., 2014). Lehner (2013) also states that traditional means of financing entrepreneurial enterprises are inadequate in initiating and sustaining growth in entrepreneurship.
4. 2. 2. Crowdfunding as a New Type of Financing
Crowdfunding is an emerging financing alternative that has gained prominence and recognition over the past years, due to the development of the Internet and advancements of online transaction services (Mollick, 2014). The concept of crowdfunding arises from the broader concept of crowdsourcing, which refers to the generation of ideas, feedback, outsourcing of work and search for solutions through an open call to an undefined, and generally large, network of people ,the crowd (Brabham, 2008).
Crowdfunding is an alternative financing opportunity for business in all forms. Lambert and Schwienbacher (2010) extend the definition of crowdsourcing provided by Klemann et al.
(2008), by describing crowdfunding as “an open call, essentially through the Internet, for the provision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights in order to support initiatives for specific purposes” (Lambert &
Schwienbacher, 2010, p. 6). Belleflamme et al. (2014) describe it as tapping into a large audience of people, the “crowd” to fund projects or businesses, rather than a small group of specialised investors e.g. banks, business angels, venture capitalists. Tapping into this large crowd through the Internet allows many individual investors to participate in the funding (Schwienbacher & Larralde, 2010). Mollick (2014) defines crowdfunding as a new form of funding for different forms of ventures that allows individuals to seek funding for for-profit, cultural or social projects in return of rewards or equity. Mollick (2014) therefore suggests a wider definition of crowdfunding as “the efforts by entrepreneurial individuals and groups - cultural, social, and for-profit - to fund their ventures by drawing on relatively small contributions from a relatively large number of individuals using the Internet, without standard financing intermediaries” (Mollick, 2014, p. 2). Crowdfunding thus enables enterprises that traditionally would rely on a few sophisticated investment institutions for funding to tap into a large crowd of investors who contribute with smaller amounts of capital (Belleflamme et al., 2014). Mollick & Robb (2016) argue that crowdfunding can, especially in
the early stages, help start-ups grow and be a viable alternative to traditional pre-seed financing.
The first academic studies on crowdfunding were mainly providing definitions, descriptions and delimitations of crowdfunding, often applied to case studies (Schwienbacher & Larralde, 2010; Belleflamme et al. 2014). However, with technology developing and more widespread access to and use of the Internet and social media, recent studies have shown that crowdfunding has become a viable option for many entrepreneurs (Mollick & Robb, 2016).
Reaching a large crowd of people at a lower cost has become far easier (Pierrakis & Collins, 2013). Furthermore, a driver of the growth of crowdfunding was the 2008 financial crisis, as it posed more difficulties for entrepreneurs and early-stage enterprises attempting to raise funds from traditional sources. During and after the financial crisis, a reduced willingness of traditional banks to lend money resulted in the entrepreneurs looking elsewhere for funding (Mollick & Robb, 2016). As more crowdfunding platforms started to occur in the marketplace, more academic literature appeared. The use of crowdfunding for funding entrepreneurial businesses started to engage academic interest around 2010.
While the area of crowdfunding is still, in academic terms, a relatively new area of research, some literature on the topic is available. The research in the area relevant to this thesis mainly revolve around motivations for entrepreneurs to participate in crowdfunding (Gerber & Hui, 2013; Lambert & Schwienbacher, 2010; Cosh et al., 2009), research on signalling to crowdfunders (Ahlers et al., 2015; Mollick, 2014), and research about geographical and human resource discrimination by crowdfunders (Agrawal et al., 2013; Ahlers et al., 2015;
Mollick, 2014).
A study by Gerber & Hui (2013) of reward-based crowdfunding platforms, found that there are five different categories of motivation for entrepreneurs to use crowdfunding. Firstly, the creator of the projects on the platforms were mainly motivated by the possibility of being able to raise funds that is otherwise unavailable. Secondly, they found that crowdfunding gave an opportunity to create awareness and thus served as a way of marketing the business. Thirdly, the study found that crowdfunding offered a possibility for creators to form a deeper connection with people for a more long-term interaction and thus extend the network of the creators. Fourthly, crowdfunding can be used to test the interest for the product or service in
the market, which is a major benefit for many companies. Lastly, in alignment with a study by Cosh, Cumming & Hughes (2009), Gerber & Hui (2013) found that entrepreneurs were motivated to use crowdfunding in order to maintain control and avoid the risks related with giving up control to powerful angel investors or venture capitalist firms. Lambert &
Schwienbacher (2010) also found in their study of entrepreneurs that while 85% of respondents stated that getting public attention was a motivation for them to do crowdfunding, and 60% stated that getting feedback on their product/service was a motivation, all respondents answered that raising money was the strongest motivation.
Other studies on crowdfunding have revolved around topics like proximity and the relative unimportance of geographical locations of entrepreneurs and investors (Agrawal et al., 2011;
Agrawal et al., 2015; Mollick, 2014), the use of signalling (Ahlers et al., 2015) and the importance of factors like financial transparency, amount of equity offered and information on human capital available for investors (Ahlers et al., 2015; Mollick, 2014). Generally, findings from these studies suggest that geographical location is less important for investors using crowdfunding than in regular investment by venture capital firms, banks and angel investors (Mollick, 2014; Agrawal et al., 2015). The research on the use of signalling generally propose that, like venture capitalist firms, crowdfunders place importance on the presence and availability of financial roadmaps, risk factors, appropriate and experienced board of directors and founders, possible exit strategies etc. (Ahlers et al., 2015; Mollick, 2014).
The unrealised potential of crowdfunding for social enterprises has to some extent gained attention by academic researchers (Lehner, 2013; Bergamini et al., 2015; Calic & Mosakowski, 2016; Mollick 2014). Lehner (2013) argues that crowdfunding offers an “especially suited answer to the financing needs of social ventures, as crowd investors do not look much at collaterals or business plans, but at the ideas and core values of the firm” (Lehner, 2013, p. 2).
