Crowdfunding: An Effective Source of Finance For SMEs

Literature Review

Overview to crowd funding

According to Belleflamme, Lambert and Schwienbacher, (2014) crowdfunding is considered to be a practice of funding a particular project in such a manner that a small amount of money can be generated from a large number of people, typically with the help of internet. Crowdfunding is a common source of crowdsourcing and an alternative method of arranging finance for a particular activity. It plays an important role in arranging wide range of funds for entrepreneurial ventures which are actually being established for profits, generally for artistic and creative projects. It is also helpful in community oriented social entrepreneurship projects as well. However, in contrast to this, as per the views of Agrawal, Catalini and Goldfarb, (2014) crowdfunding is a small amount of capital being arranged from various individuals to finance some new ventures. It is an easy method that is generally adopted due to its effective accessibility of vast network of people with the help of social media and other crowd funding websites available these days. These websites tend to bring various entrepreneurs and investors together which help in increasing the scope of investment and thereby entrepreneurship who can now arrange their finances beyond their traditional circle, that is, venture capitalists, owners, relatives and friends. The ventures can pitch their ideas to the investors with the aim to raise funds. There are other crowdfunding projects that are based on rewards where investor may also take part in launching a new product for their investment.

According to Ahlers and et.al., (2015) equity-based funding is also gaining adequate amount of popularity these days as it helps in raising adequate finances without transferring any type of ownership to the investors as it is applicable in the case of venture capitalists. Investment generated through equity based crowdfunding ventures, are generally regulated by Securities and Exchange Commission (SEC). However, in contrast to this, as per the opinion of Gerber, Hui and Kuo, (2012) another type of crowdfunding technique that is quite common these days is reward based crowdfunding technique, where entrepreneurs indulge in preselling products and services so as to launch a business concept without incurring any type of debt or sacrifice equity shares for investment.

Models of crowd funding

In the opinion of Wheat and et.al., (2013) crowdfunding is considered to be a major tool in order to provide financing with the aim of aiding Small Business Enterprises. It plays a substantial role in enhancing overall condition of the market in such a manner that it initiates ne product and service development mechanism by providing promising ideas to people. It is a preferable method of getting investments and fund for the organization. There are various models of crowdfunding that can generally be used by various entrepreneurs so as to given their business a good financial back. These models are, Donation, Reward, equity Interest and Mixed.

As per the views of Gerber and Hui, (2013) Donation model of crowdfunding refers to financing people to work towards a good cause. It helps them to bring positivity that something good has been done from their side normally related to some kind of social value attached to it. The concept is actually related to sponsor where a creative field of art is promoted for artistic work. Commonly known donation crowd funding companies functioning in UK are, Just Giving and Space hive, which generally donate their investment for some social cause. Another special type of donation crowd funding company is Unbound. It is responsible for offering special model to the companies, where it crowds the organization they like to see conversion of any book idea into reality. However, as per the views of Colombo, Franzoni and Rossi‐Lamastra, (2015) reward crowdfunding model, where, it pledges to give certain amount of investment to the particular company. However, the project must be able to offer something in return, such as, poster or any piece of merchandise. Commonly known reward model functioning in UK are, Kickstarter and Indiegogo. Other sites functioning in UK as reward crowd funding ventures are, Bloom venture catalyst in Edinburgh and crowd funder in Exeter. These two companies, generally support artists and creative industries.

As per the views of Belleflamme, Lambert and Schwienbacher, (2013) equity crowd funding model is where project management is able to offer a share of profits to the crowd, that is, who have invested in the entity. The investor is able to receive a share of profits. It can be a risky method, adopted by start ups as the organization have to pass a test before investment is made by the party. Moreover, a part of control is also transferred to the investors and the entrepreneurs can not make any type decision alone, in this scenario. Legal help in also required to be taken by small business enterprise so as to ensure that everything is correct between investor and entity at the time of equity based crowdfunding technique. Investors generally look upon area of growth and ensure that whether the organization will be able to fulfil the requirements of it or not. However, in contrast to this, as per the opinion of Lehner, (2013) another type of crowdfunding model is interest crowdfunding, whose concept is quite similar to getting a loan from bank. The only difference is, organization tend to get loan from crowd in interest crowd funding model for arranging finances. Another issue that is related to this technique is that, the interest rate of getting finances can higher in comparison to the other sources of finances. However, there is no transfer of ownership of decision making aspect in this model. Hence, all the decisions are made by the core team of the business without any type of interference.

According to the views of Stemler, (2013) mixed crowd funding models work on the concept of ix and match of other crowd funding sources available with the organization. For instance, Crowdbnk is a platform offering organization a chance of having reward and equity campaign. Based upon the suitability of organization, it can opt for crowdfunding technique so as to serve the purpose and lead the organization towards economic growth.

