His latest research seeks to uncover the reality behind the much talked about emergence of crowdfunding as a means of funding everything from the Statue of Liberty to rock albums. LBSR talks to Gary Dushnitsky.
This article is provided by the Deloitte Institute of Innovation and Entrepreneurship.
Gary Dushnitsky: I have always been interested in the way in which entrepreneurial ideas are funded and supported. I focused on corporate-backed entrepreneurs which is a growing phenomena. And then, six years ago, I launched another research stream looking at what is now called crowdfunding. It’s worth remembering that the term was not then around.
GD: Imagine an eBay for ideas and that is basically what crowdfunding is. But you can trace the idea back to subscription business models hundreds of years ago. Some crowdfunding platforms even claim that artists such as Mozart and Beethoven were basically using the same model. It covers everything from rock groups trying to raise money online to record an album or tour to small businesses raising money. In recent years we have seen the creation of hundreds of crowdfunding platforms — such as Crowdcube, Seedrs, Lending Club, Prosper, Zopa and many others — which give companies the chance to attract investment online.
More generally, markets for ideas and technologies have grown dramatically over recent decades. One calculation is that they reached about $300 billion globally during the period 1990-1997. Estimates suggest that such markets have surpassed an annual volume of $100 billion and continue to grow at a considerably higher rate than the average worldwide GDP.
In terms of crowdfunding, a 2013 report by Nesta found that the number of crowdfunding platforms had grown by 60 per cent in 2012 and that 1.5 billion euros was raised through crowdfunding in 2011. It anticipated crowdfunding activity reaching 12 billion euros in ten years’ time.
GD: Most recently, with funding from the Deloitte Institute of Innovation and Entrepreneurship at London Business School, I have looked at the following question: Crowdfunding is often looked at as a solution but to what question? People say that crowdfunding is the way to go but, with the whole hype about crowdfunding, we can forget what the question is which crowdfunding is supposed to answer.
GD: I am working with Thomas Klueter an IESE faculty and my former doctoral student on this research. We started reading and talking to people and we developed an algorithm which allows us to decide what is a viable crowdfunding platform and what is not. Over seven months this iterative process allowed us to identify the pool of crowdfunding platforms that we believe are viable and credible.
When I talk about crowdfunding, or people talk about crowdfunding today, what they are often interested in is what’s happening within a platform — how does it operate, who brings what to the table, how much do you disclose about the idea, where and how do investors bid for the money?
GD: Yes, it’s great that crowdfunding is the solution but to what question and specifically in what industry?
It was surprising that nobody was asking the question. Many people are rushing to tell us about the inner workings of a particular crowdfunding platform without asking the purpose of that platform. Generating funding to develop video games is different from generating funding to do research into new drugs. So, it is interesting to look at why a crowdfunding platform exists and whether that structure is fit for purpose in another setting. Also, why is it that we see these platforms in some settings but not others? That’s what my research is currently focusing on.
GD: Yes, they are now emerging and, looking into the future, I expect them to be the three distinct categories.
If you look around at the hundreds of crowdfunding platforms, you can identify which category they fit into. So, Kickstarter is a donation-based platform; Zopa and Bolstr are debt-based; and Seedrs is one of the equity-based platforms that are currently being formed.
GD: Undoubtedly. Part of the reason the crowdfunding world was convoluted and ambiguous was because up until a year and a half ago the legal framework to do equity-based crowdfunding was lacking. In the past decade, a number of companies have actually been served with SEC Cease and Desist instructions and have had to close down for several months because their operation’s legal status was ambiguous. The reason that you see the growing popularity of crowdfunding is because in November 2011 the US passed the JOBS Act, part of which basically gave the green light to what would be labelled equity-based crowdfunding.
GD: I am very optimistic about any innovation! And that includes innovation to the way innovations are funded. The reality is that entrepreneurs don’t have time and resources to waste. They need to be efficient and be aware of whether or not their industry is likely to lend itself to a crowdfunding platform. The reality is that in some settings it’s unlikely to expect a platform to operate efficiently. In which case entrepreneurs shouldn’t waste their time and money attempting to go down this route.
GD: I think that what happens is because crowdfunding is so creative and innovative it is getting a lot of coverage. For a budding entrepreneur it can be alluring and confusing. It might not necessarily be the way to go. In my teaching I ask students whether they would use crowdfunding and what are the things they need to consider in reaching that decision. It is to make sure that when our students actually come to the point where they need to decide on their funding approach they’ve at least spent some time thinking about the pros and cons.
GD: My aim is to make sure that when entrepreneurs are in the process of developing their ideas and growing them they can have an accurate map of what resource providers are available to them. They won’t simply go to a business angel or a venture capitalist without being clear about the other options available. I want entrepreneurs to have an accurate map and to understand the structure of each and every one of these financing options. Their structure and organisation basically defines the economics, time, horizons and interests of those investors. If they know that, then entrepreneurs can make informed decisions.
The interesting and challenging thing is that the field of funding innovation is constantly being innovated itself. It is not — and probably never will be — a stable environment. My interest is in shedding light on some of the more innovative forms. Twelve years ago I started studying corporate venture capital; today it’s a large part of the US National Venture Capital Association (NVCA) and a new and active part of the British Venture Capital Association (BVCA). I got interested in studying online funding platforms six years ago; today you probably can’t go a day without hearing about a new crowdfunding platform.
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