Furthermore, a study by Bergamini et al. (2015) found that crowdfunding is highly suitable for financing social enterprises. Not only does the literature suggest that crowdfunding is suitable for social enterprises, but a study by Calic & Mosakowski (2016) also suggests that crowdfunding projects with social and environmental objectives have greater chances of being successfully crowdfunded than others. While this study examined reward-based crowdfunding campaigns on Kickstarter and thus might not necessarily be applicable to other kinds of crowdfunding, it indicates that having a social orientation can enhance the possibility
of getting funded through crowdfunding. Another important signal is that owners of social enterprises have limited monetary motivations, as they often give significant weight to the quality of the impact compared to monetary gains, which might result in more trust from the investor side and thus a better chance of getting funded (Lehner, 2013). Furthermore, Calic &
Mosakowski (2016) find that sustainability-oriented projects tend to experience higher levels of crowdfunding success relatively to purely commercial projects.
Schwienbacher & Larralde (2010) argue that there are several benefits to crowdfunding as an alternative to traditional funding methods. For example that the benefit of the crowd being involved early in the development of the product or service might lead to them being early consumers of the product. Having the crowd as an early consumer base reduces the need for marketing resources from the enterprise from an early stage. Belleflamme et al. (2010) argue that using crowdfunding for social entrepreneurship might provide legitimacy to the enterprise, possibly making traditional investors more inclined to invest at later stages, as the ruling of the crowd is a good indicator of whether the social ideas are worthy and needed. As the selection process of the crowd is perceived as being democratic in terms of what social initiatives are actually needed and seem worthy, an area where traditional investors might have limited experience, a large crowd investing in the idea might provide an indication to larger investors of whether to invest or not (Belleflamme et al., 2010).
Crowdfunders make financial contributions with or without the expectation of compensation.
Compensation can take various forms, including cash, bonds, stocks, profit sharing and pre- ordering of products (Belleflamme et al., 2010). There are four types of crowdfunding models;
donation-based crowdfunding, reward-based crowdfunding, equity-based crowdfunding and lending-based crowdfunding. Lending- and equity-based crowdfunding can be perceived as financial crowdfunding, since the investors expect some kind of financial return on their investment, whereas, donation- and reward-based is non- financial crowdfunding (Koreen and Robano, 2014).
Crowdfunding Model Definition
Donation-based Donation towards a specific project without expectations of a financial or material return.
Reward-based Investment of a pre-defined amount of money with the expectation that, if the project is successfully funded, the investor will receive a tangible (non-financial) reward, often either a product or a service.
Lending-based Loans of small amounts of money to a specific project, business or person.
Equity-based Relatively small investments in projects or businesses in return for a stock in the respective business.
Table 1: Definitions of crowdfunding models. (Mollick, 2014; Ahlers et al., 2015; Kuti &
Madarász, 2014)
4. 2. 2. 1. Equity Crowdfunding
Equity-based crowdfunding is raising money by selling shares to the crowd (Kuti & Maderász, 2014; Mollick, 2014). In equity crowdfunding, investors invest directly or indirectly in a new or established business and expect shares of future profits (Belleflamme, et al. 2014).
Figure 6: Crowdfunding and Funding Gap Sources (Adapted from World Bank, 2013).
Equity crowdfunding allows start-ups to close the funding gaps (figure 6). The early stages of initial tests of the idea can be financed internally or through donation-based or reward-based crowdfunding. The main funding gap appears immediately after, and equity crowdfunding seems to be an appropriate way of raising higher amounts of capital (World Bank, 2013).
Kortleben & Vollmer (2012) position equity crowdfunding as a source of capital bridging the gap from funding provided by family and friends to traditional sources of risk capital, such as angel investors and venture capital firms.
While equity crowdfunding is gaining interest from entrepreneurs, the academic literature on the area is still in its infant stages. Compared to other forms of crowdfunding, research on equity crowdfunding is limited (Mochkabadi & Volkmann, 2018). This may be a result of equity crowdfunding only quite recently emerging after the legal constraints in some countries were removed (Schwienbacher & Larralde, 2010; Mollick, 2014). The limited research on the area has generally focused on the entrepreneur perspective (Miglo, 2016; Brown et al., 2015;
Schwienbacher & Larralde, 2010), the institutional perspective (Gabison, 2014; Hornuf &
Schwienbacher, 2017), and to some extent the equity crowdfunding investors (Cholakova &
Clarysse, 2015; Ordanini et al., 2011; Ahlers et al., 2012).
Miglo (2016) finds that entrepreneurs generally prefer equity crowdfunding to traditional forms of finance when they want to use the funding to grow a potential future demand of their product or service. Schwienbacher & Larralde (2010) argue that crowdfunding might result in more widely marketed and successful projects, as one benefit of equity crowdfunding is that crowdfunders participating in profits of the enterprise might be encouraged to share information and market the product to a larger extent than in other types of crowdfunding, due to the financial benefit of them doing so. Brown et al. (2015) examined the drivers of UK- based entrepreneurs to engage in crowdfunding and found that entrepreneurs use equity crowdfunding due to a lack of other funding alternatives, funding speed, increased attention by potential customers, maximum level of autonomy and feedback from crowdfunders.
In terms of the institutional perspective few have examined equity crowdfunding in relation to the European market (Gabison, 2014; Hornuf & Schwienbacher, 2017), and none to the Danish market. By comparing and examining the impact of equity crowdfunding regulations in seven European countries, Hornuf & Schwienbacher (2017) found that when raising capital from traditional sources is difficult, the benefits of using equity crowdfunding is higher.