Advantages and disadvantages of crowdfunding

According to the views of Lin and Viswanathan, (2015) businesses are seeking benefits through raising finances in the form of crowdfunding. Since, financing ios always a challenge for the newly set up businesses, it becomes important to consider crowdfunding as an active source of finance for the business. There are various advantages attached to the use of this technique of finance. It is considered to be a fast method of raising finance with no upfront fees coming over the business due to fund generation activity. Another aspect is that, the technique helps in pitching the idea through various online sources which can be a valuable form of marketing gathering adequate amount of media attention. The organization is able to collect views and feedbacks of people with respect to products and services offered and ascertain whether people are ready to invest in the provided business idea or not. It also helps in estimating future growth with respect to product and services being offered by it in the end. It helps in making investor a loyal customer based upon the financing process used by new venture. However, in contrast to this, as per the views of Harrison, (2013) crowdfunding may not be an easy process of gathering finances, in comparison to that of other traditional method of financing. All the companies applying for crowdfunding may not be able to get finances through it. It becomes important to build the interest of investors and pitch in the most effective manner otherwise the process of gathering finance through crowdfunding may become tedious for the corporation. Another disadvantage to this funding approach is that failed project can risk to damage the reputation of a business. If the idea or innovative business is not protected, the organization may face issues related to patent or copyright. The idea may also be stolen from crowd funding websites, during its display, very easily. It can be stated that, crowdfunding is an alternative method of raising finance for any business. Before making any decision related to investment, on must ensures that the method of finance will be able to meet the requirements related to business or not.

According to Crowdfunding models explained, (2016) it becomes important to effectively choose the method of crowdfunding that is going to be used by the organization for investment purposes. Further, ability of evaluation and picking the project helps in allocating investments in the economy so that it can ultimate leads to economic growth for the country. It will also help in serving the requirements of the customers in such a manner that the overall demand and supply of the particular product and services to the best possible extend, effectively contributing the overall GDP of the country.

Research Aims and Objectives (50)

The aim for present research is “To ascertain the implications for SMEs using crowdfunding in order to achieve growth in the UK market”

Based on the above aim, following objectives can be framed:

• To understand different models of crowdfunding and their preferences among SMEs in the UK manufacturing sector.
• To critically examine how crowdfunding could contribute to achieving business growth in UK SMEs.
• To critically discuss the opportunities and drawbacks of crowdfunding in the UK manufacturing sector.

Research Methodology

This part would be providing details about which type of sampling techniques would be used and how would collected data be analysed in order to find out results and conclusion in better and easy way out.

Research Design:

This would be providing details of research plan that what and how it is to be done which must be positively and logically connected with aims or objectives of research that was set up at starting (Xu, Zheng and Wang, 2016). Design is based on methods and procedures of collecting and then analysing objectives that are related with research problems.

Research Philosophy:

The part which is telling and explaining why we are using particular type of data and why we are not considering the other one or why this specific type of data collection techniques would be applied within. Like there are mainly 2 types of research philosophy or paradigm which are positivism and interpretivism only one of them could be applied in a research paper (Kozinets, 2012). Positivism is associated with knowledge that is based on common experience and relations and thus helping us to interpret the data into more logical and reasonable way out. All this type is always based on sensory experience which is specified in context of source of information. In the following present topic that is based on crowdfunding models and their implications for the manufacturing SME within context of UK. It would be understanding all aspects and parameters of this topic what managers of SME is thinking about the source of funding and whether it is good for the support on their growth and achievement of business goal or not. So researcher would be using or applying positivism as tool of philosophy only.

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Research approaches:

As we have seen in the above para that researcher is using and applying positivism philosophy which would be focusing on whether managers of SME is ready to use crowdfunding as their one of source of funding or not. Thus, the research which is conducted is mainly based on pecking order theory which is engaged into testing of two or more hypothesis rather than just creating them. There are two type of research approaches namely inductive and deductive in one of them we are to create theory and in another one we would be testing them with the use of various methods (Bechter, Jentzsch and Frey, 2011). So in this current topic where we need to build up hypothesis and then test them or their relationship with one another it is easy for researcher to use deductive approach hence telling how the hypothesis would be related to each other.

Nature of research:

This is telling the researcher that whether they would be explaining topic or exploring it so there are basically two types of nature of research i.e., exploratory and explanatory (Harvey and Myers, 2015). In this current theory or research we would be using exploratory which is helping us to explore the given research problem that was not studied at any time before. It would be highlighting the factors and their implications on businesses if the managers of SME is using crowdfunding as their source of funding. Thus analysing such problem and then building up hypothesis or more clarity on that topic is essential which would be pointing out further issues which would arise in near future. In checking out that whether crowdfunding is good and better source of funding especially for SME business and should management use it or not.

Time Frame:

This is focusing on which time period would this study or theory it is referring or on what case the study is going on. There are two types of time frame namely cross-sectional and longitudinal so in this current study we would be using and applying cross-sectional one (Gerber and Churchill, 2014). Under this type researcher is studying case of will managers of SME business is using crowdfunding as their source of collection of funds or capital or not will it be useful for them or not. The case would be focusing on issues that are related to today or this current time period so cross-sectional is used. Thus, this is showing and collecting of data over specified time like data that is collected within few weeks only so cross-sectional should be used. All the data that is collected under this type of time frame should be independent from any external influences which could change or effect data over longer duration of time.

Data collection:

This being the most important issue or part of any form of research that would be carried on this is telling that how researcher is collecting their information which must be connected to topic and its hypothesis. All the data which we are to collect should be justifying our case or questions and problem that was laid down at the starting of research plan (Ley and Weaven, 2011). So as we are to carry on research on what are the basic models of crowdfunding and will this be useful for managers of SME business in meeting their goals of growth into market. In this particular part researcher is using or applying quantitative type of data collection techniques that is providing clearer and better insights into topic. Under this type researcher is analysing that what is response rate of finding out answers to questions and collection of data in a measurable way so that solution could be made in effective and efficient manner. Quantitative data collection technique is based on gathering data which is form of numeric version and then from various statistical analysis tools would be used that is best suited to relate to current issue

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